UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended September 30, ~~2017~~2018



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the transition period from ______ to ______

Commission File No. 1-6571

Merck & Co., Inc.

2000 Galloping Hill Road

Kenilworth, N.J. 07033

(908) 740-4000



Incorporated in New Jersey		I.R.S. Employer
		Identification No. 22-1918501

The number of shares of common stock outstanding as of the close of business on October 31, ~~2017~~2018: ~~2,724,436,835~~2,600,376,500

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐~~(Do not check if a smaller reporting company)~~	Smaller reporting company	☐

		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Part I - Financial Information

Item 1. Financial Statements

MERCK & CO., INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF INCOME

(Unaudited, $ in millions except per share amounts)


	Three Months Ended September 30,					Nine Months Ended September 30,				Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016		2017		2016		2018			2017			2018			2017
Sales	$	10,325		$	10,536	$	29,689	$	29,692	$	10,794		$	10,325		$	31,296		$	29,689
Costs, Expenses and Other
Materials and production	3,274			3,409		9,369		10,559		3,619			3,307			10,220			9,472
Marketing and administrative	2,401			2,393		7,251		7,169		2,443			2,459			7,459			7,432
Research and development	4,383			1,664		7,927		5,475		2,068			4,413			7,538			8,024
Restructuring costs	153			161		470		386		171			153			494			470
Other (income) expense, net	(86		)	22		30		88		(172		)	(207		)	(512		)	(351		)
	10,125			7,649		25,047		23,677		8,129			10,125			25,199			25,047
Income Before Taxes	200			2,887		4,642		6,015		2,665			200			6,097			4,642
Taxes on Income	251			699		1,186		1,487		707			251			1,682			1,186
Net (Loss) Income	(51		)	2,188		3,456		4,528
Net Income (Loss)										1,958			(51		)	4,415			3,456
Less: Net Income Attributable to Noncontrolling Interests	5			4		16		13		8			5			22			16
Net (Loss) Income Attributable to Merck & Co., Inc.	$	(56	)	$	2,184	$	3,440	$	4,515
Basic (Loss) Earnings per Common Share Attributable to Merck & Co., Inc. Common Shareholders	$	(0.02	)	$	0.79	$	1.26	$	1.63
(Loss) Earnings per Common Share Assuming Dilution Attributable to Merck & Co., Inc. Common Shareholders	$	(0.02	)	$	0.78	$	1.25	$	1.62
Dividends Declared per Common Share	$	0.47		$	0.46	$	1.41	$	1.38
Net Income (Loss) Attributable to Merck & Co., Inc.										$	1,950		$	(56	)	$	4,393		$	3,440
Basic Earnings (Loss) per Common Share Attributable to Merck & Co., Inc. Common Shareholders										$	0.73		$	(0.02	)	$	1.64		$	1.26
Earnings (Loss) per Common Share Assuming Dilution Attributable to Merck & Co., Inc. Common Shareholders										$	0.73		$	(0.02	)	$	1.63		$	1.25

MERCK & CO., INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Unaudited, $ in millions)

Three Months Ended
September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
Net (Loss) Income Attributable to Merck & Co., Inc. $ (56 ) $ 2,184
$ 3,440
$ 4,515
Other Comprehensive Income (Loss) Net of Taxes:
Net unrealized loss on derivatives, net of reclassifications (66 ) (74 ) (441 ) (367 )
Net unrealized gain (loss) on investments, net of reclassifications 135
(30 ) 213
96
Benefit plan net gain (loss) and prior service credit (cost), net of amortization 13
(144 ) 86
(280 )
Cumulative translation adjustment 67
82
423
447
149
(166 ) 281
(104 )
Comprehensive Income Attributable to Merck & Co., Inc. $ 93
$ 2,018
$ 3,721
$ 4,411



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Net Income (Loss) Attributable to Merck & Co., Inc.	$	1,950		$	(56	)	$	4,393		$	3,440
Other Comprehensive (Loss) Income Net of Taxes:
Net unrealized gain (loss) on derivatives, net of reclassifications	27			(66		)	223			(441		)
Net unrealized gain (loss) on investments, net of reclassifications	40			135			(56		)	213
Benefit plan net gain and prior service credit, net of amortization	40			13			106			86
Cumulative translation adjustment	(136		)	67			(240		)	423
	(29		)	149			33			281
Comprehensive Income Attributable to Merck & Co., Inc.	$	1,921		$	93		$	4,426		$	3,721

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

MERCK & CO., INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited, $ in millions except per share amounts)


	September 30, 2017			December 31, 2016			September 30, 2018			December 31, 2017
Assets
Current Assets
Cash and cash equivalents	$	7,901		$	6,515		$	7,826		$	6,092
Short-term investments	3,294			7,826			2,459			2,406
Accounts receivable (net of allowance for doubtful accounts of $222 in 2017 and $195 in 2016)	7,671			7,018
Inventories (excludes inventories of $1,029 in 2017 and $1,117 in 2016 classified in Other assets - see Note 5)	5,263			4,866
Accounts receivable (net of allowance for doubtful accounts of $229 in 2018 and $210 in 2017)							7,374			6,873
Inventories (excludes inventories of $1,294 in 2018 and $1,187 in 2017 classified in Other assets - see Note 7)							5,416			5,096
Other current assets	3,790			4,389			3,761			4,299
Total current assets	27,919			30,614			26,836			24,766
Investments	12,206			11,416			7,606			12,125
Property, Plant and Equipment, at cost, net of accumulated depreciation of $16,661 in 2017 and $15,749 in 2016	12,189			12,026
Property, Plant and Equipment, at cost, net of accumulated depreciation of $16,568 in 2018 and $16,602 in 2017							12,755			12,439
Goodwill	18,340			18,162			18,258			18,284
Other Intangibles, Net	15,138			17,305			12,175			14,183
Other Assets	5,884			5,854			7,500			6,075
	$	91,676		$	95,377		$	85,130		$	87,872
Liabilities and Equity
Current Liabilities
Loans payable and current portion of long-term debt	$	5,157		$	568		$	3,656		$	3,057
Trade accounts payable	2,620			2,807			3,091			3,102
Accrued and other current liabilities	9,992			10,274			9,776			10,427
Income taxes payable	396			2,239			759			708
Dividends payable	1,302			1,316			1,304			1,320
Total current liabilities	19,467			17,204			18,586			18,614
Long-Term Debt	21,838			24,274			19,936			21,353
Deferred Income Taxes	4,159			5,077			2,065			2,219
Other Noncurrent Liabilities	7,713			8,514			11,887			11,117
Merck & Co., Inc. Stockholders’ Equity
Common stock, $0.50 par value Authorized - 6,500,000,000 shares Issued - 3,577,103,522 shares in 2017 and 2016	1,788			1,788
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
Other paid-in capital	39,823			39,939			39,762			39,902
Retained earnings	43,701			44,133			42,189			41,350
Accumulated other comprehensive loss	(4,945		)	(5,226		)	(5,151		)	(4,910		)
	80,367			80,634			78,588			78,130
Less treasury stock, at cost: 850,698,697 shares in 2017 and 828,372,200 shares in 2016	42,119			40,546
Less treasury stock, at cost: 918,364,126 shares in 2018 and 880,491,914 shares in 2017							46,166			43,794
Total Merck & Co., Inc. stockholders’ equity	38,248			40,088			32,422			34,336
Noncontrolling Interests	251			220			234			233
Total equity	38,499			40,308			32,656			34,569
	$	91,676		$	95,377		$	85,130		$	87,872

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

MERCK & CO., INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited, $ in millions)


	Nine Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2018			2017
Cash Flows from Operating Activities
Net income	$	3,456		$	4,528		$	4,415		$	3,456
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	3,509			4,286			3,424			3,509
Intangible asset impairment charges	376			572			—			376
Charge for future payments related to AstraZeneca collaboration license options	750			—
Charge for future payments related to collaboration license options							650			750
Charge for collaboration termination							420			—
Deferred income taxes	(601		)	(65		)	(391		)	(601		)
Share-based compensation	232			225			261			232
Other	(31		)	200			585			(31		)
Net changes in assets and liabilities	(5,259		)	(3,002		)	(2,034		)	(5,259		)
Net Cash Provided by Operating Activities	2,432			6,744			7,330			2,432
Cash Flows from Investing Activities
Capital expenditures	(1,173		)	(1,063		)	(1,686		)	(1,173		)
Purchases of securities and other investments	(8,397		)	(10,084		)	(6,899		)	(8,397		)
Proceeds from sales of securities and other investments	12,533			11,300			11,243			12,533
Acquisitions of businesses, net of cash acquired	(347		)	(778		)
Acquisitions, net of cash acquired							(372		)	(347		)
Other	121			(22		)	(150		)	121
Net Cash Provided by (Used in) Investing Activities	2,737			(647		)
Net Cash Provided by Investing Activities							2,136			2,737
Cash Flows from Financing Activities
Net change in short-term borrowings	1,962			909			2,294			1,962
Payments on debt	(301		)	(2,386		)	(3,007		)	(301		)
Purchases of treasury stock	(2,312		)	(2,418		)	(3,158		)	(2,312		)
Dividends paid to stockholders	(3,884		)	(3,853		)	(3,895		)	(3,884		)
Proceeds from exercise of stock options	481			790			461			481
Other	(167		)	(109		)	(289		)	(167		)
Net Cash Used in Financing Activities	(4,221		)	(7,067		)	(7,594		)	(4,221		)
Effect of Exchange Rate Changes on Cash and Cash Equivalents	438			353
Net Increase (Decrease) in Cash and Cash Equivalents	1,386			(617		)
Cash and Cash Equivalents at Beginning of Year	6,515			8,524
Cash and Cash Equivalents at End of Period	$	7,901		$	7,907
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash							(140		)	438
Net Increase in Cash, Cash Equivalents and Restricted Cash							1,732			1,386
Cash, Cash Equivalents and Restricted Cash at Beginning of Year (includes restricted cash of $4 million at January 1, 2018 included in Other Assets)							6,096			6,515
Cash, Cash Equivalents and Restricted Cash at End of Period (includes restricted cash of $2 million at September 30, 2018 included in Other Assets)							$	7,828		$	7,901

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

Notes to Condensed Consolidated Financial Statements (unaudited)


1.	Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Merck & Co., Inc. (Merck or the Company) have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and disclosures required by accounting principles generally accepted in the United States for complete consolidated financial statements are not included herein. These interim statements should be read in conjunction with the audited financial statements and notes thereto included in Merck’s Form 10-K filed on February ~~28, 2017.~~27, 2018.

The results of operations of any interim period are not necessarily indicative of the results of operations for the full year. In the Company’s opinion, all adjustments necessary for a fair statement of these interim statements have been included and are of a normal and recurring nature. Certain reclassifications have been made to prior year amounts to conform to the current presentation.

On December 31, 2016, Merck and Sanofi Pasteur S.A. (Sanofi) terminated their equally-owned joint venture, Sanofi Pasteur MSD (SPMSD), which developed and marketed vaccines in Europe. Beginning in 2017, Merck is recording vaccine sales and incurring costs as a result of operating its vaccines business in the European markets that were previously part of the SPMSD joint venture, which was accounted for as an equity method affiliate.

Recently ~~Issued~~Adopted Accounting Standards

In May 2014, the Financial Accounting Standards Board (FASB) issued amended accounting guidance on revenue recognition (ASU 2014-09) that ~~will be applied~~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 ~~Company will adopt the~~ new standard onwas effective as of January 1, 2018 and ~~currently plans to use~~was adopted using the modified retrospective method. The ~~majority of the Company’s business is ship and bill and, on that primary revenue stream, Merck does not expect significant differences. Additionally, the~~ Company ~~has not identified significant changes~~recorded a cumulative-effect adjustment upon adoption increasing Retained earnings by $5 million. See Note 2 for additional information related to the recognition of revenue for its multiple element arrangements or discount and trade promotion programs when applying the new guidance. However, the Company’s analysis is preliminary and subject to change. The Company anticipates the adoption of ~~the new guidance will result in some additional disclosures.~~this standard.

In January 2016, the FASB issued revised guidance for the accounting and reporting of financial ~~instruments.~~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~~available for sale be measured at fair value with changes in fair value recognized in net income. The ~~new guidance also simplifies the impairment testing of~~Company has elected to measure equity investments without readily determinable fair values ~~and~~at cost, less impairment, adjusted for subsequent observable price changes, which will be recognized in net income. The new guidance also changed certain disclosure requirements. ~~This guidance is~~ASU 2016-01 was effective ~~for interim~~as of January 1, 2018 and ~~annual periods beginning in 2018.~~was adopted using a modified retrospective approach. The Company ~~is currently assessing the impact of adoption on its consolidated financial statements. The impact of adoption will be~~ recorded as a cumulative-effect adjustment ~~to retained earnings.~~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 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 guidance is effective for interim and annual periods beginning in 2018. Early adoption is permitted. The guidance is to be applied retrospectively to all periods presented but may be applied prospectively if retrospective application would be impracticable. The Company does not anticipate the adoption of the new guidance will have a material effect on its Consolidated Statement of Cash Flows.

In October 2016, the FASB issued guidance on the accounting for the income tax consequences of intra-entity transfers of assets other than ~~inventory. Under existing guidance, the recognition of current and deferred income taxes for an intra-entity asset transfer is prohibited until the asset has been sold to a third party.~~inventory (ASU 2016-16). The new guidance ~~will require~~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.~~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 ~~effective for interim~~intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and ~~annual periods beginning in 2018.~~increase transparency as to the scope and results of hedging programs. The new guidance ismakes 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 ~~be applied~~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 ~~directly~~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 these amounts to retained earnings ~~in the beginning of the period of adoption.~~thereby eliminating these stranded tax effects. The Company ~~is currently evaluating the impact of adoption on its consolidated financial statements.~~

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 guidance is effective for interim and annual periods beginning in 2018 and should be applied using a retrospective transition methodelected to ~~each period presented. Early adoption is permitted. The Company does not anticipate the adoption of~~early adopt the new guidance ~~will have~~in the first quarter of 2018 and reclassified the stranded income

Notes to Condensed Consolidated Financial Statements (unaudited)

tax effects of the TCJA increasing Accumulated other comprehensive loss in the provisional amount of $266 million with a ~~material effect on its Consolidated Statement~~corresponding increase to Retained earnings (see Note 16). 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 ~~Cash Flows.~~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 earnings	5		8		54		(11	)	266		322
Accumulated other comprehensive loss			(8	)					(266	)	(274		)

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

~~Entities must use~~standard as of January 1, 2018 using a retrospective transition method as to ~~adopt~~ the requirement for separate presentation in the income statement of service costs and other components and a prospective transition method as to ~~adopt~~ the requirement to limit the capitalization of benefit costs to the service cost component. The Company ~~is currently evaluating~~utilized a practical expedient that permits it to use the ~~impact~~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 was reclassified to Other (income) expense, net from the previous classification within Materials and production costs, Marketing and administrative expenses and Research and development costs (see Note 13).

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 prior year period 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 ~~its consolidated financial statements.~~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 ~~guidance is~~standard effective ~~prospectively for interim~~as of January 1, 2018 and ~~annual periods beginning in 2018. Early adoption is permitted. The Company does not anticipate the adoption of~~will apply the new guidance ~~will have a material effect on its consolidated financial statements.~~to future share-based payment award modifications should they occur.

Recently Issued Accounting Standards Not Yet Adopted

In February 2016, the FASB issued new accounting guidance for the accounting and reporting of ~~leases.~~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 Company will adopt the new ~~guidance~~standard on January 1, 2019 using a modified retrospective approach. Merck will ~~be effective~~elect the transition method that allows for ~~interim and annual periods~~application of the standard at the adoption date rather than at the beginning of the earliest comparative period presented in ~~2019. Early adoption is permitted.~~the financial statements. The Company intends to elect available practical expedients. The Company is currently evaluating the impact of adoption on its consolidated financial statements. Merck has

~~In August 2017,~~

Notes to Condensed Consolidated Financial Statements (unaudited)

selected a lease accounting tool and made significant progress regarding lease data validation for contracts that are in the ~~FASB issued new guidance on hedge accounting that is intended~~Company’s current lease portfolio. Merck continues to ~~more closely align hedge accounting with companies’ risk management strategies, simplify~~assess the ~~application~~potential impact 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 new guidance is effective for interim and annual periods beginningembedded leases in 2019. Early application is permitted in any interim period. The Company does not anticipate the adoption of the new guidance will have a material effect on its consolidated financial statements and may elect to early adopt this guidance.certain agreements.

In June 2016, the FASB issued amended guidance on the accounting for credit losses on financial instruments. The guidance introduces an expected loss model for estimating credit losses, replacing the incurred loss model. The new guidance also changes the impairment model for available-for-sale debt securities, requiring the use of an allowance to record estimated credit losses (and subsequent recoveries). The new guidance is effective for interim and annual periods beginning in 2020, with earlier application permitted in 2019. The new guidance is to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings in the beginning of the period of adoption. The Company is currently evaluating the impact of adoption on its consolidated financial statements.

In 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 new guidance is effective for interim and annual periods in 2020. Early adoption is permitted. The Company does not anticipate that the adoption of the new guidance will have a material effect 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 in 2020. Early adoption is permitted, including adoption in any interim period. Prospective adoption for eligible costs incurred on or after the date of adoption or retrospective adoption is permitted. The Company is currently evaluating the impact of adoption on its consolidated financial statements and may elect to early adopt this guidance.


2.	Summary of Significant Accounting Policies

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 Note 1). 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 provides principles that an entity applies to report useful information about the amount, timing, and uncertainty of revenue and cash flows arising from its contracts to provide goods or services to customers. The core principle 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. The Company’s significant accounting policies are detailed in Note 2 to the consolidated financial statements included in Merck’s Annual Report on Form 10-K for the year ended December 31, 2017. Changes to the Company’s revenue recognition policy as a result of adopting ASC 606 are described below. See Note 17 for disaggregated revenue disclosures.

Revenue Recognition — 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.

Notes to Condensed Consolidated Financial Statements (unaudited)

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 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 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 also used for certain types of variable consideration. 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 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 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. These discounts, in the aggregate, reduced U.S. sales by $2.6 billion and $2.9 billion in the third quarter of 2018 and 2017, respectively, and by $7.7 billion and $8.2 billion for the first nine months of 2018 and 2017, respectively.

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 on a limited basis in certain countries.

The following table provides the effects of adopting ASC 606 on the Consolidated Statement of Income:



	Three Months Ended September 30, 2018							Nine Months Ended September 30, 2018
($ in millions)	As Reported		Effects of Adopting ASC 606			Amounts Without Adoption of ASC 606		As Reported		Effects of Adopting ASC 606			Amounts Without Adoption of ASC 606
Sales	$	10,794	$	(1	)	$	10,793	$	31,296	$	(30	)	$	31,266
Materials and production	3,619		(1		)	3,618		10,220		(18		)	10,202
Income before taxes	2,665		—			2,665		6,097		(12		)	6,085
Taxes on income	707		—			707		1,682		(3		)	1,679
Net income attributable to Merck & Co., Inc.	1,950		—			1,950		4,393		(9		)	4,384

Notes to Condensed Consolidated Financial Statements (unaudited)

The following table provides the effects of adopting ASC 606 on the Consolidated Balance Sheet:



	September 30, 2018
($ in millions)	As Reported		Effects of Adopting ASC 606			Amounts Without Adoption of ASC 606
Assets
Accounts receivable	$	7,374	$	(45	)	$	7,329
Inventories	5,416		19			5,435
Liabilities
Accrued and other current liabilities	9,776		(6		)	9,770
Income taxes payable	759		(5		)	754
Equity
Retained earnings	42,189		(15		)	42,174


3.	Acquisitions, Divestitures, Research Collaborations and License Agreements

The Company continues to pursue 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.

In ~~October 2017,~~the third quarter of 2018, the Company recorded an aggregate charge of $420 million within Materials and production costs in conjunction with the termination of a collaboration agreement entered into in 2014 with Samsung Bioepis Co., Ltd. (Samsung) for insulin glargine. The aggregate 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 aggregate charge also included fixed asset abandonment charges of $137 million, inventory write-offs of $122 million, as well as other related costs of $6 million. The termination of this agreement has no impact on the Company’s other collaboration with Samsung.

In June 2018, Merck acquired ~~Rigontec GmbH (Rigontec)~~Viralytics Limited (Viralytics), an Australian publicly traded company focused on oncolytic immunotherapy treatments for a range of cancers, for AUD 502 million ($378 million). ~~Rigontec~~The transaction provided Merck with full rights to Cavatak (V937, formerly CVA21), Viralytics’s investigational oncolytic immunotherapy. Cavatak is based on Viralytics’s proprietary formulation of an oncolytic virus (Coxsackievirus Type A21) that has been shown to preferentially infect and kill cancer cells. Cavatak is currently being evaluated in multiple Phase 1 and Phase 2 clinical trials, both as an intratumoral and intravenous agent, including in combination with Keytruda, Merck’s anti-PD-1 (programmed death receptor-1) therapy. Under a ~~leader in accessing~~previous agreement between Merck and Viralytics, a study is investigating the ~~retinoic acid-inducible gene I (RIG-I) pathway, part~~use of the ~~innate immune system, as a novel~~Keytruda and ~~distinct approach~~Cavatak combination in ~~cancer immunotherapy to induce both immediate~~melanoma, prostate, lung and long-term anti-tumor immunity. Rigontec’s lead candidate, 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 based on the attainment of certain clinical, development, regulatory and commercial milestones.bladder cancers. The transaction ~~will be~~was accounted for as an acquisition of an ~~asset~~asset. Merck recorded net assets of $34 million (primarily cash) at the acquisition date and ~~the upfront payment will be reflected within~~ Research and development expenses of $344 million for the first nine months of 2018 related to the transaction. There are no future contingent payments associated with the acquisition.

In April 2018, Merck sold C3i Solutions, a multi-channel customer engagement services provider which was part of the Healthcare Services segment, to HCL Technologies Limited for $65 million. The transaction resulted in a loss of $11 million recorded in Other (income) expense, net.

In March 2018, Merck and Eisai Co., Ltd. (Eisai) entered into a strategic collaboration for the ~~fourth quarter~~worldwide co-development and co-commercialization of ~~2017.~~Lenvima, an orally available tyrosine kinase inhibitor discovered by Eisai (see Note 4).

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 ovarian cancer. The companies will jointly develop and commercialize Lynparza, both as monotherapy and in combination trials with other potential medicines. Independently, Merck~~

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

~~and AstraZeneca will develop and commercialize Lynparza in combinations with their respective PD-1 and PD-L1 medicines,~~ ~~Keytruda~~ ~~(pembrolizumab) and Imfinzi (durvalumab)~~(see Note 4). The companies will also jointly develop and commercialize AstraZeneca’s selumetinib, an oral, potent, selective inhibitor of MEK, part of the mitogen-activated protein kinase (MAPK) pathway, currently being developed for multiple indications including thyroid cancer. Under the terms of the agreement, AstraZeneca and Merck will share the development and commercialization costs for Lynparza and selumetinib monotherapy and non-PD-L1/PD-1 combination therapy opportunities. Gross profits from Lynparza and selumetinib product sales generated through monotherapies or combination therapies will be shared equally. Merck will fund all development and commercialization costs of ~~Keytruda~~ in combination with Lynparza or selumetinib. AstraZeneca will fund all development and commercialization costs of Imfinzi in combination with Lynparza or selumetinib. As part of the agreement, Merck made an upfront payment to AstraZeneca of $1.6 billion and will make payments of $750 million over a multi-year period for certain license options ($250 million in November 2017, $400 million in November 2018 and $100 million in November 2019). The Company recorded an aggregate charge of $2.35 billion in ~~Research and development~~ expenses in the third quarter of 2017 related to the upfront payment and future license options payments. In addition, Merck will pay AstraZeneca up to an additional $6.15 billion contingent upon successful achievement of future regulatory and sales milestones for total aggregate consideration of up to $8.5 billion. Future milestone payments will be capitalized and amortized over the estimated useful life of the corresponding intangible asset. Additionally, Merck will record its share of product sales of Lynparza and selumetinib, net of 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. Merck may terminate the agreement in its entirety or with respect to a given compound (and all products comprising such compound) upon prior written notice to AstraZeneca of at least 180 days. If the agreement is terminated with respect to a given compound, the agreement shall remain in full force and effect with respect to the other compounds. The parties also have the right to terminate the agreement in its entirety or on a product-by-product or country-by-country basis upon mutual written agreement. The agreement may also be terminated at any time with respect to a given product, upon written notice by a party if the other party is in material breach of the agreement with respect to such product and has not cured such breach within the time periods provided for under the agreement.

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 ~~$291~~$297 million related to currently marketed products, net deferred tax liabilities of ~~$93~~$102 million, other net assets of ~~$15~~$32 million and noncontrolling interest of $25 million. In addition, the Company recorded liabilities of $37 million for contingencies identified at

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

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 ~~$170~~$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 ~~then~~ 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.

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 entered into a global strategic oncology collaboration to co-develop and co-commercialize AstraZeneca’s Lynparza for multiple cancer types. Lynparza is an oral poly (ADP-ribose) polymerase (PARP) inhibitor currently approved for certain types of ovarian and breast cancer. The companies are jointly developing and commercializing Lynparza, both as monotherapy and in combination trials with other potential medicines. Independently, Merck and AstraZeneca will develop and commercialize Lynparza in combinations with their respective PD-1 and PD-L1 medicines, Keytruda and Imfinzi. The companies will also jointly develop and commercialize AstraZeneca’s selumetinib, an oral, potent, selective inhibitor of MEK, part of the mitogen-activated protein kinase (MAPK) pathway, currently being developed for multiple indications. Under the terms of the agreement, AstraZeneca and Merck will share the development and commercialization costs for Lynparza and selumetinib monotherapy and non-PD-L1/PD-1 combination therapy opportunities.

Gross profits from Lynparza and selumetinib product sales generated through monotherapies or combination therapies are shared equally. Merck will fund all development and commercialization costs of Keytruda in combination with Lynparza or selumetinib. AstraZeneca will fund all development and commercialization costs of Imfinzi in combination with Lynparza or selumetinib. AstraZeneca is currently the principal on Lynparza sales transactions. Merck records its share of Lynparza product sales, net of cost of sales and commercialization costs, as alliance revenue within the Pharmaceutical segment and its share of development costs associated with the collaboration as part of Research and development 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 and is making payments totaling $750 million over a multi-year period for certain license options ($250 million of which was paid in 2017). The Company recorded an aggregate charge of $2.35 billion in Research and development expenses in 2017 related to the upfront payment and future license options payments. In addition, the agreement provides for additional contingent payments from Merck to AstraZeneca related to the successful achievement of regulatory and sales-based milestones.

In the second quarter of 2018, Merck determined it was probable that annual sales of Lynparza in the future would trigger a $200 million sales-based milestone payment from Merck to AstraZeneca. Accordingly, in the second quarter of 2018, Merck recorded a $200 million noncurrent liability and a corresponding intangible asset and also recognized $17 million of cumulative amortization expense within Materials and production costs. Merck previously accrued a $150 million sales-based milestone in the first quarter of 2018 (along with $9 million of cumulative amortization expense) and a $100 million sales-based milestone in 2017 (which was paid in 2018). The remaining $3.65 billion of potential future sales-based milestone payments have not yet been accrued as they are not deemed by the Company to be probable at this time.

In ~~July 2016, Merck acquired Afferent Pharmaceuticals (Afferent), a privately held pharmaceutical company focused on~~January 2018, Lynparza received approval in the ~~development of therapeutic candidates targeting the P2X3 receptor~~United States for the treatment of ~~common, poorly-managed, neurogenic conditions. Afferent’s lead investigational candidate, MK-7264 (formerly AF-219), is~~certain patients with metastatic breast cancer, triggering a ~~selective, non-narcotic, orally-administered P2X3 antagonist being evaluated in a Phase 2b clinical trial for~~$70 million capitalized milestone payment from Merck to AstraZeneca. Potential future regulatory milestone payments of $1.93 billion remain under the treatment of refractory, chronic cough as well as in a Phase 2 clinical trial in idiopathic pulmonary fibrosis with cough. Total consideration transferred of $510 million included cash paid for outstanding Afferent shares of $487 million, as well as share-based compensation paymentsagreement.

The asset balance related to ~~settle equity awards attributable to precombination service~~Lynparza (which includes capitalized sales-based 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 transactionregulatory milestone payments) was ~~accounted for as an acquisition of a business. The Company determined the fair value of the contingent consideration was $223~~$468 million at ~~the acquisition date utilizing a probability-weighted estimated cash flow stream adjusted for the expected timing of each payment using an appropriate discount rate dependent~~September 30, 2018 and is included in Other Assets on the nature and timing of the milestone payment. Merck recognized an intangible asset for in-process research and development (IPR&D) of $832 million, net deferred tax liabilities of $258 million, and other net assets of $29 million (primarily consisting of cash acquired).Consolidated Balance Sheet. The ~~excess of the consideration transferred~~amount is being amortized over ~~the fair value of net assets acquired of $130 million was recorded~~its estimated useful life through 2028 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-adjustedsupported by projected future ~~net~~ cash flows, ~~were then discounted~~subject to ~~present value using a discount rate of 11.5%. Actual cash flows are likely to be different than those assumed.~~

Also in July 2016, Merck, through its wholly owned subsidiary Healthcare Services & Solutions, LLC, acquired a majority ownership interest in The StayWell Company LLC (StayWell), a portfolio company of Vestar Capital Partners (Vestar).impairment testing.

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

~~StayWell~~Summarized information related to this collaboration is ~~a health engagement company that helps its clients engage~~as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
($ in millions)	2018		2017		2018		2017
Alliance revenues	$	49	$	5	$	125	$	5

Materials and production⁽¹⁾	12		—		48		—
Marketing and administrative	12		—		28		—
Research and development ⁽²⁾	47		2,377		118		2,377

($ in millions)					September 30, 2018		December 31, 2017
Receivables from AstraZeneca					$	46	$	12
Payables to AstraZeneca⁽³⁾					892		643

⁽¹⁾Represents amortization of capitalized milestone payments.

⁽²⁾Amounts for the third quarter and ~~educate people to improve health and business results. Under the terms~~first nine months of the transaction, Merck paid $150 million for a majority ownership interest. Additionally, Merck provided StayWell with a $150 million intercompany loan to pay down preexisting third-party debt. Merck has an option to buy, and Vestar has an option to require Merck to buy, some or all of Vestar’s remaining ownership interest at fair value beginning three years from the acquisition date. This transaction was accounted for as an acquisition of a business. Merck recognized intangible assets of $238 million, deferred tax liabilities of $84 million, other net liabilities of $5 million and noncontrolling interest of $124 million. The excess of the consideration transferred over the fair value of net assets acquired of $275 million was recorded as goodwill and is largely attributable to anticipated synergies expected to arise after the acquisition. The goodwill was allocated2017 include $2.35 billion related to the ~~Healthcare Services segment~~upfront payment and ~~is not deductible for tax purposes. The intangible assets recognized primarily relate to customer relationships, which are being amortized over a 10-year useful life,~~future license option payments.

⁽³⁾Includes accrued milestone and ~~medical information and solutions content, which are being amortized over a five-year useful life.~~license option payments.

Eisai

In ~~June 2016,~~March 2018, Merck and ~~Moderna Therapeutics (Moderna) entered into~~Eisai announced a strategic collaboration for the worldwide co-development and ~~license~~co-commercialization of Lenvima, an orally available tyrosine kinase inhibitor discovered by Eisai. Under the agreement, toMerck and Eisai will develop and commercialize ~~novel messenger RNA (mRNA)-based personalized cancer vaccines. The development program will entail multiple studies in several types of cancer~~Lenvima jointly, both as monotherapy and ~~include the evaluation of mRNA-based personalized cancer vaccines~~ in combination with Merck’s anti-PD-1 therapy, Keytruda. ~~Pursuant to~~Eisai records Lenvima product sales globally (Eisai is the ~~terms~~principal on Lenvima sales transactions), and Merck and Eisai share gross profits equally. Merck records its share of Lenvima product sales, net of cost of sales and commercialization costs, as alliance revenue. Expenses incurred during co-development, including for studies evaluating Lenvima as monotherapy, are shared equally by the two companies and reflected in Research and development expenses. Under the agreement, Merck made an upfront ~~cash payment~~payments to ~~Moderna~~Eisai of $750 million and will make payments of up to $650 million for certain option rights through 2021 ($325 million in January 2019 or earlier in certain circumstances, $200 million ~~which was~~in January 2020 and $125 million in January 2021). The Company recorded an aggregate charge of $1.4 billion in Research and development ~~expenses. Following human proof~~expenses in the first nine months of ~~concept studies,~~2018 related to the upfront payments and future option payments. In addition, the agreement provides for Eisai to receive up to $385 million associated with the achievement of certain clinical and regulatory milestones and up to $3.97 billion for the achievement of milestones associated with sales of Lenvima.

In the third quarter of 2018, Merck ~~has~~determined it was probable that annual sales of Lenvima in the ~~right~~future would trigger a $50 million sales-based milestone payment from Merck to ~~elect~~Eisai. Accordingly, in the third quarter of 2018, Merck recorded a $50 million noncurrent liability and a corresponding intangible asset. The remaining $3.92 billion of potential future sales-based milestone payments have not yet been accrued as they are not deemed by the Company to ~~make an additional~~be probable at this time.

Lenvima was approved for the treatment of patients with unresectable hepatocellular carcinoma in Japan in March 2018, in the United States and European Union in August 2018, and in China in September 2018, triggering capitalized milestone payments of $25 million, $125 million, $50 million, and $25 million, respectively, to Eisai. Potential future regulatory milestone payments of $160 million remain under the agreement.

The asset balance related to Lenvima (which includes capitalized sales-based and regulatory milestones payments) was $266 million at September 30, 2018 and is included in Other Assets on the Consolidated Balance Sheet. The amount is being amortized over its estimated useful life through 2026 as supported by projected future cash flows, subject to impairment testing.

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

Summarized information related to this collaboration is as follows:



($ in millions)	Three Months Ended September 30, 2018		Nine Months Ended September 30, 2018
Alliance revenues	$	43	$	78

Materials and production⁽¹⁾	8		9
Marketing and administrative	5		7
Research and development ⁽²⁾	36		1,473

($ in millions)			September 30, 2018
Receivables from Eisai			$	42
Payables to Eisai ⁽³⁾			733

⁽¹⁾Represents amortization of capitalized milestone payments.

⁽²⁾Amount for the first nine months of 2018 includes $1.4 billion related to the upfront payment and future license option payments.

⁽³⁾Includes accrued milestone and license option payments.

Bayer AG

In 2014, the Company entered into a worldwide clinical development collaboration with Bayer AG (Bayer) to ~~Moderna. If Merck exercises this right, the~~market and develop soluble guanylate cyclase (sGC) modulators including Bayer’s Adempas, which is approved to treat pulmonary arterial hypertension and chronic thromboembolic pulmonary hypertension. The two companies have implemented a joint development and commercialization strategy. The collaboration also includes clinical development of Bayer’s vericiguat, which is in Phase 3 trials for worsening heart failure, as well as opt-in rights for other early-stage sGC compounds in development by Bayer. Merck in turn made available its early-stage sGC compounds under similar terms. Under the agreement, Bayer leads commercialization of Adempas in the Americas, while Merck leads commercialization in the rest of the world. For vericiguat and other potential opt-in products, Bayer will ~~then equally~~lead commercialization in the rest of world and Merck will lead in the Americas. For all products and candidates included in the agreement, both companies will share in development costs and profits ~~under a worldwide collaboration for the development of personalized cancer vaccines. Moderna~~on sales and will have the right to ~~elect to~~ co-promote in territories where they are not the ~~personalized cancer vaccines~~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’s marketing territories, as well as Merck’s share of profits from the sale of Adempas in Bayer’s marketing territories.

In the second quarter of 2018, Merck determined it was probable that annual worldwide sales of Adempas in the ~~United States. The agreement entails exclusivity around combinations with~~ ~~Keytruda. Moderna and~~future would trigger a $375 million sales-based milestone payment from 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 provides 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 considerationBayer. Accordingly, in the ~~transaction included~~second quarter of 2018, Merck recorded a ~~cash~~$375 million noncurrent liability and a corresponding intangible asset and also recognized $106 million of cumulative amortization expense within Materials and production costs. In 2017, annual worldwide sales of Adempas exceeded $500 million triggering a $350 million milestone payment ~~of $150 million and future additional milestone payments of up~~from Merck 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 then discounted to present value also using a discount rate of 10.5%. Actual cash flows are likely to be different than those assumed. In July 2017, Merck made a $100 million payment as a result of the achievement of a clinical milestone,Bayer, which was accrued for in 2016 when Merck deemed the payment to be probable. The milestone was paid in the first quarter of 2018. 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 ~~estimated fair value at the time of acquisition as noted above.~~this time.

~~Additionally, in January 2016, Merck sold~~The intangible asset balance related to Adempas (which includes the ~~U.S. marketing rights to Cortrophin~~remaining acquired intangible asset balance, as well as capitalized sales-based milestones payments) was $1.1 billion at September 30, 2018 and ~~Corticotropin Zinc Hydroxide to ANI Pharmaceuticals, Inc. (ANI). Under the terms of the agreement, ANI made a payment of $75 million, which was recorded~~is included in ~~Sales~~Other Intangibles, Net ~~, and may make additional payments~~on the Consolidated Balance Sheet. The amount is being amortized over its estimated useful life through 2027 as supported by projected future cash flows, subject to ~~the Company based on future sales. Merck does not have any ongoing supply or other performance obligations after the closing date.~~impairment testing.

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

Summarized information related to this collaboration is as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
($ in millions)	2018		2017		2018		2017
Net product sales recorded by Merck	$	47	$	38	$	138	$	105
Merck’s profit share from sales in Bayer’s marketing territories	47		32		100		116
Total sales	94		70		238		221

Materials and production⁽¹⁾	29		25		188		73
Marketing and administrative	11		6		26		18
Research and development	34		27		90		78

($ in millions)					September 30, 2018		December 31, 2017
Receivables from Bayer					$	36	$	33
Payables to Bayer ⁽²⁾					375		352

⁽¹⁾Includes amortization of intangible assets.

⁽²⁾Includes accrued milestone payments.


3.5.	Restructuring

The Company incurs substantial costs for restructuring program activities related to Merck’s productivity and cost reduction initiatives, as well as in connection with the integration of certain acquired businesses. In 2010 and 2013, the Company commenced actions under global restructuring programs designed to streamline its cost structure. The actions under these programs include the elimination of positions in sales, administrative and headquarters organizations, as well as the sale or closure of certain manufacturing and research and development sites and the consolidation of office facilities. The Company also continues to reduce its global real estate footprint and improve the efficiency of its manufacturing and supply network.

The Company recorded total pretax costs of ~~$180~~$169 million and ~~$212~~$180 million in the third quarter of ~~2017~~2018 and ~~2016,~~2017, respectively, and ~~$605~~$508 million and ~~$759~~$605 million for the first nine months of ~~2017~~2018 and ~~2016,~~2017, respectively, related to restructuring program activities. Since inception of the programs through September 30, ~~2017~~2018, Merck has recorded total pretax accumulated costs of approximately ~~$13.2~~$14.0 billion and eliminated approximately ~~42,120~~45,220 positions comprised of employee separations, as well as the elimination of contractors and vacant positions. ~~The Company expects to substantially complete the remaining actions under these programs by the end of 2017 and incur approximately $250 million of additional pretax costs.~~ The Company estimates that approximately two-thirds of the cumulative pretax costs are cash outlays, primarily related to employee separation expense.

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

Approximately one-third of the cumulative pretax costs are non-cash, relating primarily to the accelerated depreciation of facilities to be closed or divested. While the Company has substantially completed the actions under these programs, approximately $50 million of additional pretax costs are expected to be incurred in the fourth quarter of 2018 relating to anticipated employee separations and remaining asset-related costs.

For segment reporting, restructuring charges are unallocated expenses.

The following tables summarize the charges related to restructuring program activities by type of cost:


	Three Months Ended September 30, 2017								Nine Months Ended September 30, 2017								Three Months Ended September 30, 2018										Nine Months Ended September 30, 2018
($ in millions)	Separation Costs		Accelerated Depreciation		Other		Total		Separation Costs		Accelerated Depreciation		Other		Total		Separation Costs		Accelerated Depreciation			Other		Total			Separation Costs		Accelerated Depreciation			Other		Total
Materials and production	$	—	$	5	$	20	$	25	$	—	$	52	$	69	$	121	$	—	$	1		$	1	$	2		$	—	$	1		$	10	$	11
Marketing and administrative	—		—		—		—		—		2		1		3		—		—			—		—			—		1			1		2
Research and development	—		1		1		2		—		7		4		11		—		(9		)	5		(4		)	—		(12		)	13		1
Restructuring costs	100		—		53		153		302		—		168		470		137		—			34		171			392		—			102		494
	$	100	$	6	$	74	$	180	$	302	$	61	$	242	$	605	$	137	$	(8	)	$	40	$	169		$	392	$	(10	)	$	126	$	508


	Three Months Ended September 30, 2016								Nine Months Ended September 30, 2016								Three Months Ended September 30, 2017								Nine Months Ended September 30, 2017
($ in millions)	Separation Costs		Accelerated Depreciation		Other		Total		Separation Costs		Accelerated Depreciation		Other		Total		Separation Costs		Accelerated Depreciation		Other		Total		Separation Costs		Accelerated Depreciation		Other		Total
Materials and production	$	—	$	18	$	18	$	36	$	—	$	69	$	80	$	149	$	—	$	5	$	20	$	25	$	—	$	52	$	69	$	121
Marketing and administrative	—		1		—		1		—		8		83		91		—		—		—		—		—		2		1		3
Research and development	—		14		—		14		—		133		—		133		—		1		1		2		—		7		4		11
Restructuring costs	61		—		100		161		172		—		214		386		100		—		53		153		302		—		168		470
	$	61	$	33	$	118	$	212	$	172	$	210	$	377	$	759	$	100	$	6	$	74	$	180	$	302	$	61	$	242	$	605

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

Separation costs are associated with actual headcount reductions, as well as those headcount reductions which were probable and could be reasonably estimated. In the third quarter of 2018 and 2017, ~~and 2016,~~ approximately ~~205~~525 positions and ~~300~~205 positions, respectively, and for the first nine months of 2018 and 2017, ~~and 2016, approximately 1,225~~1,870 positions and ~~1,355~~1,225 positions, respectively, were eliminated under restructuring program activities.

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 of the sites have and will continue to operate up through the respective closure dates and, since future undiscounted cash flows were 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 ~~2017~~2018 and ~~2016~~2017 includes asset abandonment, shut-down and other related costs, as well as pretax gains and losses resulting from sales of facilities and related assets. Additionally, other activity includes certain employee-related costs associated with pension and other postretirement benefit plans (see Note ~~10)~~12) and share-based compensation.

The following table summarizes the charges and spending relating to restructuring program activities for the nine months ended September 30, ~~2017:~~2018:


($ in millions)	Separation Costs			Accelerated Depreciation			Other			Total			Separation Costs			Accelerated Depreciation			Other			Total
Restructuring reserves January 1, 2017	$	395		$	—		$	146		$	541
Restructuring reserves January 1, 2018													$	619		$	—		$	128		$	747
Expense	302			61			242			605			392			(10		)	126			508
(Payments) receipts, net	(224		)	—			(339		)	(563		)	(535		)	—			(170		)	(705		)
Non-cash activity	—			(61		)	74			13			—			10			13			23
Restructuring reserves September 30, 2017 ⁽¹⁾	$	473		$	—		$	123		$	596
Restructuring reserves September 30, 2018 ⁽¹⁾													$	476		$	—		$	97		$	573


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

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


4.6.	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 volatility in foreign exchange rates.

The objective of the revenue hedging program is to reduce the variability caused by changes in foreign exchange rates that would affect the U.S. dollar value of future cash flows derived from foreign currency denominated sales, primarily the euro and Japanese yen. To achieve this objective, the Company will hedge a portion of its forecasted foreign currency denominated third-party and intercompany distributor entity sales (forecasted sales) that are expected to occur over its planning cycle, typically no more than two years into the future. The Company will layer in hedges over time, increasing the portion of forecasted sales hedged as it gets closer to the expected date of the forecasted sales. The portion of forecasted sales hedged is based on assessments of cost-benefit profiles that consider natural offsetting exposures, revenue and exchange rate volatilities and correlations, and the cost of hedging instruments. The Company manages its anticipated transaction exposure principally with purchased local currency put options, forward contracts and purchased collar options.

The fair values of these derivative contracts are recorded as either assets (gain positions) or liabilities (loss positions) in the Condensed Consolidated Balance Sheet. Changes in the fair value of derivative contracts are recorded each period in either current earnings or Other comprehensive income (OCI), depending on whether the derivative is designated as part of a hedge transaction and, if so, the type of hedge transaction. For derivatives that are designated as cash flow hedges, the ~~effective portion of the~~ unrealized gains or losses on these contracts is recorded in Accumulated other comprehensive income (AOCI) and reclassified into Sales when the hedged anticipated revenue is recognized. ~~The hedge relationship is highly effective and hedge ineffectiveness has been~~ ~~de minimis~~. For those derivatives which are not designated as cash flow hedges, but serve as economic

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

hedges of forecasted sales, unrealized gains or losses are recorded in Sales each period. The cash flows from both designated and non-designated contracts are reported as operating activities in the Condensed Consolidated Statement of Cash Flows. The Company does not enter into derivatives for trading or speculative purposes.

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

Monetary assets and liabilities denominated in a currency other than the functional currency of a given subsidiary are remeasured at spot rates in effect on the balance sheet date with the effects of changes in spot rates reported in Other (income) expense, net. The forward contracts are not designated as hedges and are marked to market through Other (income) expense, net. Accordingly, fair value changes in the forward contracts help mitigate the changes in the value of the remeasured assets and liabilities attributable to changes in foreign currency exchange rates, except to the extent of the spot-forward differences. These differences are not significant due to the short-term nature of the contracts, which typically have average maturities at inception of less than one year.

The Company ~~may~~ also ~~use~~uses forward exchange contracts to hedge its net investment in foreign operations against movements in exchange rates. The forward contracts are designated as hedges of the net investment in a foreign operation. The Company hedges a portion of the net investment in certain of its foreign ~~operations and measures ineffectiveness based upon changes in spot foreign exchange rates that are recorded in~~ ~~Other (income) expense, net~~.operations. The ~~effective portion of the~~ unrealized gains or losses on these contracts isare recorded in foreign currency translation adjustment within OCI, and ~~remains~~remain in AOCI until either the sale or complete or substantially complete liquidation of the subsidiary. The Company excludes certain portions of the change in fair value of its derivative instruments from the assessment of hedge effectiveness (excluded component). Changes in fair value of the excluded components are recognized in OCI. In accordance with the new guidance adopted on January 1, 2018 (see Note 1), the Company has elected to recognize in earnings the initial value of the excluded component on a straight-line basis over the life of the derivative instrument, rather than using the mark-to-market approach. The cash flows from these contracts are reported as investing activities in the Condensed Consolidated Statement of Cash Flows.

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

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. ~~Included in~~

The effects of the ~~cumulative translation adjustment are pretax losses of~~Company’s net investment hedges on ~~$467 million~~OCI and the Consolidated Statement of Income are shown below:



	Amount of Pretax (Gain) Loss Recognized in Other Comprehensive Income⁽¹⁾										Amount of Pretax (Gain) Loss Recognized in Other (income) expense, net for Amounts Excluded from Effectiveness Testing
	Three Months Ended September 30,					Nine Months Ended September 30,					Three Months Ended September 30,					Nine Months Ended September 30,
($ in millions)	2018			2017		2018			2017		2018			2017		2018			2017
Net Investment Hedging Relationships
Foreign exchange contracts	$	(10	)	$	—	$	(24	)	$	—	$	(4	)	$	—	$	(7	)	$	—
Euro-denominated notes	38			128		(54		)	467		—			—		—			—

~~$60 million~~⁽¹⁾ ~~for~~No amounts were reclassified from AOCI into income related to the ~~first nine months~~sale of ~~2017 and 2016, respectively, from the euro-denominated notes.~~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, four interest rate swaps with notional amounts of $250 million each matured. These swaps effectively converted the Company’s $1.0 billion, 1.30% fixed-rate notes due 2018 to variable rate debt. At September 30, ~~2017,~~2018, the Company was a party to 2622 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.

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

($ in millions) September 30, 2017
Debt Instrument Par Value of Debt Number of Interest Rate Swaps Held Total Swap Notional Amount
1.30% notes due 2018 $ 1,000
4
$ 1,000
5.00% notes due 2019 1,250
3
550
1.85% notes due 2020 1,250
5
1,250
3.875% notes due 2021 1,150
5
1,150
2.40% notes due 2022 1,000
4
1,000
2.35% notes due 2022 1,250
5
1,250



	September 30, 2018
($ in millions)	Par Value of Debt	Number of Interest Rate Swaps Held	Total Swap Notional Amount
5.00% notes due 2019	1,250	3	550
1.85% notes due 2020	1,250	5	1,250
3.875% notes due 2021	1,150	5	1,150
2.40% notes due 2022	1,000	4	1,000
2.35% notes due 2022	1,250	5	1,250

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

The table below presents the location of amounts recorded on the Consolidated Balance Sheet related to cumulative basis adjustments for fair value hedges:



	Carrying Amount of Hedged Liabilities				Cumulative Amount of Fair Value Hedging Adjustment Increase (Decrease) Included in the Carrying Amount
($ in millions)	September 30, 2018		December 31, 2017		September 30, 2018			December 31, 2017
Balance Sheet Line Item in which Hedged Item is Included
Loans payable and current portion of long-term debt	$	553	$	983	$	3		$	(17	)
Long-Term Debt ⁽¹⁾	4,503		5,146		(138		)	(41		)

⁽¹⁾Amounts include hedging adjustment gains related to discontinued hedging relationships of $6 million and $11 million at September 30, 2018 and December 31, 2017, respectively.

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:


		September 30, 2017						December 31, 2016							September 30, 2018						December 31, 2017
		Fair Value of Derivative				U.S. Dollar Notional		Fair Value of Derivative				U.S. Dollar Notional			Fair Value of Derivative				U.S. Dollar Notional		Fair Value of Derivative				U.S. Dollar Notional
($ in millions)	Balance Sheet Caption	Asset		Liability		U.S. Dollar Notional		Asset		Liability		U.S. Dollar Notional		Balance Sheet Caption	Asset		Liability		U.S. Dollar Notional		Asset		Liability		U.S. Dollar Notional
Derivatives Designated as Hedging Instruments
Interest rate swap contracts	Other assets	$	15	$	—	$	2,700	$	20	$	—	$	2,700	Other assets	$	—	$	—	$	—	$	2	$	—	$	550
Interest rate swap contracts	Accrued and other current liabilities	—		3		1,000		—		—		—		Accrued and other current liabilities	—		2		550		—		3		1,000
Interest rate swap contracts	Other noncurrent liabilities	—		23		2,500		—		29		3,500		Other noncurrent liabilities	—		138		4,650		—		52		4,650
Foreign exchange contracts	Other current assets	83		—		4,385		616		—		6,063		Other current assets	175		—		6,115		51		—		4,216
Foreign exchange contracts	Other assets	46		—		1,979		129		—		2,075		Other assets	85		—		2,682		38		—		1,936
Foreign exchange contracts	Accrued and other current liabilities	—		88		1,574		—		1		48		Accrued and other current liabilities	—		5		657		—		71		2,014
Foreign exchange contracts	Other noncurrent liabilities	—		1		25		—		1		12		Other noncurrent liabilities	—		1		66		—		1		20
		$	144	$	115	$	14,163	$	765	$	31	$	14,398		$	260	$	146	$	14,720	$	91	$	127	$	14,386
Derivatives Not Designated as Hedging Instruments
Foreign exchange contracts	Other current assets	$	77	$	—	$	3,927	$	230	$	—	$	8,210	Other current assets	$	127	$	—	$	6,531	$	39	$	—	$	3,778
Foreign exchange contracts	Accrued and other current liabilities	—		112		6,383		—		103		2,931		Accrued and other current liabilities	—		58		5,298		—		90		7,431
		$	77	$	112	$	10,310	$	230	$	103	$	11,141		$	127	$	58	$	11,829	$	39	$	90	$	11,209
		$	221	$	227	$	24,473	$	995	$	134	$	25,539		$	387	$	204	$	26,549	$	130	$	217	$	25,595

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

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


	September 30, 2017						December 31, 2016						September 30, 2018						December 31, 2017
($ in millions)	Asset			Liability			Asset			Liability			Asset			Liability			Asset			Liability
Gross amounts recognized in the consolidated balance sheet	$	221		$	227		$	995		$	134		$	387		$	204		$	130		$	217
Gross amount subject to offset in master netting arrangements not offset in the consolidated balance sheet	(137		)	(137		)	(131		)	(131		)	(135		)	(135		)	(94		)	(94		)
Cash collateral received	(8		)	—			(529		)	—			(54		)	—			(3		)	—
Net amounts	$	76		$	90		$	335		$	3		$	198		$	69		$	33		$	123

The table below provides information onregarding the location and amount of pretax ~~gain or loss amounts for~~(gains) losses of derivatives ~~that are: (i)~~ designated in a fair value ~~hedging relationship, (ii) designated in a foreign currency~~or cash flow hedging ~~relationship and (iii) not designated in a hedging relationship:~~relationships:

Three Months Ended
September 30, Nine Months Ended
September 30,
($ in millions) 2017 2016 2017 2016
Derivatives designated in a fair value hedging relationship
Interest rate swap contracts
Amount of loss (gain) recognized in Other (income) expense, net on derivatives ⁽¹⁾
$ 8
$ 59
$ 2
$ (139 )
Amount of (gain) loss recognized in Other (income) expense, net on hedged item ⁽¹⁾
(9 ) (60 ) (5 ) 135
Derivatives designated in foreign currency cash flow hedging relationships
Foreign exchange contracts
Amount of gain reclassified from AOCI to Sales
(13 ) (44 ) (157 ) (251 )
Amount of loss recognized in OCI on derivatives
88
69
520
311
Derivatives not designated in a hedging relationship
Foreign exchange contracts
Amount of loss (gain) recognized in Other (income) expense, net on derivatives ⁽²⁾
119
29
70
(87 )



	Sales					Other (income) expense, net ⁽¹⁾					Other comprehensive income (loss)						Sales				Other (income) expense, net⁽¹⁾						Other comprehensive income (loss)
	Three Months Ended September 30,					Three Months Ended September 30,					Three Months Ended September 30,						Nine Months Ended September 30,				Nine Months Ended September 30,						Nine Months Ended September 30,
($ in millions)	2018			2017		2018			2017		2018			2017			2018		2017		2018			2017			2018		2017
Financial Statement Line Items in which Effects of Fair Value or Cash Flow Hedges are Recorded	$	10,794		$	10,325	$	(172	)	(207	)	$	(29	)	$	149		31,296		$	29,689	$	(512	)	$	(351	)	$	33	$	281
(Gain) loss on fair value hedging relationships
Interest rate swap contracts
Hedged items	—			—		(9		)	(9	)	—			—			—		—		(86		)	(5		)	—		—
Derivatives designated as hedging instruments	—			—		15			2		—			—			—		—		100			(25		)	—		—
Impact of cash flow hedging relationships
Foreign exchange contracts
Amount of gain (loss) recognized in OCI on derivatives	—			—		—			—		29			(88		)	—		—		—			—			113		(520		)
(Decrease) increase in Sales as a result of AOCI reclassifications	(6		)	13		—			—		6			(13		)	(172	)	157		—			—			172		(157		)

⁽¹⁾~~There was $1 million~~ Interest expense is a component of ~~ineffectiveness on~~Other (income) expense, net.

The table below provides information regarding the ~~hedge during both the third quarter~~income statement effects of ~~2017 and 2016, and $3 million and $4 million, respectively, of ineffectiveness on the hedge during the first nine months of 2017 and 2016, respectively.~~derivatives not designated as hedging instruments:



		Amount of Derivative Pretax (Gain) Loss Recognized in Income
		Three Months Ended September 30,					Nine Months Ended September 30,
($ in millions)	Income Statement Caption	2018			2017		2018			2017
Derivatives Not Designated as Hedging Instruments
Foreign exchange contracts⁽¹⁾	Other (income) expense, net	$	(57	)	$	119	$	(224	)	$	70
Foreign exchange contracts ⁽²⁾	Sales	—			—		(5		)	—

⁽²⁾⁽¹⁾ These derivative contracts mitigate changes in the value of remeasured foreign currency denominated monetary assets and liabilities attributable to changes in foreign currency exchange rates.

⁽²⁾ These derivative contracts serve as economic hedges of forecasted transactions.

At September 30, ~~2017~~2018, the Company estimates $~~164~~75 million of pretax net unrealized ~~losses~~gains on derivatives maturing within the next 12 months that hedge foreign currency denominated sales over that same period will be reclassified from AOCI to Sales. The amount ultimately reclassified to Sales may differ as foreign exchange rates change. Realized gains and losses are ultimately determined by actual exchange rates at maturity.

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

Investments in Debt and Equity Securities

Information on investments in debt and equity securities is as follows:


	September 30, 2017									December 31, 2016									September 30, 2018									December 31, 2017
	Fair Value		Amortized Cost		Gross Unrealized					Fair Value		Amortized Cost		Gross Unrealized					Fair Value		Amortized Cost		Gross Unrealized					Fair Value		Amortized Cost		Gross Unrealized
($ in millions)	Fair Value		Amortized Cost		Gains		Losses			Fair Value		Amortized Cost		Gains		Losses			Fair Value		Amortized Cost		Gains		Losses			Fair Value		Amortized Cost		Gains		Losses
Corporate notes and bonds	$	10,259	$	10,242	$	31	$	(14	)	$	10,577	$	10,601	$	15	$	(39	)	$	6,866	$	6,952	$	2	$	(88	)	$	9,806	$	9,837	$	9	$	(40	)
U.S. government and agency securities	1,924		1,934		—		(10		)	2,232		2,244		1		(13		)	1,431		1,448		—		(17		)	2,042		2,059		—		(17		)
Asset-backed securities	1,473		1,473		2		(2		)	1,376		1,380		1		(5		)	1,288		1,300		1		(13		)	1,542		1,548		1		(7		)
Foreign government bonds																			538		546		—		(8		)	733		739		—		(6		)
Mortgage-backed securities	704		708		1		(5		)	796		801		1		(6		)	23		24		—		(1		)	626		634		1		(9		)
Commercial paper	695		695		—		—			4,330		4,330		—		—			30		30		—		—			159		159		—		—
Foreign government bonds	640		642		—		(2		)	519		521		—		(2		)
Equity securities	539		309		233		(3		)	349		281		71		(3		)
	$	16,234	$	16,003	$	267	$	(36	)	$	20,179	$	20,158	$	89	$	(68	)
Total debt securities																			$	10,176	$	10,300	$	3	$	(127	)	$	14,908	$	14,976	$	11	$	(79	)
Publicly traded equity securities ⁽¹⁾																			378									275		265		16		(6		)
Total debt and publicly traded equity securities																			$	10,554								$	15,183	$	15,241	$	27	$	(85	)

⁽¹⁾Pursuant to the adoption of ASU 2016-01 (see Note 1), beginning on January 1, 2018, changes in the fair value of publicly traded equity securities are recognized in net income. Unrealized net gains of $10 million and $60 million, respectively, were recognized in Other (income) expense, net during the third quarter and first nine months of 2018 on equity securities still held at September 30, 2018.

At September 30, 2018, the Company also had $749 million of equity investments without readily determinable fair values included in Other Assets. During the first nine months of 2018, the Company recognized unrealized gains of $199 million on certain of these equity investments recorded in Other (income) expense, net based on favorable observable price changes from transactions involving similar investments of the same investee. In addition, during the first nine months of 2018, the Company recognized unrealized losses of $25 million in Other (income) expense, net related to certain of these investments based on unfavorable observable price changes.

Available-for-sale debt securities included in Short-term investments totaled ~~$3.0~~$2.4 billion at September 30, ~~2017~~.2018. Of the remaining debt securities, ~~$11.2~~$7.1 billion mature within five years. At September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, there were no debt securities pledged as collateral.

Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company uses a fair value hierarchy which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. There are three levels of inputs used to measure fair value with Level 1

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

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.

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

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

Financial assets and liabilities measured at fair value on a recurring basis are summarized below:


	Fair Value Measurements Using								Fair Value Measurements Using								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		Quoted Prices In Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
($ in millions)	September 30, 2017								December 31, 2016								September 30, 2018									December 31, 2017
Assets
Investments
Corporate notes and bonds	$	—	$	10,110	$	—	$	10,110	$	—	$	10,389	$	—	$	10,389	$	—		$	6,765	$	—	$	6,765	$	—	$	9,678	$	—	$	9,678
Asset-backed securities⁽¹⁾																	—			1,271		—		1,271		—		1,476		—		1,476
U.S. government and agency securities	68		1,622		—		1,690		29		1,890		—		1,919		—			1,265		—		1,265		68		1,767		—		1,835
Asset-backed securities⁽¹⁾	—		1,395		—		1,395		—		1,257		—		1,257
Foreign government bonds																	—			538		—		538		—		732		—		732
Commercial paper	—		695		—		695		—		4,330		—		4,330		—			30		—		30		—		159		—		159
Foreign government bonds	—		639		—		639		—		518		—		518
Mortgage-backed securities ⁽¹⁾	—		603		—		603		—		628		—		628
Equity securities	368		—		—		368		201		—		—		201
Mortgage-backed securities																	—			—		—		—		—		547		—		547
Publicly traded equity securities																	196			—		—		196		104		—		—		104
	436		15,064		—		15,500		230		19,012		—		19,242		196			9,869		—		10,065		172		14,359		—		14,531
Other assets ⁽²⁾																			��
U.S. government and agency securities	—		234		—		234		—		313		—		313		54			112		—		166		—		207		—		207
Corporate notes and bonds	—		149		—		149		—		188		—		188		—			101		—		101		—		128		—		128
Mortgage-backed securities ⁽¹⁾	—		101		—		101		—		168		—		168
Mortgage-backed securities																	—			23		—		23		—		79		—		79
Asset-backed securities⁽¹⁾	—		78		—		78		—		119		—		119		—			17		—		17		—		66		—		66
Foreign government bonds	—		1		—		1		—		1		—		1		—			—		—		—		—		1		—		1
Equity securities	171		—		—		171		148		—		—		148
Publicly traded equity securities																	182			—		—		182		171		—		—		171
	171		563		—		734		148		789		—		937		236			253		—		489		171		481		—		652
Derivative assets ⁽³⁾
Forward exchange contracts																	—			233		—		233		—		48		—		48
Purchased currency options	—		119		—		119		—		644		—		644		—			154		—		154		—		80		—		80
Forward exchange contracts	—		87		—		87		—		331		—		331
Interest rate swaps	—		15		—		15		—		20		—		20		—			—		—		—		—		2		—		2
	—		221		—		221		—		995		—		995		—			387		—		387		—		130		—		130
Total assets	$	607	$	15,848	$	—	$	16,455	$	378	$	20,796	$	—	$	21,174	$	432		$	10,509	$	—	$	10,941	$	343	$	14,970	$	—	$	15,313
Liabilities
Other liabilities
Contingent consideration	$	—	$	—	$	945	$	945	$	—	$	—	$	891	$	891	$	—		$	—	$	852	$	852	$	—	$	—	$	935	$	935
Derivative liabilities ⁽³⁾
Interest rate swaps																	—			140		—		140		—		55		—		55
Forward exchange contracts	—		201		—		201		—		93		—		93		—			60		—		60		—		162		—		162
Interest rate swaps	—		26		—		26		—		29		—		29
Written currency options	—		—		—		—		—		12		—		12		—			4		—		4		—		—		—		—
	—		227		—		227		—		134		—		134		—			204		—		204		—		217		—		217
Total liabilities	$	—	$	227	$	945	$	1,172	$	—	$	134	$	891	$	1,025	$	—		$	204	$	852	$	1,056	$	—	$	217	$	935	$	1,152

⁽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. ~~Mortgage-backed securities represent AAA-rated securities issued or unconditionally guaranteed as to payment of principal and interest by U.S. government agencies.~~


⁽²⁾	Investments included in other assets are restricted as to use, primarily for the payment of benefits under employee benefit plans.


⁽³⁾	The fair value determination of derivatives includes the impact of the credit risk of counterparties to the derivatives and the Company’s own credit risk, the effects of which were not significant.

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

There were no transfers between Level 1 and Level 2 during the first nine months of ~~2017.~~2018. As of September 30, ~~2017~~2018, Cash and cash equivalents of $~~7.9~~7.8 billion included $7.1 billion of cash equivalents (which would be considered Level 2 in the fair value hierarchy).

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

Contingent Consideration

Summarized information about the changes in liabilities for contingent consideration is as follows:


	Nine Months Ended September 30,						Nine Months Ended September 30,
($ in millions)	2017			2016			2018			2017
Fair value January 1	$	891		$	590		$	935		$	891
Changes in fair value⁽¹⁾	151			29
Changes in estimated fair value⁽¹⁾							144			151
Additions	3			300			8			3
Payments	(100		)	(25		)	(235		)	(100		)
Fair value September 30 ⁽²⁾	$	945		$	894		$	852		$	945

⁽¹⁾ Recorded in Research and development expenses, Materials and production costs and Other (income) expense, net. Includes cumulative translation adjustments.

⁽²⁾ ~~Includes $234~~Balance at September 30, 2018 includes $95 million recorded as a current liability for amounts expected to be paid within the next 12 months.

The ~~additions to~~payments of contingent consideration ~~reflected in the table above~~ in the first nine months of 2018 include $175 million related to the achievement of a clinical milestone in connection with the 2016 acquisition of Afferent Pharmaceuticals. The remaining payments in 2018 relate to liabilities recorded in connection with the ~~acquisitions~~2016 termination of ~~Afferent and IOmet (see Note 2).~~the Sanofi-Pasteur MSD joint venture. The payments of contingent consideration in the first nine months of 2017 relate to the achievement of a clinical milestone in connection with the 2016 acquisition of IOmet ~~(see Note 2) and in 2016 relate to the first commercial sale of~~ ~~Zerbaxa~~ ~~in the European Union.~~Pharma Ltd.

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 September 30, ~~2017~~2018, was $~~28.3~~24.0 billion compared with a carrying value of $~~27.0~~23.6 billion and at December 31, ~~2016~~2017, was $~~25.7~~25.6 billion compared with a carrying value of $~~24.8~~24.4 billion. Fair value was estimated using recent observable market prices and would be considered Level 2 in the fair value hierarchy.

Concentrations of Credit Risk

On an ongoing basis, the Company monitors concentrations of credit risk associated with corporate and government issuers of securities and financial institutions with which it conducts business. Credit exposure limits are established to limit a concentration with any single issuer or institution. Cash and investments are placed in instruments that meet high credit quality standards as specified in the Company’s investment policy guidelines.

The majority of the Company’s accounts receivable arise from product sales in the United States and Europe and are primarily due from drug wholesalers and retailers, hospitals, government agencies, managed health care providers and pharmacy benefit managers. The Company monitors the financial performance and creditworthiness of its customers so that it can properly assess and respond to changes in their credit profile. The Company also continues to monitor global economic conditions, including the volatility associated with international sovereign economies, and associated impacts on the financial markets and its ~~business, taking into consideration global economic conditions and the ongoing sovereign debt issues in certain European countries.~~business. At September 30, ~~2017~~2018, the Company’s total net accounts receivable outstanding for more than one year were approximately $~~190~~40 million. The Company does not expect to have write-offs or adjustments to accounts receivable which would have a material adverse effect on its financial position, liquidity or results of operations.

Derivative financial instruments are executed under International Swaps and Derivatives Association master agreements. The master agreements with several of the Company’s financial institution counterparties also include credit support annexes. These annexes contain provisions that require collateral to be exchanged depending on the value of the derivative assets and liabilities, the Company’s credit rating, and the credit rating of the counterparty. As of September 30, ~~2017~~2018 and December 31, ~~2016~~2017, the Company had received cash collateral of $8$54 million and $~~529~~3 million, respectively, from various counterparties and the obligation to return such collateral is recorded in Accrued and other current liabilities. The Company had not advanced any cash collateral to counterparties as of September 30, ~~2017~~2018 or December 31, ~~2016~~2017.

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


5.7.	Inventories

Inventories consisted of:


($ in millions)	September 30, 2017		December 31, 2016		September 30, 2018			December 31, 2017
Finished goods	$	1,364	$	1,304	$	1,585		$	1,334
Raw materials and work in process	4,588		4,222		4,933			4,703
Supplies	198		155		202			201
Total (approximates current cost)	6,150		5,681		6,720			6,238
Increase to LIFO costs	142		302
(Decrease) increase to LIFO costs					(10		)	45
	$	6,292	$	5,983	$	6,710		$	6,283
Recognized as:
Inventories	$	5,263	$	4,866	$	5,416		$	5,096
Other assets	1,029		1,117		1,294			1,187

Amounts recognized as Other assets are comprised almost entirely of raw materials and work in process inventories. At September 30, ~~2017~~2018 and December 31, ~~2016~~2017, these amounts included ~~$957 million~~$1.3 billion and ~~$1.0~~$1.1 billion, respectively, of inventories not expected to be sold within one year. In addition, these amounts included ~~$72~~$3 million and $80 million at September 30, ~~2017~~2018 and December 31, ~~2016~~2017, respectively, of inventories produced in preparation for product launches.


6.8.	Other Intangibles

In connection with acquisitions, the Company measures the fair value of ~~marketed products and~~ research and development pipeline programs and marketed products and capitalizes these amounts. See Note 23 for information on intangible assets acquired as a result of business acquisitions in the first nine months of ~~2017~~2018 and ~~2016.~~2017.

During ~~the first nine months of 2017, the Company recorded an intangible asset impairment charge of $47 million within~~ ~~Materials and production~~ ~~costs related to~~ ~~Intron A, a treatment for certain types of cancers. Sales of~~ ~~Intron A~~ ~~are being adversely affected by the availability of new therapeutic options. During the second quarter, sales of~~ ~~Intron A~~ ~~in the United States eroded more rapidly than previously anticipated by the Company, which led to changes in the cash flow assumptions for~~ ~~Intron A.~~ ~~These revisions to cash flows indicated that the~~ ~~Intron A~~ 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 A~~ ~~that, when compared with its related carrying value, resulted in the impairment charge noted above. The remaining intangible asset value for~~ ~~Intron A~~ ~~at September 30, 2017 was $19 million.~~

~~During the first nine months of 2016, the Company recorded intangible asset impairment charges related to marketed products of $347 million. Of this amount, $252 million relates to~~ ~~Zontivity~~, a product for the reduction of thrombotic cardiovascular events in patients with a history of myocardial infarction or with peripheral arterial disease. In March 2016, following several business decisions that reduced sales expectations for ~~Zontivity~~ ~~in the United States and Europe, the Company lowered its cash flow projections for~~ ~~Zontivity. The Company utilized market participant assumptions and considered several different scenarios to determine the fair value of the intangible asset related to~~ ~~Zontivity~~ that, when compared with its related carrying value, resulted in the impairment charge noted above. In addition, the Company wrote-off $95 million that had been capitalized in connection with in-licensed products that, for business reasons, the Company returned to the licensor.

~~Also, during~~ the third quarter and first nine months of 2017, the Company recorded $245 million and $253 million, respectively, of IPR&D impairment charges within Research and development expenses. In the third quarter of 2017, Merck made a strategic decision to discontinue the development of the investigational combination regimens MK-3682B (grazoprevir/ruzasvir/uprifosbuvir) and MK-3682C (ruzasvir/uprifosbuvir) for the treatment of 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 ~~(elbasvir and grazoprevir)~~, which is ~~currently~~ marketed by the Company for the treatment of adult patients with chronic HCV infection. As a result of this decision, the Company recorded an IPR&D impairment charge of $240 million in the third quarter and first nine months of 2017 to write-off the remaining intangible asset related to uprifosbuvir.

~~During~~Also, during the first nine months of ~~2016,~~2017, the Company recorded ~~$225~~an intangible asset impairment charge of $47 million of IPR&D impairment charges. Of this amount, $112 million relates to an in-licensed program that, for business reasons, was returned to the licensor. The remaining IPR&D impairment charges in 2016 primarily relate to deprioritized pipeline programs that were deemed to have no alternative use during the period.

within ~~Notes to Condensed Consolidated Financial Statements (unaudited)~~Materials and production ~~(continued)~~costs related to

Intron A, a treatment for certain types of cancers. Sales of Intron A were being adversely affected by the availability of new therapeutic options. Sales of Intron A in the United States eroded more rapidly than previously anticipated by the Company, which led to changes in the cash flow assumptions for Intron A. These revisions to cash flows indicated that the Intron A intangible asset value was not fully recoverable on an undiscounted cash flows basis. The Company ~~may recognize additional non-cash impairment charges~~utilized market participant assumptions to determine its best estimate of the fair value of the intangible asset related to Intron A that, when compared with its related carrying value, resulted in the ~~future related to other marketed products or pipeline programs and such charges could be material.~~impairment charge noted above.


7.9.	Contingencies

The Company is involved in various claims and legal proceedings of a nature considered normal to its business, including product liability, intellectual property, and commercial litigation, as well as certain additional matters including governmental and environmental matters. In the opinion of the Company, it is unlikely that the resolution of these matters will be material to the Company’s financial position, results of operations or cash flows.

Given the nature of the litigation discussed below and the complexities involved in these matters, the Company is unable to reasonably estimate a possible loss or range of possible loss for such matters until the Company knows, among other factors, (i) what claims, if any, will survive dispositive motion practice, (ii) the extent of the claims, including the size of any potential class, particularly when damages are not specified or are indeterminate, (iii) how the discovery process will affect the litigation, (iv) the settlement posture of the other parties to the litigation and (v) any other factors that may have a material effect on the litigation.

The Company records accruals for contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. These accruals are adjusted periodically as assessments change or additional information becomes

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

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.

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 September 30, ~~2017~~2018, approximately ~~4,125~~3,955 cases are filed and pending against Merck in either federal or state court. In ~~approximately~~ 15four of these actions, plaintiffs allege, among other things, that they have suffered osteonecrosis of the jaw (ONJ), generally subsequent to invasive dental procedures, such as tooth extraction or dental implants and/or delayed healing, in association with the use of Fosamax. In addition, plaintiffs in approximately ~~4,110~~3,950 of these actions generally allege that they sustained femur fractures and/or other bone injuries (Femur Fractures) in association with the use of Fosamax.

Cases Alleging ONJ and/or Other Jaw Related Injuries

In August 2006, the Judicial Panel on Multidistrict Litigation (JPML) ordered that certain Fosamax product liability cases pending in federal courts nationwide should be transferred and consolidated into one multidistrict litigation (Fosamax ONJ MDL) for coordinated pre-trial proceedings.

In ~~December 2013,~~2014, Merck ~~reached an agreement in principle with~~settled approximately 95% of the ~~Plaintiffs’ Steering Committee (PSC) in the~~ ~~Fosamax~~ ~~ONJ MDL to resolve pending~~ ONJ cases ~~not on appeal~~pending in the Fosamax ONJ MDL and in ~~the~~ state courts for ~~an aggregate amount of $27.7 million. Merck and the PSC subsequently formalized the terms of this agreement in~~ a Master Settlement Agreement (ONJ Master Settlement Agreement) that was executed in April 2014 and included over 1,200 plaintiffs. In July 2014, Merck elected to proceed with the ONJ Master Settlement Agreement at a reduced funding levelpayment of $27.3 ~~million since the participation level was approximately 95%. Merck has fully funded the ONJ Master Settlement Agreement and the~~million. The escrow agent under the agreement has been making settlement payments to qualifying plaintiffs. The ONJ Master Settlement Agreement has no effect on the cases alleging Femur Fractures discussed below. The

~~Discovery is currently ongoing~~Fosamax ONJ MDL was closed in ~~some of the approximately 15 remaining ONJ cases that are pending in various federal and state courts and the Company intends to defend against these lawsuits.~~June 2018.

Cases Alleging Femur Fractures

In March 2011, Merck submitted a Motion to Transfer to the JPML seeking to have all federal cases alleging Femur Fractures consolidated into one multidistrict litigation for coordinated pre-trial proceedings. ~~The Motion to Transfer was granted in May 2011, and all~~All federal cases involving allegations of Femur Fracture have been or will be transferred to a multidistrict litigation in the District of New Jersey (Femur Fracture MDL). In the only bellwether case tried to date in the Femur Fracture

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

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. ~~The~~ ~~Glynn~~ ~~decision was not appealed by plaintiff.~~

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). ~~The Femur Fracture MDL court has also dismissed without prejudice another approximately 510 cases pending plaintiffs’ appeal of the preemption ruling to the Third Circuit. On~~In March ~~22,~~ 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. ~~On April 5, 2017, Merck filed a petition seeking a rehearing on the Third Circuit’s March 22, 2017 decision, which was denied on April 24, 2017.~~ Merck filed a petition for a writ of certiorari to the U.S. Supreme Court onin August ~~22,~~ 2017 seeking review of the Third Circuit’s decision.

In ~~addition,~~December 2017, the Supreme Court invited the Solicitor General to file a brief in the case expressing the views of the United States, and in May 2018, the Solicitor General submitted a brief stating that the Third Circuit’s decision was wrongly decided and recommended that the Supreme Court grant Merck’s cert petition. The Supreme Court granted Merck’s petition in June ~~2014, the Femur Fracture MDL court granted Merck summary judgment in the~~ ~~Gaynor v. Merck~~ ~~case~~2018, and ~~found that Merck’s updates in January 2011 to the~~ ~~Fosamax~~ ~~label regarding atypical femur fractures were adequate as a matter of law and that Merck adequately communicated those changes. The plaintiffs in~~ ~~Gaynor~~ ~~did not appeal~~final decision on the Femur Fracture MDL court’s ~~findings with respect to~~preemption ruling is now pending before the adequacy of the 2011 label change but did appeal the dismissal of their case based on preemption grounds, and the Third Circuit subsequently reversed that dismissal in its March 22, 2017 decision. In August 2014, Merck filed a motion requesting that the Femur Fracture MDL court enter a further order requiring all plaintiffs in the Femur Fracture MDL who claim that the 2011 ~~Fosamax~~ ~~label is inadequate and the proximate cause of their alleged injuries to show cause why their cases should not be dismissed based on the court’s preemption decision and its ruling in the~~ ~~Gaynor~~ ~~case. In November 2014, the court granted Merck’s motion and entered the requested show cause order. No plaintiffs responded to or appealed the November 2014 show cause order.~~Supreme Court.

AsAccordingly, as of September 30, ~~2017, approximately 520~~2018, three cases were actively pending in the Femur Fracture MDL, ~~following the reinstatement of the~~and approximately 1,055 cases ~~that had~~have either been ~~on appeal to the Third Circuit. The 510 cases~~ dismissed without prejudice ~~that were also~~or administratively closed pending ~~the~~ final resolution by the Supreme Court of the ~~aforementioned~~ appeal ~~have not yet been reinstated.~~of the Femur Fracture MDL court’s preemption order.

As of September 30, ~~2017~~2018, approximately ~~2,795~~2,610 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 ~~during~~from 2016 ~~and 2017.~~to the present.

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

As of September 30, ~~2017~~2018, approximately ~~280~~275 cases alleging Femur Fractures have been filed and are pending in California state court. ~~A petition was filed seeking to coordinate all~~All of the Femur Fracture cases filed in California state court have been coordinated before a single judge in Orange County, California. ~~The petition was granted and Judge Thierry Colaw is currently presiding over the coordinated proceedings.~~ 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. ~~Oral argument on plaintiff’s appeal in~~ ~~Galper~~ ~~was held in November 2016 and, on~~In April ~~24,~~ 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 ~~five~~four Femur Fracture cases pending in other state courts.

Discovery is ongoing in the Femur Fracture MDL and in state courts where Femur Fracture cases are pending and the Company 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 September 30, ~~2017~~2018, Merck is aware of approximately ~~1,225~~1,285 product ~~user claims~~users alleging ~~generally~~ that ~~use of~~ Januvia and/or Janumet caused the development of pancreatic cancer and other injuries. ~~These complaints were~~

Most claims have been filed in ~~several different state and federal courts.~~

~~Most of the claims were filed in a consolidated~~ multidistrict litigation ~~proceeding in~~before the U.S. District Court for the Southern District of California ~~called “In re Incretin-Based Therapies Products Liability Litigation”~~ (MDL). ~~The MDL includes federal lawsuits alleging pancreatic cancer due to use~~Outside of the ~~following medicines:~~ ~~Januvia, Janumet, Byetta and Victoza,~~MDL, the ~~latter two of which are products manufactured by other pharmaceutical companies. The~~ majority of claims ~~not~~have been filed in ~~the MDL were filed in~~coordinated proceedings before the Superior Court of California, County of Los Angeles (California State Court).

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

In November 2015, the MDL and California State ~~Court -~~ Court–in separate ~~opinions -~~ opinions–granted summary judgment to defendants on grounds of federal preemption. OfPlaintiffs appealed, and in November 2017, the ~~approximately 1,225 product user claims, these rulings resulted~~U.S. Court of Appeals for the Ninth Circuit reversed and remanded for further discovery, which is ongoing. The appeal in ~~the dismissal of approximately 1,175 product user claims.~~

~~Plaintiffs are appealing the MDL and~~ California State Court ~~preemption rulings.~~was argued on October 4, 2018.

As of September 30, ~~2017, seven~~2018, eight product users have claims pending against Merck in state courts other than ~~the~~ California, ~~State Court,~~ including ~~four active product user claims pending in Illinois state court. On~~Illinois. In June ~~30,~~ 2017, the Illinois trial court denied Merck’s motion for summary judgment based on ~~grounds of~~federal preemption. Merck has ~~sought permission to appeal that order on an interlocutory basis~~appealed, and ~~was granted a stay of proceedings in the trial court. As a result, trials~~oral argument is scheduled for ~~certain of the product users in Illinois have been delayed.~~November 14, 2018.

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.

Propecia/Proscar

As previously disclosed, Merck is a defendant in product liability lawsuits in the United States involving Propecia and/or Proscar. ~~As of~~ ~~September 30, 2017, approximately~~ ~~915~~ ~~lawsuits have been filed by plaintiffs who allege that they have experienced persistent sexual side effects following cessation of treatment with~~ ~~Propecia~~ ~~and/or~~ ~~Proscar. Approximately~~ 20 ~~of the plaintiffs also allege that~~ ~~Propecia~~ or ~~Proscar~~ ~~has caused or can cause prostate cancer, testicular cancer or male breast cancer.~~ The lawsuits ~~have been~~were filed in various federal courts and in state court in New Jersey. The federal lawsuits ~~have been~~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 ~~have been~~were consolidated before Judge Hyland in Middlesex ~~County. In addition, there~~County (NJ Coordinated Proceedings). There is one matter pending in state court in California and one matter pending in state court in ~~Ohio,~~Massachusetts.

As previously disclosed, on April 9, 2018, Merck and ~~one matter on appeal~~the Plaintiffs’ Executive Committee in the ~~Massachusetts Supreme Judicial Court.~~ 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 has been finalized. After the settlement, fewer than 40 cases will remain pending in the United States.

The Company intends to defend against ~~these~~any remaining unsettled lawsuits.

Governmental Proceedings

~~In July 2017, the Company learned that the Prosecution Office of Milan, Italy is investigating interactions between~~As previously disclosed, the Company’s ~~Italian subsidiary, certain employees~~subsidiaries in China have received and may continue to receive inquiries regarding their operations from various Chinese governmental agencies. Some of ~~the subsidiary~~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 certain Italian healthcare providers. The Company understands that this is part of a larger investigation involving engagements between various healthcare companies and those healthcare providers. The Company is cooperating with the investigation.to provide responses as appropriate.

~~From~~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.

~~Commercial and Other Litigation~~

~~K-DUR Antitrust Litigation~~

In June 1997 and January 1998, Schering-Plough Corporation (Schering-Plough) settled patent litigation with Upsher-Smith, Inc. (Upsher-Smith) and ESI Lederle, Inc. (Lederle), respectively, relating to generic versions of Schering-Plough’s long-acting potassium chloride product supplement used by cardiac patients, for which Lederle and Upsher-Smith had filed Abbreviated New Drug Applications (ANDAs). Putative class and non-class action suits were then filed on behalf of direct and indirect purchasers of K‑DUR against Schering-Plough, Upsher-Smith and Lederle and were consolidated in a multidistrict litigation in the U.S. District Court for the District of New Jersey. In February 2016, the court denied the Company’s motion for summary judgment relating to all of the direct purchasers’ claims concerning the settlement with Upsher-Smith and granted the Company’s motion for summary judgment relating to all of the direct purchasers’ claims concerning the settlement with Lederle.

As previously disclosed, in February 2017, Merck and Upsher-Smith reached a settlement in principle with the class of direct purchasers and the opt-outs to the class. Merck will contribute approximately $80 million in the aggregate towards the overall settlement. On April 5, 2017, the claims of the opt-outs were dismissed with prejudice pursuant to a written settlement agreement with those parties. On May 15, 2017, Merck and the class executed a settlement agreement, which received preliminary approval from the court on May 23, 2017. On October 5, 2017, the court entered a Final Judgment and Order of Dismissal approving the settlement agreement with the direct purchaser class and dismissing the claims of the class with prejudice.

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

Patent Litigation

From time to time, generic manufacturers of pharmaceutical products file ~~ANDAs~~abbreviated New Drug Applications with the U.S. Food and Drug Administration (FDA) seeking to market generic forms of the Company’s products prior to the expiration of relevant patents owned by the Company. To protect its patent rights, the Company may file patent infringement lawsuits against such generic companies. ~~Certain products of the Company (or products marketed via agreements with other companies) currently involved in such patent infringement litigation in the United States include:~~ ~~Invanz~~, ~~Noxafil,~~ ~~and~~ ~~NuvaRing~~. 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.

~~Invanz~~Inegy — ~~In July 2014, a~~The patents protecting Inegy in Europe have expired but supplemental protection certificates (SPCs) have been granted to the Company in many European countries that will expire in April 2019. There are multiple challenges to the SPCs related to Inegy throughout Europe and generic products have been launched in France, Italy, Ireland, Spain, Portugal, and the Netherlands and may launch in Germany. The Company has filed for preliminary injunctions in many countries that are still pending decision. Preliminary injunctions have been granted in Belgium, the Czech Republic, Germany, Greece, Portugal, Norway and Slovakia. Preliminary injunctions have been denied or revoked in France, Germany, Belgium, Ireland, the Netherlands and Spain. The Company is appealing those decisions. The Company has filed and will continue to file actions for patent infringement ~~lawsuit was filed in the United States~~seeking damages against ~~Hospira, Inc. (Hospira) in respect of Hospira’s application to the FDA seeking pre-patent expiry approval to market a~~those companies that launch generic ~~version of~~ ~~Invanz. The trial in this matter was held in~~products before April 2016 and, in October 2016, the district court ruled that the patent is valid and infringed. In August 2015, a patent infringement lawsuit was filed in the United States against Savior Lifetec Corporation (Savior) in respect of Savior’s application to the FDA seeking pre-patent expiry approval to market a generic version of ~~Invanz. The Company will lose the right to market exclusivity in the United States for~~ ~~Invanz~~ ~~on November 15, 2017.~~2019.

Noxafil — In August 2015, the Company filed a lawsuit against Actavis Laboratories Fl, Inc. (Actavis) 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. In October 2017, the district court held the patent valid and infringed. Actavis ~~can appeal~~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. In March 2016, the Company filed a lawsuit against Roxane Laboratories, Inc. (Roxane) 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. In ~~October~~November 2017, the parties reached a settlement whereby Roxane can launch its generic version ~~upon~~prior to expiry of the patent ~~or earlier~~ under certain conditions. In February 2016, the Company filed a lawsuit against Par Sterile Products LLC, Par Pharmaceutical, Inc., Par Pharmaceutical Companies, Inc. and Par Pharmaceutical Holdings, Inc. (collectively, Par) 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.injection. In October 2016, the parties reached a settlement whereby Par can launch its generic version in January 2023, or earlier under certain conditions.

~~NuvaRing~~ — In ~~December 2013,~~February 2018, the Company filed a lawsuit against ~~a subsidiary of Allergan plc~~Fresenius Kabi USA, LLC., 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 ~~NuvaRing~~Noxafil. ~~. The trial in this matter was held in January 2016.~~ In August 2016, the district court ruled that the patent was invalid and the Company appealed this decision. In October 2017, the appellate court reversed the district court decision and found the patent to be valid. Allergan may seek further review of this decision. In September 2015,March 2018, the Company filed a lawsuit against ~~Teva Pharma~~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 ~~NuvaRing. Based on its ruling in the Allergan plc matter, the district court dismissed the Company’s lawsuit in December 2016. The Company has appealed this decision and the matter is currently stayed.~~

~~Anti-PD-1 Antibody Patent Oppositions and Litigation~~

~~As previously disclosed, Ono Pharmaceutical Co. (Ono) has a European patent (EP 1 537 878) (’878) that broadly claims the use of an anti-PD-1 antibody, such as the Company’s immunotherapy,~~ ~~Keytruda~~, for the treatment of cancer. Ono has previously licensed its commercial rights to an anti-PD-1 antibody to Bristol-Myers Squibb (BMS) in certain markets. BMS and Ono also own European Patent EP 2 161 336 (’336) that, as granted, broadly claimed anti-PD-1 antibodies that could include ~~Keytruda~~Noxafil.

~~As previously disclosed, the Company and BMS and Ono were engaged in worldwide litigation, including~~Nasonex — Nasonex lost market exclusivity in the United States ~~over~~in 2016. Prior to that, in April 2015, the ~~validity~~Company filed a patent infringement lawsuit against Apotex Inc. and ~~infringement~~Apotex Corp. (Apotex) in respect of Apotex’s marketed product that the ~~’878 patent, the ’336 patent and their equivalents.~~

Company believed was infringing. In January ~~2017,~~2018, the Company ~~announced that it had entered into a settlement~~ and ~~license agreement~~Apotex settled this matter with ~~BMS and Ono resolving the worldwide patent infringement litigation related~~Apotex agreeing to ~~the use of an anti-PD-1 antibody for the treatment of cancer, such as~~ ~~Keytruda.~~ ~~Under the settlement and license agreement,~~pay the Company ~~made a one-time payment of $625~~$115 million ~~(which was recorded as an expense in the Company’s 2016 financial results) to BMS and will pay royalties on the worldwide sales of~~ plus certain other consideration.~~Keytruda~~ ~~for a non-exclusive license to market~~ ~~Keytruda~~ ~~in any market in which it is approved. For global net sales of~~ ~~Keytruda~~, the Company will pay royalties of 6.5% of net sales occurring from January 1, 2017 through and including December 31, 2023; and 2.5% of net sales occurring from January 1, 2024 through and including December 31, 2026. The parties also agreed to dismiss all claims worldwide in the relevant legal proceedings.

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

Gilead Patent Litigation and Opposition

In August 2013, Gilead Sciences, Inc. (Gilead) filed a lawsuit in the U.S. District Court for the Northern District of California seeking a declaration that two Company patents were invalid and not infringed by the sale of their two sofosbuvir containing products, Sovaldi and Harvoni. The Company filed a counterclaim that the sale of these products did infringe these two patents and sought a reasonable royalty for the past, present and future sales of these products. In March 2016, at the conclusion of a jury trial, the patents were found to be not invalid and infringed. The jury awarded the Company $200 million as a royalty for sales of these products up to December 2015. After the conclusion of the jury trial, the court held a bench trial on the equitable defenses raised by Gilead. In June 2016, the court found for Gilead and determined that Merck could not collect the jury award and that the patents were unenforceable with respect to Gilead. The Company ~~has~~ appealed the court’s decision. Gilead ~~has~~ also asked the court to overturn the jury’s decision on validity. The court held a hearing on Gilead’s motion in August 2016, and the court subsequently rejected Gilead’s ~~request. The Company will pay 20%, net~~request, which Gilead appealed. In April 2018, the appeals court affirmed the decisions that both patents were unenforceable against Gilead. In September 2018, Merck filed a petition for a writ of ~~legal fees,~~certiorari to the U.S. Supreme Court seeking review of ~~damages or royalties, if any, that it receives to Ionis Pharmaceuticals, Inc.~~the appellate decision.

The Company, through its Idenix Pharmaceuticals, Inc. subsidiary, has pending litigation against Gilead in the United States, ~~the UK, Norway, Canada,~~ Germany ~~France,~~ and ~~Australia~~France based on different patent estates that would also be infringed by Gilead’s sales of these two products. Gilead ~~has~~ opposed the European patent at the European Patent Office (EPO). Trial in the United States was held in December 2016 and the jury returned a verdict for the Company, awarding damages of $2.54 billion. The Company submitted post-trial motions, including on the issues 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, the court denied the Company’s motion on

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

enhanced damages, granted its motion on prejudgment interest and deferred its motion on future royalties. ~~The Company is currently awaiting~~In February 2018, the ~~court’s decision on~~court granted Gilead’s ~~post-trial motions~~motion for judgment as a matter of ~~law. In Australia, the Company was initially unsuccessful~~law and that case is currently under appeal. In Canada, the Company was initially unsuccessful and the Federal Court of Appeals has affirmed the lower court decision. The Company has sought leave to the Supreme Court of Canada for further review. In the UK and Norway,found the patent was ~~held~~ invalid ~~and no further appeal was filed.~~for a lack of enablement. The Company appealed this decision. The EPO opposition division revoked the European patent, and the Company ~~has~~ appealed this decision. The cases in France and Germany have been stayed pending the final decision of the EPO.

Other Litigation

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

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 September 30, ~~2017~~2018 and December 31, ~~2016~~2017 of approximately $~~170~~150 million and $~~185~~160 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.


10.	Equity



	Three Months Ended September 30,
	Common Stock			Other Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Loss			Treasury Stock					Non- Controlling Interests			Total
($ and shares in millions)	Shares	Par Value		Other Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Loss			Shares		Cost			Non- Controlling Interests			Total
Balance at July 1, 2017	3,577	$	1,788	$	39,776	$	45,046		$	(5,094	)	850		$	(42,053	)	$	249		$	39,712
Net loss attributable to Merck & Co., Inc.	—	—		—		(56		)	—			—		—			—			(56		)
Other comprehensive income, net of taxes	—	—		—		—			149			—		—			—			149
Cash dividends declared on common stock ($0.47 per share)	—	—		—		(1,289		)	—			—		—			—			(1,289		)
Treasury stock shares purchased	—	—		—		—			—			2		(159		)	—			(159		)
Share-based compensation plans and other	—	—		47		—			—			(1	)	93			—			140
Net income attributable to noncontrolling interests	—	—		—		—			—			—		—			5			5
Distributions attributable to noncontrolling interests	—	—		—		—			—			—		—			(3		)	(3		)
Balance at September 30, 2017	3,577	$	1,788	$	39,823	$	43,701		$	(4,945	)	851		$	(42,119	)	$	251		$	38,499
Balance at July 1, 2018	3,577	$	1,788	$	39,741	$	41,523		$	(5,122	)	907		$	(45,401	)	$	237		$	32,766
Net income attributable to Merck & Co., Inc.	—	—		—		1,950			—			—		—			—			1,950
Other comprehensive loss, net of taxes	—	—		—		—			(29		)	—		—			—			(29		)
Cash dividends declared on common stock ($0.48 per share)	—	—		—		(1,284		)	—			—		—			—			(1,284		)
Treasury stock shares purchased	—	—		—		—			—			16		(996		)	—			(996		)
Share-based compensation plans and other	—	—		21		—			—			(5	)	231			—			252
Net income attributable to noncontrolling interests	—	—		—		—			—			—		—			8			8
Distributions attributable to noncontrolling interests	—	—		—		—			—			—		—			(11		)	(11		)
Balance at September 30, 2018	3,577	$	1,788	$	39,762	$	42,189		$	(5,151	)	918		$	(46,166	)	$	234		$	32,656

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


8.	~~Equity~~


																								Nine Months Ended September 30,
	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
($ and shares in millions)	Shares	Par Value											Shares		Cost									Shares	Par Value											Shares		Cost
Balance at January 1, 2016	3,577	$	1,788	$	40,222		$	45,348		$	(4,148	)	796		$	(38,534	)	$	91		$	44,767
Net income attributable to Merck & Co., Inc.	—	—		—			4,515			—			—		—			—			4,515
Other comprehensive loss, net of taxes	—	—		—			—			(104		)	—		—			—			(104		)
Cash dividends declared on common stock	—	—		—			(3,835		)	—			—		—			—			(3,835		)
Treasury stock shares purchased	—	—		—			—			—			44		(2,418		)	—			(2,418		)
Share-based compensation plans and other	—	—		(325		)	—			—			(25	)	1,235			—			910
Changes in noncontrolling ownership interests	—	—		—			—			—			—		—			124			124
Net income attributable to noncontrolling interests	—	—		—			—			—			—		—			13			13
Distributions attributable to noncontrolling interests	—	—		—			—			—			—		—			(15		)	(15		)
Balance at September 30, 2016	3,577	$	1,788	$	39,897		$	46,028		$	(4,252	)	815		$	(39,717	)	$	213		$	43,957
Balance at January 1, 2017	3,577	$	1,788	$	39,939		$	44,133		$	(5,226	)	828		$	(40,546	)	$	220		$	40,308		3,577	$	1,788	$	39,939		$	44,133		$	(5,226	)	828		$	(40,546	)	$	220		$	40,308
Net income attributable to Merck & Co., Inc.	—	—		—			3,440			—			—		—			—			3,440			—	—		—			3,440			—			—		—			—			3,440
Other comprehensive income, net of taxes	—	—		—			—			281			—		—			—			281			—	—		—			—			281			—		—			—			281
Cash dividends declared on common stock	—	—		—			(3,872		)	—			—		—			—			(3,872		)
Cash dividends declared on common stock ($1.41 per share)																								—	—		—			(3,872		)	—			—		—			—			(3,872		)
Treasury stock shares purchased	—	—		—			—			—			36		(2,312		)	—			(2,312		)	—	—		—			—			—			36		(2,312		)	—			(2,312		)
Share-based compensation plans and other	—	—		(116		)	—			—			(13	)	739			—			623			—	—		(116		)	—			—			(13	)	739			—			623
Acquisition of Vallée	—	—		—			—			—			—		—			25			25			—	—		—			—			—			—		—			25			25
Net income attributable to noncontrolling interests	—	—		—			—			—			—		—			16			16			—	—		—			—			—			—		—			16			16
Distributions attributable to noncontrolling interests	—	—		—			—			—			—		—			(10		)	(10		)	—	—		—			—			—			—		—			(10		)	(10		)
Balance at September 30, 2017	3,577	1,788		39,823			43,701			(4,945		)	851		(42,119		)	251			38,499			3,577	$	1,788	$	39,823		$	43,701		$	(4,945	)	851		$	(42,119	)	$	251		$	38,499
Balance at January 1, 2018																								3,577	$	1,788	$	39,902		$	41,350		$	(4,910	)	880		$	(43,794	)	$	233		$	34,569
Adoption of new accounting standards (see Note 1)																								—	—		—			322			(274		)	—		—			—			48
Net income attributable to Merck & Co., Inc.																								—	—		—			4,393			—			—		—			—			4,393
Other comprehensive income, net of taxes																								—	—		—			—			33			—		—			—			33
Cash dividends declared on common stock ($1.44 per share)																								—	—		—			(3,876		)	—			—		—			—			(3,876		)
Treasury stock shares purchased																								—	—		—			—			—			53		(3,158		)	—			(3,158		)
Share-based compensation plans and other																								—	—		(140		)	—			—			(15	)	786			—			646
Net income attributable to noncontrolling interests																								—	—		—			—			—			—		—			22			22
Distributions attributable to noncontrolling interests																								—	—		—			—			—			—		—			(21		)	(21		)
Balance at September 30, 2018																								3,577	$	1,788	$	39,762		$	42,189		$	(5,151	)	918		$	(46,166	)	$	234		$	32,656


9.11.	Share-Based Compensation Plans

The Company has share-based compensation plans under which the Company grants restricted stock units (RSUs) and performance share units (PSUs) to certain management level employees. In addition, employees and non-employee directors may be granted options to purchase shares of Company common stock at the fair market value at the time of grant.

The following table provides the amounts of share-based compensation cost recorded in the Condensed Consolidated Statement of Income:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
($ in millions)	2017			2016			2017			2016			2018			2017			2018			2017
Pretax share-based compensation expense	$	76		$	77		$	232		$	225		$	91		$	76		$	261		$	232
Income tax benefit	(23		)	(24		)	(70		)	(69		)	(14		)	(23		)	(42		)	(70		)
Total share-based compensation expense, net of taxes	$	53		$	53		$	162		$	156		$	77		$	53		$	219		$	162

During the first nine months of ~~2017~~2018 and ~~2016,~~2017, the Company granted7 million RSUs with a weighted-average grant date fair value of $58.19 per RSU and 5 million RSUs with a weighted-average grant date fair value of $63.96 per RSU, respectively. During the first nine months of 2018 and ~~6 million~~ ~~RSUs~~2017, the Company granted 855 thousand PSUs with a weighted-average grant date fair value of ~~$54.61~~$56.70 per ~~RSU,~~PSU and 1 million PSUs with a weighted-average grant date fair value of $63.62 per PSU, respectively.

During the first nine months of ~~2017~~2018 and ~~2016,~~2017, the Company granted 43 million stock options with a weighted-average exercise price of $~~63.96~~57.72 per option and 64 million stock options with a weighted-average exercise price of ~~$54.62~~$63.96 per option, respectively. The weighted-average fair value of options granted for the first nine months of ~~2017~~2018 and ~~2016~~2017 was $~~7.04~~8.19 and ~~$5.89~~$7.04 per option, respectively, and was determined using the following assumptions:

Nine Months Ended
September 30,
2017 2016
Expected dividend yield 3.6 % 3.8 %
Risk-free interest rate 2.0 % 1.4 %
Expected volatility 17.8 % 19.6 %
Expected life (years) 6.1
6.2

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



	Nine Months Ended September 30,
	2018		2017
Expected dividend yield	3.4	%	3.6	%
Risk-free interest rate	2.8	%	2.0	%
Expected volatility	19.1	%	17.8	%
Expected life (years)	6.1		6.1

At September 30, ~~2017~~2018, there was $~~549~~654 million of total pretax unrecognized compensation expense related to nonvested stock options, RSU and PSU awards which will be recognized over a weighted-average period of 2.1 years. For segment reporting, share-based compensation costs are unallocated expenses.


~~10.~~12.	Pension and Other Postretirement Benefit Plans

The Company has defined benefit pension plans covering eligible employees in the United States and in certain of its international subsidiaries. The net periodic benefit cost ~~(credit)~~ of such plans consisted of the following components:


	Three Months Ended September 30,												Nine Months Ended September 30,												Three Months Ended September 30,												Nine Months Ended September 30,
	2017						2016						2017						2016						2018						2017						2018						2017
($ in millions)	U.S.			International			U.S.			International			U.S.			International			U.S.			International			U.S.			International			U.S.			International			U.S.			International			U.S.			International
Service cost	$	80		$	66		$	66		$	59		$	234		$	189		$	212		$	179		$	77		$	56		$	80		$	66		$	245		$	181		$	234		$	189
Interest cost	114			44			116			51			341			127			342			155			109			43			114			44			324			134			341			127
Expected return on plan assets	(210		)	(101		)	(203		)	(95		)	(646		)	(292		)	(623		)	(288		)	(209		)	(106		)	(210		)	(101		)	(634		)	(326		)	(646		)	(292		)
Amortization of unrecognized prior service credit	(13		)	(3		)	(14		)	(3		)	(40		)	(8		)	(41		)	(9		)	(12		)	(3		)	(13		)	(3		)	(37		)	(10		)	(40		)	(8		)
Net loss amortization	46			25			32			21			135			72			89			64			63			21			46			25			174			64			135			72
Termination benefits	3			1			6			1			11			2			11			2			1			—			3			1			18			—			11			2
Curtailments	4			(1		)	3			(2		)	8			(1		)	3			(1		)	3			—			4			(1		)	7			(1		)	8			(1		)
Settlements																									—			—			—			—			1			3			—			—
	$	24		$	31		$	6		$	32		$	43		$	89		$	(7	)	$	102		$	32		$	11		$	24		$	31		$	98		$	45		$	43		$	89

The Company now anticipates contributing approximately $375 million to its U.S. pension plans in 2018, of which $325 million was contributed in the third quarter.

The Company provides medical benefits, principally to its eligible U.S. retirees and similar benefits to their dependents, through its other postretirement benefit plans. The net ~~cost (credit)~~credit of such plans consisted of the following components:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
($ in millions)	2017			2016			2017			2016			2018			2017			2018			2017
Service cost	$	15		$	14		$	43		$	41		$	15		$	15		$	43		$	43
Interest cost	20			19			61			62			17			20			52			61
Expected return on plan assets	(20		)	(19		)	(59		)	(88		)	(21		)	(20		)	(63		)	(59		)
Amortization of unrecognized prior service credit	(24		)	(26		)	(74		)	(79		)	(21		)	(24		)	(63		)	(74		)
Net loss amortization	—			1			1			1			—			—			1			1
Termination benefits	—			1			1			1			—			—			2			1
Curtailments	(1		)	(5		)	(6		)	(7		)	(1		)	(1		)	(7		)	(6		)
	$	(10	)	$	(15	)	$	(33	)	$	(69	)	$	(11	)	$	(10	)	$	(35	)	$	(33	)

In connection with restructuring actions (see Note 3)5), termination charges were recorded on pension and other postretirement benefit plans related to expanded eligibility for certain employees exiting Merck. Also, in connection with these restructuring actions, curtailments and settlements were recorded on pension and other postretirement benefit plans as reflected in the tables above.

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

The components of net periodic benefit cost (credit) other than the service cost component are included in Other (income) expense, net (see Note 13), 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.


~~11.~~13.	Other (Income) Expense, Net

Other (income) expense, net, consisted of:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
($ in millions)	2017			2016			2017			2016			2018			2017			2018			2017
Interest income	$	(90	)	$	(87	)	$	(284	)	$	(244	)	$	(92	)	$	(90	)	$	(257	)	$	(284	)
Interest expense	189			170			564			513			190			189			569			564
Exchange (gains) losses	(6		)	3			5			79
Equity (income) loss from affiliates	(18		)	(21		)	(11		)	(59		)
Exchange losses (gains)													42			(6		)	119			5
Equity income from affiliates													(81		)	(18		)	(93		)	(11		)
Net periodic defined benefit plan (credit) cost other than service cost													(119		)	(121		)	(384		)	(381		)
Other, net	(161		)	(43		)	(244		)	(201		)	(112		)	(161		)	(466		)	(244		)
	$	(86	)	$	22		$	30		$	88		$	(172	)	$	(207	)	$	(512	)	$	(351	)

The increases in equity income from affiliates in the third quarter and first nine months of 2018 compared with the same periods of 2017 were driven primarily by higher equity income from certain research investment funds.

Other, net (as reflected in the table above) includes net gains on securities of $80 million and $202 million in the third quarter and first nine months of 2018, respectively, compared with $25 million and $74 million for the third quarter and first nine months of 2017, respectively. The increase in net gains on securities is attributable to the recognition of unrealized gains on equity securities pursuant to the prospective adoption of ASU 2016-01 on January 1, 2018 (see Note 1). Other, net in the first nine months of 2018 also includes a $115 million gain on the settlement of certain patent litigation (see Note 9). These gains were partially offset by lower income related to AstraZeneca’s option exercise in 2014.

Interest paid for the nine months ended September 30, ~~2017~~2018 and ~~2016~~2017 was ~~$505~~$535 million and $~~470~~505 million, respectively.

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


~~12.~~14.	Taxes on Income

The effective income tax rates of ~~125.5%~~26.5% and ~~24.2%~~125.5% for the third quarter of ~~2017~~2018 and ~~2016,~~2017, respectively, and ~~25.5%~~27.6% and ~~24.7%~~25.5% for the first nine months of ~~2017~~2018 and ~~2016,~~2017, respectively, reflect the impacts of acquisition and divestiture-related costs and restructuring costs, partially offset by the beneficial impact of foreign earnings. In addition, the effective income tax rates for the third quarter and first nine months of 2018 reflect the unfavorable impact of a $420 million aggregate pretax charge related to the termination of a collaboration agreement with Samsung for which no tax benefit was recognized. The effective income tax rate for the first nine months of 2018 also reflects the unfavorable impact of a $1.4 billion aggregate pretax charge recorded in connection with the formation of an oncology collaboration with Eisai for which no tax benefit was recognized. In addition, the effective income tax rates for the third quarter and first nine months of 2017 reflect the unfavorable impact of a $2.35 billion aggregate pretax charge recorded in connection with the formation of an oncology 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 (discussed below). The effective income tax rate for the first nine months of 2017 also ~~includes~~reflects a benefit of $88 million related to the settlement of a state income tax issue. ~~The effective income tax rate for the first nine months of 2016 also reflects the beneficial impact of orphan drug federal income tax credits, primarily for~~ ~~Keytruda~~.

In the third quarter of 2017, the Internal Revenue Service (IRS) concluded its examinations of Merck’s 2006-2011 U.S. federal income tax returns. As a result, the Company was required to make a payment of approximately $2.8 billion. 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 net $234 million tax ~~provision~~ benefit in the third quarter of 2017. 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.

On December 22, 2017, new U.S. tax legislation known as the Tax Cuts and Jobs Act of 2017 (TCJA) was enacted. Among other provisions, 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 as described below. However, application of certain provisions of the TCJA was and remains subject to further interpretation and in

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

these instances the Company made a reasonable estimate of the effects of the TCJA. Changes to these amounts in the first nine months of 2018 were immaterial.

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 amount for its one-time transition tax liability of $5.3 billion in 2017. Merck has not yet finalized its calculation of the total post-1986 undistributed E&P for these foreign subsidiaries. The transition tax is based in part on the amount of undistributed E&P held in cash and other specified assets; therefore, this amount may change when the Company finalizes its calculation of post-1986 undistributed foreign E&P and finalizes the amounts held in cash or other specified assets. 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. The Company anticipates that it will be able to utilize certain foreign tax credits to partially reduce the transition tax payment, resulting in a net transition tax payment of $5.1 billion.

The Company remeasured its deferred tax assets and liabilities at the new federal statutory tax rate of 21%, which resulted in a provisional deferred tax benefit of $779 million in 2017. The deferred tax benefit calculation remains subject to certain clarifications, particularly related to executive compensation and benefits.

Beginning in 2018, the TCJA includes a tax on “global intangible low-taxed income” (GILTI) as defined in the TCJA. The Company is allowed to make an accounting policy election to account for the tax effects of the GILTI tax either in the income tax provision in future periods as the tax arises, or as a component of deferred taxes on the related investments in foreign subsidiaries. The Company is currently evaluating the GILTI provisions of the TCJA and the implications on its tax provision and has not finalized the accounting policy election; therefore, the Company has not recorded deferred taxes for GILTI.


~~13.~~15.	Earnings Per Share

The calculations of earnings per share are as follows:


	Three Months Ended September 30,					Nine Months Ended September 30,				Three Months Ended September 30,					Nine Months Ended September 30,
($ and shares in millions except per share amounts)	2017			2016		2017		2016		2018		2017			2018		2017
Net (loss) income attributable to Merck & Co., Inc.	$	(56	)	$	2,184	$	3,440	$	4,515
Net income (loss) attributable to Merck & Co., Inc.										$	1,950	$	(56	)	$	4,393	$	3,440
Average common shares outstanding	2,727			2,765		2,735		2,769		2,662		2,727			2,680		2,735
Common shares issuable ⁽¹⁾	—			21		19		22		16		—			14		19
Average common shares outstanding assuming dilution	2,727			2,786		2,754		2,791		2,678		2,727			2,694		2,754
Basic (loss) earnings per common share attributable to Merck & Co., Inc. common shareholders	$	(0.02	)	$	0.79	$	1.26	$	1.63
(Loss) earnings per common share assuming dilution attributable to Merck & Co., Inc. common shareholders	$	(0.02	)	$	0.78	$	1.25	$	1.62
Basic earnings (loss) per common share attributable to Merck & Co., Inc. common shareholders										$	0.73	$	(0.02	)	$	1.64	$	1.26
Earnings (loss) per common share assuming dilution attributable to Merck & Co., Inc. common shareholders										$	0.73	$	(0.02	)	$	1.63	$	1.25


⁽¹⁾	Issuable primarily under share-based compensation plans.

For the three months ended September 30, 2018, 2 million, and for the first nine months of 2018 and 2017, 7 million and 4 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. The Company recorded a net loss for the three months ended September 30, 2017; therefore, no potential dilutive common shares were used in the computation of loss per common share assuming dilution because the effect would have been antidilutive. ~~For the three months ended September 30, 2016,~~ ~~4 million~~, and for the first nine months of 2017 and 2016, 4 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.

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


~~14.~~16.	Other Comprehensive Income (Loss)

Changes in AOCI by component are as follows:


	Three Months Ended September 30,																		Three Months Ended September 30,
($ in millions)	Derivatives				Investments				Employee Benefit Plans				Cumulative Translation Adjustment			Accumulated Other Comprehensive Income (Loss)			Derivatives				Investments				Employee Benefit Plans				Cumulative Translation Adjustment			Accumulated Other Comprehensive Income (Loss)
Balance July 1, 2016, net of taxes	$	111			$	167			$	(2,543	)		$	(1,821	)	$	(4,086	)
Other comprehensive income (loss) before reclassification adjustments, pretax	(69		)		(22		)		(177		)		70			(198		)
Tax	24				(3		)		21				12			54
Other comprehensive income (loss) before reclassification adjustments, net of taxes	(45		)		(25		)		(156		)		82			(144		)
Reclassification adjustments, pretax	(45		)	⁽¹⁾	(5		)	⁽²⁾	11			⁽³⁾	—			(39		)
Tax	16				—				1				—			17
Reclassification adjustments, net of taxes	(29		)		(5		)		12				—			(22		)
Other comprehensive income (loss), net of taxes	(74		)		(30		)		(144		)		82			(166		)
Balance September 30, 2016, net of taxes	$	37			$	137			$	(2,687	)		$	(1,739	)	$	(4,252	)

Balance July 1, 2017, net of taxes	$	(37	)		$	75			$	(3,133	)		$	(1,999	)	$	(5,094	)	$	(37	)		$	75			$	(3,133	)		$	(1,999	)	$	(5,094	)
Other comprehensive income (loss) before reclassification adjustments, pretax	(88		)		170				2				23			107			(88		)		170				2				23			107
Tax	31				(19		)		(13		)		44			43			31				(19		)		(13		)		44			43
Other comprehensive income (loss) before reclassification adjustments, net of taxes	(57		)		151				(11		)		67			150			(57		)		151				(11		)		67			150
Reclassification adjustments, pretax	(14		)	⁽¹⁾	(24		)	⁽²⁾	31			⁽³⁾	—			(7		)	(14		)	⁽¹⁾	(24		)	⁽²⁾	31			⁽³⁾	—			(7		)
Tax	5				8				(7		)		—			6			5				8				(7		)		—			6
Reclassification adjustments, net of taxes	(9		)		(16		)		24				—			(1		)	(9		)		(16		)		24				—			(1		)
Other comprehensive income (loss), net of taxes	(66		)		135				13				67			149			(66		)		135				13				67			149
Balance September 30, 2017, net of taxes	$	(103	)		$	210			$	(3,120	)		$	(1,932	)	$	(4,945	)	$	(103	)		$	210			$	(3,120	)		$	(1,932	)	$	(4,945	)
Balance July 1, 2018, net of taxes																			$	65			$	(164	)		$	(3,065	)		$	(1,958	)	$	(5,122	)
Other comprehensive income (loss) before reclassification adjustments, pretax																			29				8				—				(147		)	(110		)
Tax																			(6		)		—				—				11			5
Other comprehensive income (loss) before reclassification adjustments, net of taxes																			23				8				—				(136		)	(105		)
Reclassification adjustments, pretax																			5			⁽¹⁾	32			⁽²⁾	47			⁽³⁾	—			84
Tax																			(1		)		—				(7		)		—			(8		)
Reclassification adjustments, net of taxes																			4				32				40				—			76
Other comprehensive income (loss), net of taxes																			27				40				40				(136		)	(29		)
Balance September 30, 2018, net of taxes																			$	92			$	(124	)		$	(3,025	)		$	(2,094	)	$	(5,151	)

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


	Nine Months Ended September 30,																		Nine Months Ended September 30,
($ in millions)	Derivatives				Investments				Employee Benefit Plans				Cumulative Translation Adjustment			Accumulated Other Comprehensive Income (Loss)			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, pretax	(311		)		108				(395		)		424			(174		)
Tax	109				8				88				23			228
Other comprehensive income (loss) before reclassification adjustments, net of taxes	(202		)		116				(307		)		447			54
Reclassification adjustments, pretax	(254		)	⁽¹⁾	(26		)	⁽²⁾	25			⁽³⁾	—			(255		)
Tax	89				6				2				—			97
Reclassification adjustments, net of taxes	(165		)		(20		)		27				—			(158		)
Other comprehensive income (loss), net of taxes	(367		)		96				(280		)		447			(104		)
Balance September 30, 2016, net of taxes	$	37			$	137			$	(2,687	)		$	(1,739	)	$	(4,252	)

Balance January 1, 2017, net of taxes	$	338			$	(3	)		$	(3,206	)		$	(2,355	)	$	(5,226	)	$	338			$	(3	)		$	(3,206	)		$	(2,355	)	$	(5,226	)
Other comprehensive income (loss) before reclassification adjustments, pretax	(520		)		283				27				261			51			(520		)		283				27				261			51
Tax	182				(23		)		(7		)		162			314			182				(23		)		(7		)		162			314
Other comprehensive income (loss) before reclassification adjustments, net of taxes	(338		)		260				20				423			365			(338		)		260				20				423			365
Reclassification adjustments, pretax	(159		)	⁽¹⁾	(73		)	⁽²⁾	86			⁽³⁾	—			(146		)	(159		)	⁽¹⁾	(73		)	⁽²⁾	86			⁽³⁾	—			(146		)
Tax	56				26				(20		)		—			62			56				26				(20		)		—			62
Reclassification adjustments, net of taxes	(103		)		(47		)		66				—			(84		)	(103		)		(47		)		66				—			(84		)
Other comprehensive income (loss), net of taxes	(441		)		213				86				423			281			(441		)		213				86				423			281
Balance September 30, 2017, net of taxes	$	(103	)		$	210			$	(3,120	)		$	(1,932	)	$	(4,945	)	$	(103	)		$	210			$	(3,120	)		$	(1,932	)	$	(4,945	)
Balance January 1, 2018, net of taxes																			$	(108	)		$	(61	)		$	(2,787	)		$	(1,954	)	$	(4,910	)
Other comprehensive income (loss) before reclassification adjustments, pretax																			113				(125		)		(2		)		(129		)	(143		)
Tax																			(24		)		1				4				(111		)	(130		)
Other comprehensive income (loss) before reclassification adjustments, net of taxes																			89				(124		)		2				(240		)	(273		)
Reclassification adjustments, pretax																			169			⁽¹⁾	68			⁽²⁾	128			⁽³⁾	—			365
Tax																			(35		)		—				(24		)		—			(59		)
Reclassification adjustments, net of taxes																			134				68				104				—			306
Other comprehensive income (loss), net of taxes																			223				(56		)		106				(240		)	33

Adoption of ASU 2018-02 (see Note 1)																			(23		)		1				(344		)		100			(266		)
Adoption of ASU 2016-01 (see Note 1)																			—				(8		)		—				—			(8		)

Balance September 30, 2018, net of taxes																			$	92			$	(124	)		$	(3,025	)		$	(2,094	)	$	(5,151	)


⁽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, these amounts included both debt and equity investments; however, upon adoption of ASU 2016-01 in 2018 (see Note 1), these amounts relate only to available-for-sale debt investments.


⁽³⁾	Includes net amortization of prior service cost and actuarial gains and losses included in net periodic benefit cost (see Note ~~10)~~12).

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


~~15.~~17.	Segment Reporting

The Company’s operations are principally managed on a products basis and include four operating segments, which are the Pharmaceutical, Animal Health, Healthcare Services and Alliances ~~operating~~segments. The Pharmaceutical and Animal Health segments are the only reportable segments. The Animal Health ~~Healthcare Services and Alliances segments are not material~~segment met the criteria for separate ~~reporting.~~reporting and became a reportable segment in the first quarter of 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. 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.~~

The ~~Company also has an~~ Animal Health segment ~~that~~ discovers, develops, manufactures and markets animal health products, including vaccines, which the Company sells to veterinarians, distributors and animal producers.

The ~~Company’s~~ Healthcare Services segment provides services and solutions that focus on engagement, health analytics and clinical services to improve the value of care delivered to patients.

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

Sales of the Company’s products were as follows:



	Three Months Ended September 30,														Nine Months Ended September 30,
	2018							2017							2018							2017
($ in millions)	U.S.			Int’l		Total		U.S.			Int’l		Total		U.S.		Int’l			Total		U.S.		Int’l		Total
Pharmaceutical:
Oncology
Keytruda	$	1,109		$	780	$	1,889	$	604		$	442	$	1,047	$	2,906	$	2,114		$	5,020	$	1,522	$	990	$	2,512
Emend	71			52		123		88			49		137		239		157			396		257		156		413
Temodar	—			46		46		—			68		68		3		156			159		4		194		198
Alliance revenue - Lynparza	33			15		49		—			5		5		88		37			125		—		5		5
Alliance revenue - Lenvima	30			13		43		—			—		—		49		29			78		—		—		—
Vaccines
Gardasil/Gardasil 9	740			308		1,048		484			191		675		1,422		894			2,317		1,195		481		1,675
ProQuad/M-M-R II/Varivax	429			96		525		419			100		519		1,097		246			1,343		1,058		215		1,273
Pneumovax 23	160			54		214		174			56		229		394		192			586		392		166		558
RotaTeq	134			57		191		127			52		179		384		156			540		377		148		525
Zostavax	(1		)	56		54		139			94		234		16		147			163		356		191		547
Hospital Acute Care
Bridion	96			120		217		63			122		185		272		389			661		162		333		495
Noxafil	89			99		188		78			83		162		257		294			551		220		237		458
Invanz	74			62		137		93			66		159		252		185			437		268		177		445
Cubicin	55			40		95		41			50		91		150		137			287		148		141		290
Cancidas	2			77		79		6			88		94		10		247			257		17		310		327
Primaxin	1			71		72		5			68		73		6		206			212		7		199		206
Immunology
Simponi	—			210		210		—			219		219		—		673			673		—		602		602
Remicade	—			135		135		—			214		214		—		459			459		—		651		651
Neuroscience
Belsomra	23			43		66		27			30		56		76		115			191		72		78		150
Virology
Isentress/Isentress HD	123			151		275		143			167		310		383		477			860		422		474		896
Zepatier	18			86		104		228			241		468		8		339			347		683		680		1,363
Cardiovascular
Zetia	9			157		165		65			255		320		34		662			696		298		723		1,021
Vytorin	—			92		92		(6		)	148		142		11		402			414		114		451		565
Atozet	—			84		84		—			59		59		—		258			258		—		171		171
Adempas	—			94		94		—			70		70		—		238			238		—		221		221
Diabetes
Januvia	498			429		927		598			414		1,012		1,466		1,291			2,756		1,646		1,153		2,799
Janumet	225			339		563		197			316		513		625		1,067			1,693		640		933		1,572
Women’s Health
NuvaRing	193			41		234		160			54		214		550		135			686		425		148		573
Implanon/Nexplanon	133			53		186		110			45		155		375		160			535		367		137		503
Diversified Brands
Singulair	5			156		161		16			145		161		16		505			521		28		522		550
Cozaar/Hyzaar	4			99		103		9			119		128		18		330			348		15		345		360
Nasonex	7			64		71		(23		)	65		42		8		266			274		16		250		266
Arcoxia	—			83		83		—			80		80		—		249			249		—		272		272
Follistim AQ	26			34		60		30			41		72		83		115			198		104		128		232
Fosamax	2			42		45		4			48		53		3		155			159		7		173		180
Dulera	44			6		50		52			7		59		128		21			149		191		19		210
Other pharmaceutical ⁽¹⁾	317			666		980		266			688		952		877		2,150			3,023		876		2,140		3,017
Total Pharmaceutical segment sales	4,649			5,010		9,658		4,197			4,959		9,156		12,206		15,653			27,859		11,887		14,214		26,101
Animal Health:
Livestock	153			508		660		137			518		655		383		1,563			1,946		359		1,457		1,816
Companion Animals	153			207		361		153			192		345		541		689			1,230		483		595		1,078
Total Animal Health segment sales	306			715		1,021		290			710		1,000		924		2,252			3,176		842		2,052		2,894
Other segment sales ⁽²⁾	55			—		55		100			—		100		194		1			195		294		—		294
Total segment sales	5,010			5,725		10,734		4,587			5,669		10,256		13,324		17,906			31,230		13,023		16,266		29,289
Other ⁽³⁾	20			39		60		7			63		69		101		(35		)	66		73		327		400
	$	5,030		$	5,764	$	10,794	$	4,594		$	5,732	$	10,325	$	13,425	$	17,871		$	31,296	$	13,096	$	16,593	$	29,689

Three Months Ended
September 30, Nine Months Ended
September 30,
($ in millions) 2017 2016 2017 2016
Primary Care and Women’s Health
Cardiovascular
Zetia $ 320
$ 671
$ 1,021
$ 1,985
Vytorin 142
273
565
843
Atozet 59
39
171
96
Adempas 70
48
221
120
Diabetes
Januvia 1,012
1,006
2,799
2,976
Janumet 513
548
1,572
1,624
General Medicine and Women’s Health
NuvaRing 214
195
573
571
Implanon/Nexplanon 155
148
503
446
Follistim AQ 72
101
232
268
Hospital and Specialty
Hepatitis
Zepatier 468
164
1,363
326
HIV
Isentress/Isentress HD
310
372
896
1,050
Hospital Acute Care
Bridion 185
139
495
343
Noxafil 162
147
458
434
Invanz 159
152
445
409
Cancidas 94
142
327
406
Cubicin 91
320
290
969
Primaxin 73
77
206
231
Immunology
Remicade 214
311
651
999
Simponi 219
193
602
581
Oncology
Keytruda 1,047
356
2,512
919
Emend 137
137
413
405
Temodar 68
78
198
216
Diversified Brands
Respiratory
Singulair 161
239
550
705
Nasonex 42
94
266
425
Dulera 59
97
210
331
Other
Cozaar/Hyzaar 128
131
360
389
Arcoxia 80
114
272
342
Fosamax 53
68
180
217
Vaccines ⁽¹⁾

Gardasil/Gardasil 9
675
860
1,675
1,631
ProQuad/M-M-R II/Varivax
519
496
1,273
1,236
Pneumovax 23
229
175
558
403
Zostavax 234
190
547
464
RotaTeq 179
171
525
489
Other pharmaceutical ⁽²⁾
1,013
1,191
3,172
3,398
Total Pharmaceutical segment sales 9,156
9,443
26,101
26,247
Other segment sales ⁽³⁾
1,100
977
3,188
2,862
Total segment sales 10,256
10,420
29,289
29,109
Other ⁽⁴⁾
69
116
400
583
$ 10,325
$ 10,536
$ 29,689
$ 29,692
U.S. plus international may not equal total due to rounding.

⁽¹⁾

On December 31, 2016, Merck and Sanofi terminated their equally-owned joint venture, SPMSD, which marketed vaccines in most major European markets. Accordingly, vaccine sales in 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 which is 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~~separately.


.⁽²⁾	Represents the non-reportable segments of Healthcare Services and Alliances.


⁽³⁾	~~Represents the non-reportable segments of Animal Health, Healthcare Services and Alliances.~~


⁽⁴⁾	Other is primarily comprised of miscellaneous corporate revenues, including revenue hedging activities, as well as third-party manufacturing ~~sales~~.sales. Other in the first nine months of ~~2017~~2018 and ~~2016~~2017 also includes ~~$60~~$81 million and ~~$75~~$60 million, respectively, related to the sale of the marketing rights to certain products.

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

Consolidated revenues by geographic area where derived are as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
($ in millions)	2018		2017		2018		2017
United States	$	5,030	$	4,594	$	13,425	$	13,096
Europe, Middle East and Africa	2,884		2,941		9,218		8,374
Asia Pacific	1,178		1,112		3,766		3,164
Japan	761		775		2,353		2,320
Latin America	622		585		1,748		1,654
Other	319		318		786		1,081
	$	10,794	$	10,325	$	31,296	$	29,689

A reconciliation of segment profits to Income before taxes is as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
($ in millions)	2017			2016			2017			2016			2018			2017			2018			2017
Segment profits:
Pharmaceutical segment	$	5,929		$	6,162		$	16,722		$	16,698		$	6,479		$	5,906		$	18,109		$	16,657
Animal Health segment													409			389			1,273			1,202
Other segments	482			389			1,442			1,129			5			93			94			234
Total segment profits	6,411			6,551			18,164			17,827			6,893			6,388			19,476			18,093
Other profits	(78		)	21			107			341
Other profits (losses)													55			(78		)	(35		)	107
Unallocated:
Interest income	90			87			284			244			92			90			257			284
Interest expense	(189		)	(170		)	(564		)	(513		)	(190		)	(189		)	(569		)	(564		)
Equity income from affiliates	23			(27		)	16			(13		)	85			23			101			16
Depreciation and amortization	(334		)	(365		)	(1,036		)	(1,228		)	(324		)	(334		)	(1,006		)	(1,036		)
Research and development	(1,829		)	(1,444		)	(4,955		)	(4,651		)	(1,855		)	(4,208		)	(6,878		)	(7,399		)
Aggregate charge related to the formation of an oncology collaboration with AstraZeneca	(2,350		)	—			(2,350		)	—
Amortization of purchase accounting adjustments	(765		)	(772		)	(2,322		)	(2,933		)	(679		)	(765		)	(2,144		)	(2,322		)
Restructuring costs	(153		)	(161		)	(470		)	(386		)	(171		)	(153		)	(494		)	(470		)
Gain on sale of certain migraine clinical development programs	—			40			—			40
Aggregate charge related to termination of collaboration agreement with Samsung													(420		)	—			(420		)	—
Other unallocated, net	(626		)	(873		)	(2,232		)	(2,713		)	(821		)	(574		)	(2,191		)	(2,067		)
	$	200		$	2,887		$	4,642		$	6,015		$	2,665		$	200		$	6,097		$	4,642

~~Segment~~Pharmaceutical segment profits are comprised of segment sales less standard costs, as well as marketing and ~~certain operating~~administrative expenses and research and development costs directly incurred by the ~~segments.~~segment. Animal Health segment profits are comprised of segment sales, less all materials and production costs, as well as marketing 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 materials and production costs ~~other than standard costs, the majority of~~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 contingent consideration, and other miscellaneous income or expense items.

In the first quarter of 2018, the Company adopted a new accounting standard related to the classification of certain defined benefit plan costs (see Note 1), 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.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Recent Developments

Dividend Increase and Share Repurchase Program

In October 2018, Merck announced that its Board of Directors approved a 15% increase to the Company’s quarterly dividend, raising it to $0.55 per share from $0.48 per share of the Company’s outstanding common stock. The Board also authorized an additional $10 billion of treasury stock purchases with no time limit for completion. The Company has entered into a $5 billion accelerated share repurchase program under its expanded authorization (see ��Liquidity and Capital Resources” below).

Business Developments

In ~~July 2017,~~June 2018, Merck acquired Viralytics Limited (Viralytics), an Australian publicly traded company focused on oncolytic immunotherapy treatments for a range of cancers, for AUD 502 million ($378 million). The transaction provided Merck with full rights to Cavatak (V937, formerly CVA21), Viralytics’s investigational oncolytic immunotherapy. Cavatak is based on Viralytics’s proprietary formulation of an oncolytic virus (Coxsackievirus Type A21) that has been shown to preferentially infect and kill cancer cells. Cavatak is currently being evaluated in multiple Phase 1 and Phase 2 clinical trials, both as an intratumoral and intravenous agent, including in combination with Keytruda (pembrolizumab), Merck’s anti-PD-1 (programmed death receptor-1) therapy. Under a previous agreement between Merck and ~~AstraZeneca entered into~~Viralytics, a ~~global~~study is investigating the use of the Keytruda and Cavatak combination in melanoma, prostate, lung and bladder cancers.

In March 2018, Merck and Eisai Co., Ltd. (Eisai) announced a strategic ~~oncology~~ collaboration ~~to co-develop~~for the worldwide co-development and ~~co-commercialize AstraZeneca’s Lynparza (olaparib) for multiple cancer types. Lynparza is~~co-commercialization of Lenvima (lenvatinib mesylate), an ~~oral, poly (ADP-ribose) polymerase (PARP)~~orally available tyrosine kinase inhibitor ~~currently approved for certain types of ovarian cancer. The companies~~discovered by Eisai. Under the agreement, Merck and Eisai will ~~jointly~~ develop and commercialize ~~Lynparza,~~Lenvima jointly, both as monotherapy and in combination ~~trials~~ with ~~other potential medicines. Independently,~~Keytruda. Eisai records Lenvima product sales globally and Merck and ~~AstraZeneca will develop~~Eisai share gross profits equally. Merck records its share of Lenvima product sales, net of cost of sales and ~~commercialize Lynparza in combinations with their respective PD-1 and PD-L1 medicines,~~ ~~Keytruda~~ ~~(pembrolizumab) and Imfinzi (durvalumab). The companies will also jointly develop and commercialize AstraZeneca’s selumetinib, an oral, potent, selective inhibitor of MEK, part of~~commercialization costs, as alliance revenue. Expenses incurred during co-development, including for studies evaluating Lenvima as monotherapy, are shared equally by the ~~mitogen-activated protein kinase (MAPK) pathway, currently being developed for multiple indications including thyroid cancer. As part of~~two companies. Under the agreement, Merck made an upfront ~~payment~~payments to ~~AstraZeneca~~Eisai of ~~$1.6 billion~~$750 million and will make payments of ~~$750~~up to $650 million ~~over a multi-year period~~ for certain ~~license options~~option rights through 2021 ($~~250~~325 million in ~~November 2017, $400~~January 2019 or earlier in certain circumstances, $200 million in ~~November 2018~~January 2020 and ~~$100~~$125 million in ~~November 2019)~~January 2021). The Company recorded an aggregate charge of ~~$2.35~~$1.4 billion in Research and development expenses in the ~~third quarter~~first nine months of ~~2017~~2018 related to the upfront ~~payment~~payments and future ~~license options~~option payments. In addition, ~~Merck will pay AstraZeneca~~the agreement provides for Eisai to receive up to ~~an additional $6.15 billion contingent upon successful~~$385 million associated with the achievement ~~of future regulatory and sales milestones for total aggregate consideration of up to $8.5 billion (see Note 2 to the condensed consolidated financial statements).~~

In October 2017, Merck acquired Rigontec GmbH (Rigontec). Rigontec is a leader in accessing the retinoic acid-inducible gene I (RIG-I) pathway, part of the innate immune system, as a novel and distinct approach in cancer immunotherapy to induce both immediate and long-term anti-tumor immunity. Rigontec’s lead candidate, RGT100, is currently in Phase I development evaluating treatment in patients with 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 based on the attainment of certain clinical ~~development,~~and regulatory milestones and ~~commercial milestones. The transaction will be accounted for as an acquisition of an asset and the upfront payment will be reflected within~~ ~~Research and development~~ ~~expenses in the fourth quarter of 2017.~~

~~Cyber-attack~~

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

~~The Company is confident in the continuous supply of key products such as~~ ~~Keytruda~~, ~~Januvia~~ ~~(sitagliptin) and~~ ~~Zepatier~~ (elbasvir and grazoprevir). However, as anticipated, the Company was unable to fulfill orders for certain other products in certain markets, which had an unfavorable effect on sales for the third quarter and first nine months of 2017 of approximately $135 million. In addition, the Company recorded manufacturing-related expenses, primarily unfavorable manufacturing variances, in ~~Materials and Production~~ ~~costs, as well as expenses related to remediation efforts in~~ ~~Marketing and Administrative~~ ~~expenses and~~ ~~Research and Development~~ expenses, which aggregated $175 million for the third quarter and first nine months of 2017. The Company anticipates a similar impact to revenue and expenses in the fourth quarter of 2017 and for the full year of 2018 from the cyber-attack. Additionally, the temporary production shut-down from the cyber-attack contributed to the Company’s inability to meet higher than expected demand for ~~Gardasil~~ ~~9 (Human Papillomavirus 9-valent Vaccine, Recombinant), which resulted in Merck’s decision to borrow doses of~~ ~~Gardasil~~ 9 from the U.S. Centers for Disease Control and Prevention (CDC) Pediatric Vaccine Stockpile, reducing sales as discussed below. Merck does not expect a significant impairment to the value of intangible assets related to marketed products or inventories as a result of the cyber-attack.

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

~~Hurricane Maria~~

In September 2017, Hurricane Maria made direct landfall on Puerto Rico. The Company has one plant in Puerto Rico that makes a limited number of its pharmaceutical products, and the Company also works with contract manufacturers on the island. Merck’s plant did not sustain substantial damage, and production activities at the plant have resumed, although the operations at the plant are currently reliant on alternative sources of power and water. The Company is making progress despite the significant damage to the island’s infrastructure; however, supply chains within Puerto Rico are not yet restored. Based on Merck’s current assessment, the Company expects an immaterial impact to sales in 2017 and 2018.

~~Operating Results~~

~~Sales~~

~~Worldwide sales were~~ ~~$10.3 billion~~ ~~for the~~ ~~third~~ ~~quarter of 2017, a decrease of 2% compared with the~~ ~~third~~ ~~quarter of 2016 including a 1% favorable effect from foreign exchange. The sales decline was primarily attributable to the effects of generic and biosimilar competition for certain products including~~ ~~Zetia~~ ~~(ezetimibe), which lost U.S. market exclusivity in December 2016,~~ ~~Vytorin~~ ~~(ezetimibe and simvastatin), which lost U.S. market exclusivity in April 2017,~~ ~~Cubicin~~ ~~(daptomycin for injection) due to U.S. patent expiration in June 2016,~~ ~~Remicade~~ ~~(infliximab) and~~ ~~Cancidas~~ ~~(caspofungin acetate), as well as lower sales of products within Diversified Brands including~~ ~~Singulair~~ ~~(montelukast),~~ ~~Nasonex~~ ~~(mometasone furoate monohydrate), and~~ ~~Dulera~~ ~~Inhalation Aerosol (mometasone furoate/formoterol fumarate dihydrate). Lower combined sales of~~ ~~Isentress/Isentress HD~~ (raltegravir) also contributed to the revenue decline in the third quarter. Additionally, sales in the third quarter of 2017 were reduced by approximately $240 million due to a borrowing the Company made from the CDC Pediatric Vaccine Stockpile of doses of ~~Gardasil~~ 9 as discussed below. Also, as anticipated, the Company was unable to fulfill orders for certain other products in certain markets due to the cyber-attack, which had an unfavorable effect on sales for the third quarter of 2017 of approximately $135 million. Sales in the third quarter of 2017 as compared with the third quarter of 2016 were also unfavorably affected by approximately $150 million of additional sales in Japan in the third quarter of 2016 resulting from the timing of shipments in anticipation of the implementation of a resource planning system.

~~These declines were partially offset by higher sales from the ongoing launches of~~ ~~Keytruda~~, ~~Zepatier~~ ~~and~~ ~~Bridion~~ (sugammadex) Injection. Additionally, sales in the third quarter of 2017 benefited from the December 31, 2016 termination of Sanofi Pasteur MSD (SPMSD), a joint venture between Merck and Sanofi Pasteur S.A. (Sanofi), 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 $130 million during the third quarter of 2017. Higher sales of Animal Health products also partially offset the revenue decline in the third quarter of 2017.

~~Worldwide sales were $29.7~~$3.97 billion for the ~~first nine months~~achievement of ~~2017, essentially flat as compared~~milestones associated with sales of Lenvima. Lenvima has since been approved for the treatment of patients with unresectable hepatocellular carcinoma in the ~~first nine months of 2016 including a 1% unfavorable effect from foreign exchange. Sales were unfavorably affected by generic~~United States, Europe, China and ~~biosimilar competition for~~ Japan.~~Zetia,Vytorin, Cubicin, Remicade~~ ~~and~~ ~~Cancidas, as well as by lower sales of products within Diversified Brands, the diabetes franchise of~~ ~~Januvia~~ ~~and~~ ~~Janumet~~ ~~(sitagliptin/metformin HCl) and~~ ~~Isentress/Isentress HD.~~ ~~Sales in the first nine months of 2017 were also unfavorably affected by the CDC stockpile borrowing and June cyber-attack by the amounts noted above. These declines were offset by higher sales of~~ ~~Keytruda~~, ~~Zepatier~~, ~~Bridion,~~ Adempas (riociguat), and Animal Health products. Incremental vaccine sales of approximately $265 million as a result of the termination of SPMSD as noted above also offset the revenue decline in the first nine months of 2017.

Pricing

Global efforts toward health care cost containment continue to exert pressure on product pricing and market access worldwide. In the United States, pricing pressures continue 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, could result in further pricing pressures. In July 2018, the Company announced its commitment not to increase the average net price in the United States across its human health portfolio of products ~~and, in~~by more than inflation annually.

In several international markets, government-mandated pricing actions have reduced prices of generic and patented drugs. In addition, other austerity measures negatively affected the Company’s revenue performance in the first nine months of ~~2017.~~2018. The Company anticipates these pricing actions and other austerity measures will continue to negatively affect revenue performance for the remainder of 2018.

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 residual 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 for the first nine months of 2018 of approximately $150 million, including an immaterial impact to sales in the third quarter of 2018. The Company expects an immaterial impact to sales for the remainder of 2018. Sales in the third quarter and first nine months of 2017 were unfavorably affected by $135 million due to the cyber-attack. In addition, the Company recorded manufacturing-related expenses, primarily unfavorable manufacturing variances, in Materials and production costs, as well as expenses related to remediation efforts in Marketing and administrative expenses and Research and development expenses, which aggregated approximately $175 million for the third quarter and first nine months of 2017. Costs in the first nine months of 2018 were immaterial.

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

Operating Results

Sales

Worldwide sales were $10.8 billion for the third quarter of 2018, an increase of 5% compared with the third quarter of 2017 including a 1% unfavorable effect from foreign exchange. Global sales were $31.3 billion for the first nine months of 2018, an increase of 5% compared with the same period of 2017. Sales growth in both periods was driven primarily by higher sales in the oncology franchise reflecting strong growth of Keytruda, as well as alliance revenue related to Lynparza (olaparib) and Lenvima. Also contributing to revenue growth were higher sales in the hospital acute care franchise, largely attributable to Bridion (sugammadex) Injection and Noxafil (posaconazole). The sales increases in the third quarter and first nine months of 2018 also reflect higher sales of human papillomavirus (HPV) vaccine Gardasil (Human Papillomavirus Quadrivalent [Types 6, 11, 16 and 18] Vaccine, Recombinant)/Gardasil 9 (Human Papillomavirus 9-valent Vaccine, Recombinant), which were attributable in part to a reduction of Gardasil 9 sales due to a borrowing the Company made from the U.S. Centers for Disease Control and Prevention (CDC) Pediatric Vaccine Stockpile in the third quarter of 2017 as discussed below. Higher sales of animal health products also drove revenue growth in the third quarter and first nine months of 2018. Additionally, a lower impact from the June 2017 cyber-attack as discussed above also contributed to the sales increase in the third quarter and first months of 2018.

Revenue growth in the third quarter and first nine months of 2018 was partially offset by declines in the virology franchise driven primarily by lower sales of hepatitis C virus (HCV) treatment Zepatier (elbasvir and grazoprevir), as well as lower sales of shingles (herpes zoster) vaccine Zostavax (Zoster Vaccine Live). The ongoing effects of generic and biosimilar competition for cardiovascular products Zetia (ezetimibe), Vytorin (ezetimibe and simvastatin), and immunology product Remicade (infliximab), as well as lower sales of products within the diversified brands franchise also partially offset revenue growth in the quarter and year-to-date period. 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.

Sales of the Company’s products were as follows:



	Three Months Ended September 30,														Nine Months Ended September 30,
	2018							2017							2018							2017
($ in millions)	U.S.			Int’l		Total		U.S.			Int’l		Total		U.S.		Int’l			Total		U.S.		Int’l		Total
Pharmaceutical:
Oncology
Keytruda	$	1,109		$	780	$	1,889	$	604		$	442	$	1,047	$	2,906	$	2,114		$	5,020	$	1,522	$	990	$	2,512
Emend	71			52		123		88			49		137		239		157			396		257		156		413
Temodar	—			46		46		—			68		68		3		156			159		4		194		198
Alliance revenue - Lynparza	33			15		49		—			5		5		88		37			125		—		5		5
Alliance revenue - Lenvima	30			13		43		—			—		—		49		29			78		—		—		—
Vaccines
Gardasil/Gardasil 9	740			308		1,048		484			191		675		1,422		894			2,317		1,195		481		1,675
ProQuad/M-M-R II/Varivax	429			96		525		419			100		519		1,097		246			1,343		1,058		215		1,273
Pneumovax 23	160			54		214		174			56		229		394		192			586		392		166		558
RotaTeq	134			57		191		127			52		179		384		156			540		377		148		525
Zostavax	(1		)	56		54		139			94		234		16		147			163		356		191		547
Hospital Acute Care
Bridion	96			120		217		63			122		185		272		389			661		162		333		495
Noxafil	89			99		188		78			83		162		257		294			551		220		237		458
Invanz	74			62		137		93			66		159		252		185			437		268		177		445
Cubicin	55			40		95		41			50		91		150		137			287		148		141		290
Cancidas	2			77		79		6			88		94		10		247			257		17		310		327
Primaxin	1			71		72		5			68		73		6		206			212		7		199		206
Immunology
Simponi	—			210		210		—			219		219		—		673			673		—		602		602
Remicade	—			135		135		—			214		214		—		459			459		—		651		651
Neuroscience
Belsomra	23			43		66		27			30		56		76		115			191		72		78		150
Virology
Isentress/Isentress HD	123			151		275		143			167		310		383		477			860		422		474		896
Zepatier	18			86		104		228			241		468		8		339			347		683		680		1,363
Cardiovascular
Zetia	9			157		165		65			255		320		34		662			696		298		723		1,021
Vytorin	—			92		92		(6		)	148		142		11		402			414		114		451		565
Atozet	—			84		84		—			59		59		—		258			258		—		171		171
Adempas	—			94		94		—			70		70		—		238			238		—		221		221
Diabetes
Januvia	498			429		927		598			414		1,012		1,466		1,291			2,756		1,646		1,153		2,799
Janumet	225			339		563		197			316		513		625		1,067			1,693		640		933		1,572
Women’s Health
NuvaRing	193			41		234		160			54		214		550		135			686		425		148		573
Implanon/Nexplanon	133			53		186		110			45		155		375		160			535		367		137		503
Diversified Brands
Singulair	5			156		161		16			145		161		16		505			521		28		522		550
Cozaar/Hyzaar	4			99		103		9			119		128		18		330			348		15		345		360
Nasonex	7			64		71		(23		)	65		42		8		266			274		16		250		266
Arcoxia	—			83		83		—			80		80		—		249			249		—		272		272
Follistim AQ	26			34		60		30			41		72		83		115			198		104		128		232
Fosamax	2			42		45		4			48		53		3		155			159		7		173		180
Dulera	44			6		50		52			7		59		128		21			149		191		19		210
Other pharmaceutical ⁽¹⁾	317			666		980		266			688		952		877		2,150			3,023		876		2,140		3,017
Total Pharmaceutical segment sales	4,649			5,010		9,658		4,197			4,959		9,156		12,206		15,653			27,859		11,887		14,214		26,101
Animal Health:
Livestock	153			508		660		137			518		655		383		1,563			1,946		359		1,457		1,816
Companion Animals	153			207		361		153			192		345		541		689			1,230		483		595		1,078
Total Animal Health segment sales	306			715		1,021		290			710		1,000		924		2,252			3,176		842		2,052		2,894
Other segment sales ⁽²⁾	55			—		55		100			—		100		194		1			195		294		—		294
Total segment sales	5,010			5,725		10,734		4,587			5,669		10,256		13,324		17,906			31,230		13,023		16,266		29,289
Other ⁽³⁾	20			39		60		7			63		69		101		(35		)	66		73		327		400
	$	5,030		$	5,764	$	10,794	$	4,594		$	5,732	$	10,325	$	13,425	$	17,871		$	31,296	$	13,096	$	16,593	$	29,689

Three Months Ended
September 30, Nine Months Ended
September 30,
($ in millions) 2017 2016 2017 2016
Primary Care and Women’s Health
Cardiovascular
Zetia $ 320
$ 671
$ 1,021
$ 1,985
Vytorin 142
273
565
843
Atozet 59
39
171
96
Adempas 70
48
221
120
Diabetes
Januvia 1,012
1,006
2,799
2,976
Janumet 513
548
1,572
1,624
General Medicine and Women’s Health
NuvaRing 214
195
573
571
Implanon/Nexplanon 155
148
503
446
Follistim AQ 72
101
232
268
Hospital and Specialty
Hepatitis
Zepatier 468
164
1,363
326
HIV
Isentress/Isentress HD 310
372
896
1,050
Hospital Acute Care
Bridion 185
139
495
343
Noxafil 162
147
458
434
Invanz 159
152
445
409
Cancidas 94
142
327
406
Cubicin 91
320
290
969
Primaxin 73
77
206
231
Immunology
Remicade 214
311
651
999
Simponi 219
193
602
581
Oncology
Keytruda 1,047
356
2,512
919
Emend 137
137
413
405
Temodar 68
78
198
216
Diversified Brands
Respiratory
Singulair 161
239
550
705
Nasonex 42
94
266
425
Dulera 59
97
210
331
Other
Cozaar/Hyzaar 128
131
360
389
Arcoxia 80
114
272
342
Fosamax 53
68
180
217
Vaccines ⁽¹⁾

Gardasil/Gardasil 9
675
860
1,675
1,631
ProQuad/M-M-R II/Varivax
519
496
1,273
1,236
Pneumovax 23
229
175
558
403
Zostavax 234
190
547
464
RotaTeq 179
171
525
489
Other pharmaceutical ⁽²⁾
1,013
1,191
3,172
3,398
Total Pharmaceutical segment sales 9,156
9,443
26,101
26,247
Other segment sales ⁽³⁾
1,100
977
3,188
2,862
Total segment sales 10,256
10,420
29,289
29,109
Other ⁽⁴⁾
69
116
400
583
$ 10,325
$ 10,536
$ 29,689
$ 29,692
U.S. plus international may not equal total due to rounding.

⁽¹⁾

On December 31, 2016, Merck and Sanofi terminated their equally-owned joint venture, SPMSD, which marketed vaccines in most major European markets. Accordingly, vaccine sales in 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 which is 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⁾⁽²⁾	Represents the non-reportable segments of ~~Animal Health,~~ Healthcare Services and Alliances.


⁽⁴⁾⁽³⁾	Other is primarily comprised of miscellaneous corporate revenues, including revenue hedging activities, as well as third-party manufacturing sales. Other in the first nine months of ~~2017~~2018 and ~~2016~~2017 also includes ~~$60~~$81 million and ~~$75~~$60 million, respectively, related to the sale of the marketing rights to certain products.

Product sales are recorded net of the provision for discounts, including chargebacks, which are customer discounts that occur when a contracted customer purchases ~~directly~~ through an intermediary wholesale purchaser, and rebates that are owed based upon definitive contractual agreements or legal requirements with private sector and public sector (Medicaid and Medicare Part D) benefit providers, after the final dispensing of the product by a pharmacy to a benefit plan participant. These discounts, in the aggregate, reduced U.S. sales by ~~$2.9~~$2.6 billion and ~~$2.6~~$2.9 billion for the three months ended September 30, ~~2017~~2018 and ~~2016~~2017, respectively, and by ~~$8.2~~$7.7 billion and ~~$7.1~~$8.2 billion for the nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, respectively. Inventory levels at key U.S. wholesalers for each of the Company’s major pharmaceutical products are generally less than one month.

Pharmaceutical Segment

~~Primary Care~~Oncology

Keytruda, an anti-PD-1 therapy, is approved in the United States and ~~Women’s Health~~

~~Cardiovascular~~

~~Combined global sales~~in the European Union (EU) as monotherapy for the treatment of certain patients with non-small-cell lung cancer (NSCLC), melanoma, classical Hodgkin lymphoma (cHL), head and neck squamous cell carcinoma (HNSCC) and urothelial carcinoma, a type of bladder cancer, and in combination with pemetrexed and carboplatin for certain patients with nonsquamous NSCLC. ~~Zetia~~Keytruda ~~(marketed~~is also approved in ~~most countries outside~~ the United States as ~~Ezetrol~~), ~~Vytorin~~ ~~(marketed outside the United States as~~ ~~Inegy), and~~ ~~Atozet~~ (ezetimibe and atorvastatin) (marketed in certain countries outside of the United States), medicines for lowering LDL cholesterol, were $521 million in the third quarter of 2017 and $1.8 billion for the first nine months of 2017, declines of 47% and 40%, respectively, compared with the same periods of 2016. Foreign exchange favorably affected global sales performance by 1% in the third quarter of 2017. The sales declines primarily reflect lower volumes and pricing of ~~Zetia~~ ~~and~~ ~~Vytorin~~ ~~in the United States from generic competition. By agreement, a generic manufacturer launched a generic version of~~ ~~Zetia~~ ~~in the United States in December 2016. The U.S. patent and exclusivity periods for~~ ~~Zetia~~ ~~and~~ ~~Vytorin~~ ~~otherwise expired in April 2017. Accordingly, the Company is experiencing rapid and substantial declines in U.S.~~ ~~Zetia~~ ~~and~~ ~~Vytorin~~ ~~sales from generic competition and expects the declines to continue. The Company will lose market exclusivity in major European markets for~~ ~~Ezetrol~~ ~~in April 2018 and for~~ ~~Inegy~~ ~~in April 2019 and anticipates sales declines in these markets thereafter. Sales of~~ ~~Ezetrol~~ ~~and~~ ~~Inegy~~ ~~in these markets were $389 million and $327 million, respectively, for the first nine months of 2017.~~

~~Pursuant to a collaboration with Bayer AG (Bayer), Merck acquired lead commercial rights for Adempas, a novel cardiovascular drug~~monotherapy for the treatment of pulmonary arterial hypertension, in countries outside the Americas while Bayer has lead rights in the Americas, including the United States. The companies equally share profits under the collaboration.certain patients with gastric or gastroesophageal junction adenocarcinoma and microsatellite instability-high or mismatch repair deficient cancer. In 2016, Merck began promoting and distributing Adempas in Europe. Transition from Bayer in other Merck territories will continue in 2017. Merck recorded sales of $70 million and $48 million for Adempas in the third quarter of 2017 and 2016, respectively, and $221 million and $120 million for the first nine months of 2017 and 2016, respectively, which includes sales in Merck’s marketing territories, as well as Merck’s share of profits from the sale of Adempas in Bayer’s marketing territories.

~~Diabetes~~

~~Worldwide combined sales of~~ ~~Januvia~~ ~~and~~ ~~Janumet~~, medicines that help lower blood sugar levels in adults with type 2 diabetes, were $1.5 billion in the third quarter of 2017, a decline of 2% compared with the third quarter of 2016, and were $4.4 billion in the first nine months of 2017, a decline of 5% compared with the same period of 2016. The declines were driven primarily by ongoing pricing pressure partially offset by continued volume growth globally.

~~In April 2017, Merck announced that~~addition, the U.S. Food and Drug Administration (FDA) ~~issued a Complete Response Letter (CRL) regarding Merck’s supplemental New Drug Applications for~~ ~~Januvia~~, ~~Janumet~~ ~~and~~ ~~Janumet XR~~ (sitagliptin and metformin HCl extended-release). With these applications, Merck is seeking to include data from TECOS (Trial Evaluating Cardiovascular Outcomes with Sitagliptin) in the prescribing information of sitagliptin-containing medicines. Merck has reviewed the letter and is discussing next steps with the FDA.

~~General Medicine and Women’s Health~~

~~Worldwide sales of~~ ~~NuvaRing~~ ~~(etonogestrel/ethinyl estradiol vaginal ring), a vaginal contraceptive product, were~~ ~~$214 million~~ in the third quarter of 2017, an increase of 10% compared with the third quarter of 2016 including a 2% favorable effect from foreign exchange. The increase was driven by higher sales in the United States reflecting higher pricing. Global sales of ~~NuvaRing~~ ~~were $573 million in the first nine months of 2017, essentially flat as compared with the same period of 2016.~~

~~Worldwide sales of~~ ~~Implanon/Nexplanon~~ (etonogestrel implant), single-rod subdermal contraceptive implants, grew 5% to $155 million in the third quarter of 2017 and increased 13% to $503 million in the first nine months of 2017 compared with the same periods of 2016 driven by higher sales in the United States from volume growth and, for the year-to-date period, also from higher pricing. Foreign exchange favorably affected global sales performance by 1% for the third quarter of 2017.

~~Hospital and Specialty~~

~~Hepatitis~~

~~Global sales of~~ ~~Zepatier~~ were $468 million in the third quarter of 2017 compared with $164 million in the third quarter of 2016 and were $1.4 billion in the first nine months of 2017 compared with $326 million in the first nine months of 2016. Sales growth in both periods primarily reflects higher sales in Europe, the United States and Japan as the Company continues to launch ~~Zepatier~~ ~~globally. In January 2016, the FDA~~recently approved ~~Zepatier~~Keytruda for the treatment of ~~chronic HCV genotype (GT) 1 or GT4 infection~~

~~in adults.~~ ~~Zepatier~~ ~~is indicated for use~~certain patients with ~~ribavirin in certain patient populations.~~ ~~Zepatier~~ ~~became available in the United States in February 2016.~~ ~~Zepatier~~ ~~was approved by the European Commission (EC) in July 2016, became available in European markets in late November 2016~~cervical cancer, primary mediastinal large B-cell lymphoma (PMBCL), a type of non-Hodgkin lymphoma, and ~~has launched across these markets during 2017. The Company has also launched~~ ~~Zepatier~~ ~~in other international markets. The Company anticipates that future sales of~~ ~~Zepatier~~ ~~will be unfavorably affected by increasing competition and declining patient volumes.~~

~~HIV~~

~~Combined global sales of~~ ~~Isentress/Isentress HD, HIV integrase inhibitors for use~~ in combination with ~~other antiretroviral agents~~carboplatin and either paclitaxel or nab-paclitaxel for ~~the treatment of HIV-1 infection, were~~patients with squamous NSCLC (see below). ~~$310 million~~Keytruda is approved in ~~the~~ ~~third~~ quarter of 2017, a decline of 17% compared with the third quarter of 2016, and were $896 million in the first nine months of 2017, a decline of 15% compared with the first nine months of 2016. Foreign exchange favorably affected global sales performance by 1% in the third quarter of 2017 and unfavorably affected global sales performance by 1% in the first nine months of 2017. The sales declines primarily reflect lower demand in the United States due to competitive pressures. Lower volumes and pricing in Europe due to competition also had an unfavorable effect on sales in the year-to-date period. In May 2017, the FDA approved ~~Isentress~~HD~~, a 1200 mg once-daily dose of~~ ~~Isentress~~, to be administered orally as two 600 mg tablets, in combination with other antiretroviral agents, for the treatment of HIV-1 infection in adults, and pediatric patients weighing at least 40 kg, who are treatment-naïve or whose virus has been suppressed on an initial regimen of ~~Isentress~~ ~~400 mg given twice daily. In July 2017, the EC granted marketing authorization of the once-daily dose of~~ ~~Isentress~~ (~~Isentress~~ 600 mg as it is known outside the United States) in combination with other antiretroviral medicinal products, for the treatment of HIV-1 infection in adults and pediatric patients weighing at least 40 kg. Regulatory reviews are underway for once-daily versions of ~~Isentress~~ ~~in other countries and regions around the world.~~

~~Hospital Acute Care~~

~~Worldwide sales of~~ ~~Bridion~~, for the reversal of two types of neuromuscular blocking agents used during surgery, were $185 million in the third quarter of 2017, an increase of 33% compared with the third quarter of 2016. Global sales of ~~Bridion~~ were $495 million in the first nine months of 2017, an increase of 44% compared with the same period of 2016 including a 1% unfavorable effect from foreign exchange. Sales growth in both periods primarily reflects volume growth in the United States.

~~Global sales of~~ ~~Invanz~~ ~~(ertapenem sodium),~~Japan for the treatment of certain ~~infections, were $159 million~~patients with melanoma, NSCLC, cHL, and urothelial carcinoma. Additionally, in July 2018, Keytruda was approved in China for the treatment of adult patients with unresectable or metastatic melanoma following failure of one prior line of therapy. 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).

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 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 has now been demonstrated in KEYNOTE-189 and has resulted in the ~~third quarter~~FDA converting the accelerated approval to full (regular) approval. Also, in September 2018, the EU approved Keytruda in combination with pemetrexed and platinum chemotherapy for the first-line treatment of ~~2017,~~metastatic nonsquamous NSCLC in adults whose tumors have no EGFR or ALK positive mutations. This is the first approval in Europe for an ~~increase~~anti-PD-1 therapy in combination with chemotherapy.

In June 2018, the FDA approved Keytruda for the treatment of ~~5% compared~~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 ~~third quarter~~FDA approved Keytruda for the treatment of ~~2016, driven by volume growth~~adult and pediatric patients with refractory PMBCL, or who have relapsed after two or more prior lines of therapy. With this indication, Keytruda becomes the first anti-PD-1 therapy to be approved for the treatment of PMBCL. Both of these indications were approved under the FDA’s accelerated approval regulations based on tumor response rate and durability of response.

Additionally, 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. Keytruda is the first anti-PD-1 approved in the first-line setting as both combination and monotherapy in certain ~~international markets. Worldwide sales of~~ ~~Invanz~~ ~~were $445 million in the first nine months of 2017, an increase of 9% compared~~patients with the same period of 2016, primarily reflecting higher pricing in the United States. Foreign exchange favorably affected global sales performance by 2% and 1% in the third quarter and first nine months of 2017, respectively. The patent that provides U.S. market exclusivity for metastatic NSCLC.~~Invanz~~ ~~will expire on November 15, 2017 and the Company anticipates a significant decline in U.S.~~ ~~Invanz~~ ~~sales thereafter. U.S. sales of~~ ~~Invanz~~ ~~were $268 million in the first nine months of 2017.~~

~~Global sales of~~ ~~Cancidas~~, an anti-fungal product sold primarily outside of the United States, were $94 million in the third quarter of 2017 and $327 million for the first nine months of 2017, declines of 34% and 19%, respectively, compared with the same periods of 2016. Foreign exchange favorably affected global sales performance by 1% in the third quarter of 2017 and unfavorably affected global sales performance by 1% in the first nine months of 2017. 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 significant declines in~~ ~~Cancidas~~ ~~sales in those European markets from generic competition and expects the declines to continue.~~

~~Sales of~~ ~~Cubicin~~, an I.V. antibiotic for complicated skin and skin structure infections or bacteremia when caused by designated susceptible organisms, were $91 million in the third quarter of 2017, a decline of 71% compared with the third quarter of 2016, and were $290 million in the first nine months of 2017, a decline of 70% compared with the same period in 2016. Foreign exchange favorably affected sales performance by 1% in the third quarter of 2017. The U.S. composition patent for ~~Cubicin~~ ~~expired in June 2016. Accordingly, the Company is experiencing a rapid and substantial decline in U.S.~~ ~~Cubicin~~ ~~sales from generic competition and expects the decline to continue. The Company anticipates it will lose market exclusivity for~~ ~~Cubicin~~ ~~in Europe later in 2017 or early in 2018.~~

~~Immunology~~

~~Sales of~~ ~~Remicade,~~ ~~a treatment for inflammatory diseases (marketed by the Company in Europe, Russia and Turkey), were~~ ~~$214 million~~ ~~in the~~ ~~third~~ quarter of 2017 and $651 million in the first nine months of 2017, declines of 31% and 35%, respectively, compared with the same periods of 2016. Foreign exchange favorably affected sales performance by 3% in the third quarter of 2017 and unfavorably affected sales performance by 1% in the first nine months of 2017. The Company lost market exclusivity for ~~Remicade~~ in major European markets in 2015 and no longer has market exclusivity in any of its marketing territories. The Company is experiencing pricing and volume declines in these markets as a result of biosimilar competition and expects the declines to continue.

~~Sales of~~ ~~Simponi~~ ~~(golimumab), a once-monthly subcutaneous treatment for certain inflammatory diseases (marketed by the Company in Europe, Russia and Turkey), were~~ ~~$219 million~~ ~~in the~~ ~~third~~ ~~quarter of 2017, growth of 13% compared with~~

the third quarter of 2016, and were $602 million in the first nine months of 2017, an increase of 4% compared with the same period of 2016. Foreign exchange favorably affected sales performance by 4% in the third quarter of 2017 and unfavorably affected sales performance by 1% in the first nine months of 2017. Sales growth in both periods is primarily attributable to volume growth in Europe.

~~Oncology~~

Global sales of Keytruda~~, an anti-PD-1 (programmed death receptor-1) therapy,~~ were $1.9 billion in the third quarter of 2018 compared with $1.0 billion in the third quarter of 2017 ~~compared with $356 million in the third quarter of 2016~~ and were ~~$2.5~~$5.0 billion in the first nine months of ~~2017~~2018 compared with ~~$919 million in~~$2.5 billion for the ~~first nine months~~same period of ~~2016.~~2017. Sales growth in both periods was driven by volume growth in all markets ~~particularly in the United States,~~ as the Company continues to launch Keytruda with multiple new indications globally. ~~During the first nine months of 2017, Merck has launched six new indications for~~ ~~Keytruda~~ ~~in the United States, four in Europe and three in Japan. U.S. sales of~~ ~~Keytruda~~ grew to $604 million and $1.5 billion in the third quarter and first nine months of 2017, respectively, compared with $188 million and $481 million for the third quarter and first nine months of 2016, respectively. Sales in the United States continue to build across the multiple approved indications, in particular for the treatment of ~~non-small-cell lung cancer (NSCLC)~~NSCLC reflecting both the continued adoption of Keytruda in the first-line setting as monotherapy for patients with metastatic NSCLC whose tumors have high PD-L1 expression, as well as the uptake of Keytruda in combination with pemetrexed and carboplatin, a commonly used chemotherapy regimen, for the first-line treatment of metastatic nonsquamous NSCLC with or without PD-L1 expression. Other indications, including ~~melanoma~~HNSCC, bladder, and ~~head and neck cancer, combined with the launch in bladder~~microsatellite instability-high cancer, also contributed toKeytruda sales growth in the third quarter and first nine months of ~~2017.~~2018. Sales growth in international markets reflects positive performance in the melanoma indications, as well as a greater contribution from the treatment of patients with NSCLC as reimbursement is established in additional markets in the first- and second-line settings.

~~In September 2017, the FDA approved~~ ~~Keytruda~~ for the treatment of patients with recurrent locally advanced or metastatic gastric or gastroesophageal junction adenocarcinoma whose tumors express PD-L1 (Combined Positive Score ≥1) as determined by an FDA-approved test, with disease progression on or after two or more prior lines of therapy including fluoropyrimidine- and platinum-containing chemotherapy and if appropriate, HER2/neu-targeted therapy.

~~In May 2017, the FDA approved~~ ~~Keytruda~~ in combination with pemetrexed and carboplatin for the first-line treatment of metastatic nonsquamous NSCLC, irrespective of PD-L1 expression. The National Cancer Care Network also recommended the combination for treatment of patients with metastatic nonsquamous NSCLC. ~~Keytruda~~ ~~is the only anti-PD-1 approved in the first-line setting as both monotherapy and combination therapy for appropriate patients with metastatic NSCLC. In October 2016,~~ ~~Keytruda~~ was approved by the FDA as monotherapy in the first-line setting for patients with metastatic NSCLC whose tumors have high PD-L1 expression (tumor proportion score [TPS] of ≥50%) as determined by an FDA-approved test, with no EGFR or ALK genomic tumor aberrations. ~~Keytruda~~ as monotherapy is also indicated for the second-line or greater treatment setting for patients with metastatic NSCLC whose tumors express PD-L1 (TPS ≥1%) as determined by an FDA-approved test, with disease progression on or after platinum-containing chemotherapy. Patients with EGFR or ALK genomic tumor aberrations should have disease progression on FDA-approved therapy for these aberrations prior to receiving ~~Keytruda. In December 2016,~~ ~~Keytruda~~ was approved in Japan for the treatment of certain patients with PD-L1-positive unresectable advanced/recurrent NSCLC in the first- and second-line treatment settings. Additionally, in January 2017, the EC approved ~~Keytruda~~ ~~for the first-line treatment of metastatic NSCLC in adults whose tumors have high PD-L1 expression (TPS of 50% or more) with no EGFR or ALK positive tumor mutations.~~

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

~~Additionally in May 2017, the FDA approved~~ ~~Keytruda~~ for a first-of-its-kind indication: the treatment of adult and pediatric patients with unresectable or metastatic, microsatellite instability-high (MSI-H) or mismatch repair deficient solid tumors that have progressed following prior treatment and who have no satisfactory alternative treatment options or colorectal cancer that has progressed following treatment with a fluoropyrimidine, oxaliplatin, and irinotecan. With this unique indication, ~~Keytruda~~ ~~is the first cancer therapy approved for use based on a biomarker, regardless of tumor type.~~

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

~~In August 2016, Merck announced that the FDA approved~~ ~~Keytruda~~markets reflects continued uptake for the treatment of ~~patients~~NSCLC, as the Company has secured reimbursement in most major markets, along with recurrent or metastatic head and neck squamous cell carcinoma (HNSCC) with disease progression on or after platinum-containing chemotherapy. In July 2017, Merck announced that the pivotal Phase 3 KEYNOTE-040 trial investigating ~~Keytruda~~ in previously treated patients with recurrent or metastatic HNSCC did not meet its pre-specified primary endpoint of overall survival (OS) (HR, 0.82 [95% CI, 0.67-1.01]; p = 0.03 [one-sided]). The safety profile observed in KEYNOTE-040 was consistent with that observed in previously reported studies of ~~Keytruda; no new safety signals were identified. The current indication remains unchanged and clinical trials continue, including KEYNOTE-048, a Phase 3 clinical trial of~~ ~~Keytruda~~growth in the ~~first-line treatment~~melanoma, HNSCC, and bladder cancer indications.

Lynparza, an oral poly (ADP-ribose) polymerase (PARP) inhibitor being developed as part of ~~recurrent or metastatic HNSCC.~~

~~Keytruda~~ ~~is now approved in the United States and in the EU as monotherapy for the treatment of certain patients~~a collaboration with ~~NSCLC, melanoma, cHL and urothelial carcinoma.~~ ~~Keytruda~~ is also approved in the United States as monotherapy for the treatment of certain patients with HNSCC, gastric or gastroesophageal junction adenocarcinoma and MSI-H or mismatch repair deficient cancer, and in combination with pemetrexed and carboplatin in certain patients with NSCLC. ~~Keytruda~~ ~~is also approved in Japan for use in patients with curatively unrespectable melanoma and PD-L1-positive unresectable advanced/recurrent NSCLC. The~~ ~~Keytruda~~ clinical development program includes studies across a broad range of cancer types (see “Research and Development” below). Pursuant to the settlement of worldwide patent infringement litigation related to ~~Keytruda~~AstraZeneca PLC (AstraZeneca) (see Note 74 to the condensed consolidated financial statements), ~~the Company will pay royalties~~is currently approved for certain types of ~~6.5% on net sales~~ovarian and breast cancer. Merck recorded alliance revenue of ~~Keytruda~~ ~~in 2017 through 2023;~~$49 million and ~~2.5% on net sales of~~ ~~Keytruda~~ ~~in 2024 through 2026.~~

~~Diversified Brands~~

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

~~Respiratory~~

~~Worldwide sales of~~ ~~Singulair, a once-a-day oral medicine for the chronic treatment of asthma and for the relief of symptoms of allergic rhinitis, were $161~~$125 million in the third quarter of 2017 and $550 million for the first nine months of 2017, declines of 33% and 22%, respectively, compared with the same periods of 2016. Foreign exchange unfavorably affected global sales performance by 1% in both the third quarter and first nine months of 2017. The sales declines were largely driven by lower volumes in Japan as a result of generic competition. The patents that provided market exclusivity for ~~Singulair~~ ~~in Japan expired in February and October of 2016. As a result, the Company is experiencing a decline in~~ ~~Singulair~~ ~~sales in Japan and expects the decline to continue. The Company no longer has market exclusivity for~~ ~~Singulair~~ ~~in any major market.~~

~~Global sales of~~ ~~Nasonex~~, an inhaled nasal corticosteroid for the treatment of nasal allergy symptoms, declined 55% to $42 million in the third quarter of 2017, and decreased 37% to $266 million in the first nine months of 2017, compared with the same periods of 2016, driven by lower sales in the United States from ongoing generic competition. Foreign exchange favorably affected global sales performance by 1% in both the third quarter and first nine months of 2017.

~~Global sales of~~ ~~Dulera~~ Inhalation Aerosol, a combination medicine for the treatment of asthma, were $59 million in the third quarter of 2017, a decline of 39% compared with the third quarter of 2016, and were $210 million in the first nine months of 2017, a decline of 37% compared with the first nine months of 2016. The declines were driven by lower sales in the United States reflecting competitive pricing pressures. Foreign exchange favorably affected global sales performance by 1% in the third quarter of 2017.

~~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 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 are reflected in equity income from affiliates included in ~~Other (income) expense, net~~ (see Note 11 to the condensed consolidated financial statements). 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 in the third quarter and first nine months of ~~2017 were approximately $130~~2018, respectively, related to Lynparza. In January 2018, the FDA approved Lynparza for use in patients 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 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. Lynparza was approved for use as a maintenance therapy in patients with platinum-sensitive relapsed ovarian cancer, regardless of BRCA mutation status in the EU in May 2018 and in Japan in January 2018.

Lenvima, an orally available tyrosine kinase inhibitor being developed as part of a collaboration with Eisai (see Note 4 to the condensed consolidated financial statements), is currently approved for certain types of thyroid cancer, hepatocellular carcinoma, and in combination for certain patients with renal cell cancer. Merck recorded alliance revenue of $43 million and ~~$265~~$78 million in the third quarter and first nine months of 2018, respectively, related to Lenvima. Lenvima was approved for the treatment of certain patients with unresectable hepatocellular carcinoma in Japan in March 2018, in the United States and EU in August 2018, and in China in September 2018, triggering capitalized milestone payments of $25 million, $125 million, $50 million, and $25 million, respectively, ~~of which approximately $65 million and $155 million, respectively, relate~~ to ~~Gardasil/Gardasil~~ 9. Eisai.

Vaccines

~~Merck’s~~Worldwide sales of ~~Gardasil~~ ~~(Human Papillomavirus Quadrivalent [Types 6, 11, 16 and 18] Vaccine, Recombinant)~~/Gardasil/Gardasil 9, vaccines to help prevent certain cancers and diseases caused by certain types of ~~human papillomavirus (HPV),~~HPV, were ~~$675 million~~$1.0 billion in the third quarter of 2018, an increase of 55% compared with the third quarter of 2017 including a 1% unfavorable effect from foreign exchange. The increase was driven primarily by higher sales in the United States attributable to a borrowing from the CDC Pediatric Vaccine Stockpile in the third quarter of 2017 ~~a decline~~as discussed below. The increase in sales of ~~22% compared with~~Gardasil/Gardasil 9 during the third quarter of ~~2016,~~2018 was also driven ~~primarily~~ by ~~lower~~higher demand in most international markets, particularly in China due to the ongoing launch and in Europe. Global sales of Gardasil/Gardasil 9 were $2.3 billion in the ~~United States.~~ first nine months of 2018, an increase of 38% compared with the same period of 2017 including a 2% favorable effect from foreign exchange. The increase was driven in part by the 2017 CDC stockpile borrowing, as well as by higher demand in the Asia Pacific region, particularly in China, and in Europe. 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 the third quarter of 2017, the Company made a request to borrow doses of Gardasil 9 from the CDC Pediatric Vaccine Stockpile, which the CDC granted. The Company’s decision to borrow the doses from the CDC was driven 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, which reduced revenues

by approximately $240 million in the third quarter of 2017, and recognized a corresponding liability. The Company subsequently replenished a portion of the borrowed doses in the fourth quarter of 2017. The net effect of the borrowing and subsequent partial replenishment was a reduction in sales of $125 million for the full year of 2017. The Company anticipates it will replenish the ~~stockpile~~remaining borrowed doses in the ~~second half of 2018, which will result in the recognition of sales and a reversal of the liability. Additionally, the timing of sales in Brazil also contributed to the sales decline in~~ ~~Gardasil~~/~~Gardasil~~ ~~9 in the third~~fourth quarter of 2017 as compared with the third quarter of 2016. These declines were partially offset by higher sales in Europe resulting from the termination of the SPMSD joint venture noted above, as well as higher demand in Asia Pacific. Merck’s sales of ~~Gardasil/Gardasil~~ 9 were $1.7 billion in the first nine months of 2017, growth of 3% compared with the first nine months of 2016. Sales growth was driven primarily by higher sales in Europe resulting from the termination of the SPMSD joint venture and higher demand in Asia Pacific, partially offset by lower sales in the United States as a result of the CDC stockpile borrowing discussed above. In October 2016, the FDA approved a 2-dose vaccination regimen for ~~Gardasil~~ 9, for use in girls and boys 9 through 14 years of age, and the CDC’s Advisory Committee on Immunization Practices (ACIP) voted to recommend the 2-dose vaccination regimen for certain 9 through 14 year olds. The Company is beginning to experience an impact from the transition from a 3-dose vaccine regimen to a 2-dose vaccination regimen; however, increased patient starts are helping to offset the negative effects of the transition. ~~Gardasil~~ recently received marketing authorization from the China Food and Drug Administration for use in females aged 20 to 45 to prevent cervical cancers and cervical pre-cancers (cervical intraepithelial neoplasia, or CIN1/2/3, and adenocarcinoma in situ or AIS) caused by HPV types 16 and 18.2018.

~~Merck’s~~Global sales of ProQuad (Measles, Mumps, Rubella and Varicella Virus Vaccine Live), a pediatric combination vaccine to help protect against measles, mumps, rubella and varicella, were $186 million in the third quarter of 2018, an increase of 10% compared with $169 million in the third quarter of ~~2017~~2017. Worldwide sales of ProQuad were $455 million in the first nine months of 2018, an increase of 13% compared with ~~$150~~$402 million in the first nine months of 2017. Foreign exchange unfavorably affected global sales performance by 1% in the third quarter of ~~2016~~2018. Sales growth in both periods was driven primarily by higher volumes and pricing in the United States and volume growth in ~~most international~~certain European markets. ~~Merck’s sales of~~

~~ProQuad~~ ~~were $402 million in the first nine months of 2017 compared with $389 million in the first nine months of 2016. The increase reflects volume growth in most international markets. Merck’s~~Worldwide sales of M‑M‑R II (Measles, Mumps and Rubella Virus Vaccine Live), a vaccine to help protect against measles, mumps and rubella, were $121 million for the third quarter of 2018, a decline of 2% compared with $124 million for the third quarter of ~~2017~~2017. Global sales of M‑M‑R II were $310 million in the first nine months of 2018, an increase of 2% compared with ~~$115 million for the third quarter of 2016 and were~~ $303 million in the first nine months of ~~2017 compared with $269 million~~2017. Foreign exchange favorably affected global sales performance by 1% in the ~~first nine months~~third quarter of ~~2016. The increases were largely attributable to higher sales in Europe resulting from the termination of the SPMSD joint venture. Merck’s~~2018.

Global sales of Varivax (Varicella Virus Vaccine Live), a vaccine to help prevent chickenpox (varicella), were $217 million for the third quarter of 2018, a decline of 4% compared with $226 million for the third quarter of ~~2017~~2017. The sales decrease primarily reflects volume declines in Turkey due to the loss of a government tender, partially offset by volume growth in Latin America. Worldwide sales of Varivax were $578 million in the first nine months of 2018, an increase of 2% compared with ~~$232 million for the third quarter of 2016 and were~~ $568 million in the first nine months of ~~2017 compared with $578 million~~2017. Foreign exchange favorably affected global sales performance by 1% in the first nine

months of ~~2016. The declines are~~2018. Sales growth in the year-to-date period was largely attributable to ~~lower sales~~volume growth in most international markets, along with higher pricing in the United States, ~~reflecting lower volumes~~ partially offset by ~~higher pricing, and lower sales~~volume declines in ~~Latin America~~Turkey due to the ~~timing~~loss of ~~shipments. These declines were partially offset by higher sales in Europe resulting from the termination of the SPMSD joint venture.~~a government tender.

~~Merck’s~~Global sales of Pneumovax 23 (pneumococcal vaccine polyvalent), a vaccine to help prevent pneumococcal disease, were ~~$229~~$214 million in the third quarter of ~~2017, an increase~~2018, a decline of ~~31%~~7% compared with the third quarter of ~~2016. Merck’s~~2017, driven primarily by lower sales in the United States reflecting lower demand, partially offset by higher pricing. Worldwide sales of Pneumovax 23 were ~~$558~~$586 million in the first nine months of ~~2017,~~2018, an increase of ~~38%~~5% compared with the ~~first nine months~~same period of ~~2016 including a 1% unfavorable effect from foreign exchange. Sales growth in both periods was~~2017, driven primarily by volume growth ~~and higher pricing~~in Europe. Sales in the United States ~~as well as in Europe resulting from the termination of the SPMSD joint venture.~~

~~Merck’s sales of~~ ~~Zostavax~~ ~~(Zoster Vaccine Live), a vaccine to help prevent shingles (herpes zoster) in adults 50 years of age and older,~~ were ~~$234 million in the third quarter of 2017, an increase of 23% compared with the third quarter of 2016, and were $547 million~~relatively flat in the first nine months of ~~2017, an increase~~2018 as higher pricing offset lower volumes. Foreign exchange unfavorably affected global sales performance by 1% in the third quarter of ~~18% compared with~~2018 and favorably affected global sales performance by 1% in the first nine months of 2016 including a 1% favorable effect from foreign exchange. Sales growth in both periods was driven largely by volume growth in Europe resulting from the termination of the SPMSD joint venture. Volume growth in the Asia Pacific region also contributed to sales growth, particularly in the year-to-date period. Sales in United States were down slightly in both periods as lower demand was largely offset by higher pricing. In October 2017, the ACIP voted to recommend a competitor’s vaccine as the preferred vaccine for the prevention of shingles over ~~Zostavax. The Company anticipates the ACIP recommendation, if approved by the CDC, will have a material unfavorable effect on U.S. sales of~~ ~~Zostavax~~ ~~in future periods.~~2018.

~~Merck’s~~Worldwide sales of RotaTeq (Rotavirus Vaccine, Live Oral, Pentavalent), a vaccine to help protect against rotavirus gastroenteritis in infants and children, were $191 million in the third quarter of 2018, an increase of 7% compared with the third quarter of 2017 including a 1% unfavorable effect from foreign exchange. Sales growth was driven primarily by the launch in China and higher volumes and pricing in the United States. Global sales of RotaTeq were $540 million in the first nine months of 2018, up 3% compared with the same period of 2017 including a 1% favorable effect from foreign exchange. Sales growth was driven primarily by the launch in China and higher pricing in the United States.

Worldwide sales of Zostavax, a vaccine to help prevent shingles (herpes zoster) in adults 50 years of age and older, were $54 million in the third quarter of 2018 and $163 million in the first nine months of 2018, declines of 77% and 70%, respectively, compared with the same periods of 2017. Foreign exchange favorably affected global sales performance by 1% in the first nine months of 2018. The sales declines were driven by lower volumes in most markets, particularly in the United States. Lower demand in the United States reflects the approval of a competitor’s 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 Company anticipates competition will continue to have a material adverse effect on sales of Zostavax in future periods.

Hospital Acute Care

Worldwide sales of Bridion, for the reversal of two types of neuromuscular blocking agents used during surgery, were $217 million in the third quarter of 2018, an increase of 17% compared with the third quarter of 2017 including a 3% unfavorable effect from foreign exchange. Global sales of Bridion were $~~179~~661 million in the first nine months of 2018, an increase of 33% compared with the same period of 2017 including a 2% favorable effect from foreign exchange. Sales growth in both periods primarily reflects volume growth in the United States and certain European markets.

Worldwide sales of ~~third~~Noxafil, for the prevention of invasive fungal infections, were $188 million in the third quarter of 2018, an increase of 16% compared with the third quarter of 2017 including a 2% unfavorable effect from foreign exchange. Global sales of Noxafil were $551 million in the first nine months of 2018, an increase of 21% compared with the same period of 2017 including a 3% favorable effect from foreign exchange. Sales growth in both periods primarily reflects higher demand in the United States, as well as volume growth in certain European markets and in China.

Global sales of Invanz (ertapenem sodium), for the treatment of certain infections, were $137 million in the third quarter of 2018, a decline of 14% compared with the third quarter of 2017 including a 2% unfavorable effect from foreign exchange. Worldwide sales of Invanz were $437 million for the first nine months of 2018, a decrease of 2% compared with the same period of 2017. The sales declines were driven primarily by lower volumes in the United States. The patent that provided U.S. market exclusivity for Invanz expired in November 2017 and the Company is experiencing a decline in U.S. Invanz sales as a result of generic competition and expects the decline to continue.

Global sales of Cancidas (caspofungin acetate), an anti-fungal product sold primarily outside of the United States, were $79 million in the third quarter of 2018 and $257 million in the first nine months of 2018, declines of 16% and 22%, respectively, compared with the same periods of 2017. Foreign exchange unfavorably affected global sales performance by 2% in the third quarter of 2018 and favorably affected global sales performance by 3% in the first nine months of 2018. The sales declines were driven 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.

In September 2018, Merck announced that the pivotal Phase 3 clinical study evaluating the Company’s antibiotic Zerbaxa (ceftolozane and tazobactam) at an investigational dose for the treatment of adult patients with either ventilated hospital-acquired bacterial pneumonia or ventilator-associated bacterial pneumonia met the pre-specified primary endpoints, demonstrating non-inferiority to meropenem, the active comparator, in day 28 all-cause mortality and in clinical cure rate at the test-of-cure visit. Based on these results, Merck plans to submit supplemental new drug applications to the FDA and European Medicines Agency (EMA) seeking regulatory approval of Zerbaxa for these potential new indications. Zerbaxa is currently approved in the United States for the treatment of adult patients with complicated urinary tract infections caused by certain Gram-negative microorganisms

and in combination with metronidazole for the treatment of complicated intra-abdominal infections caused by certain Gram-negative and Gram-positive microorganisms.

Immunology

Sales of Simponi (golimumab), a once-monthly subcutaneous treatment for certain inflammatory diseases (marketed by the Company in Europe, Russia and Turkey), were $210 million in the third quarter of 2018, a decline of 4% compared with the third quarter of ~~2016 driven primarily~~2017 including a 1% unfavorable effect from foreign exchange. The sales decline reflects lower pricing, partially offset by higher ~~sales~~volumes in ~~Europe resulting from the termination of the SPMSD joint venture. Merck’s sales~~Europe. Sales of ~~RotaTeq~~Simponi were ~~$525~~$673 million in the first nine months of ~~2017, an increase~~2018, growth of 7%12% compared with the same period of 2017 including a 7% favorable effect from foreign exchange. Sales growth was driven by volume growth in Europe.

Sales of Remicade, a treatment for inflammatory diseases (marketed by the Company in Europe, Russia and Turkey), were $135 million in the third quarter of 2018 and $459 million in the first nine months of ~~2016.~~2018, declines of 37% and 29%, respectively, compared with the same periods of 2017. Foreign exchange unfavorably affected global sales performance by 2% in the third quarter of 2018 and favorably affected global sales performance by 4% in the first nine months of 2018. The ~~increase~~Company lost market exclusivity for Remicade in major European markets in 2015 and no longer has market exclusivity in any of its marketing territories. The Company is experiencing pricing and volume declines in these markets as a result of biosimilar competition and expects the declines to continue.

Virology

Global sales of Isentress/Isentress HD (raltegravir), an HIV integrase inhibitor for use in combination with other antiretroviral agents for the treatment of HIV-1 infection, were $275 million in the third quarter of 2018, a decline of 11% compared with the third quarter of 2017 including a 2% unfavorable effect from foreign exchange. Worldwide sales of Isentress/Isentress HD were $860 million in the first nine months of 2018, a decline of 4% compared with the same period of 2017 including a 1% favorable effect from foreign exchange. The sales declines were driven primarily by lower demand in the United States and competitive pricing pressure and lower volumes in Europe.

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. In September 2018, the Committee for Medicinal Products for Human Use (CHMP) of the EMA adopted a positive opinion recommending granting of marketing authorization for Delstrigo and Pifeltro. These two recommendations will now be reviewed by the European Commission (EC) for marketing authorization in the EU.

Global sales of Zepatier, a treatment for adult patients with certain types of chronic HCV infection, were $104 million in the third quarter of 2018 and $347 million in the first nine months of 2018, declines of 78% and 75%, respectively, compared with the same periods of 2017. Foreign exchange unfavorably affected global sales performance by 1% in the third quarter of 2018 and favorably affected global sales performance by 1% in the first nine months of 2018. The sales declines were driven primarily by the unfavorable effects of increasing competition and declining patient volumes, particularly in the United States, Europe and Japan. The Company anticipates that sales of Zepatier in the future will continue to be materially adversely affected by competition and lower patient volumes.

Cardiovascular

Combined global sales of Zetia (marketed in most countries outside the United States as Ezetrol), Vytorin (marketed outside the United States as Inegy), as well as Atozet (ezetimibe and atorvastatin) and Rosuzet (ezetimibe and rosuvastatin) (both marketed in certain countries outside of the United States), medicines for lowering LDL cholesterol, were $353 million in the third quarter of 2018, a decline of 34% compared with the third quarter of 2017 including a 1% unfavorable effect from foreign exchange. The sales decline in the third quarter was driven primarily by ~~higher~~lower sales in Europe, as well as ~~higher pricing and volumes~~ in the United States. 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 9 to the condensed consolidated financial statements). Accordingly, the Company is experiencing sales declines in these markets as a result of generic competition and expects the declines to continue. In addition, Zetia and Vytorin lost market exclusivity in the United States in December 2016 and April 2017, 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. Combined global sales of the ezetimibe family were $1.4 billion in the first nine months of 2018, a decline of 21% compared with the same period of 2017 including a 4% favorable effect from foreign exchange. The sales decline primarily reflects lower volumes and pricing of Zetia and Vytorin in the United States, as well as in certain European markets as a result of generic competition. These declines were partially offset by higher sales in Japan due in part to the launch of Atozet.

Pursuant to a collaboration with Bayer AG (Bayer) (see Note 4 to the condensed consolidated financial statements), Merck has lead commercial rights for Adempas (riociguat), a cardiovascular drug for the treatment of pulmonary arterial hypertension, in countries outside 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. 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 sales related to Adempas of $94 million in the third quarter of 2018, an increase of 35% compared with the third quarter of 2017. Sales growth in the third quarter reflects higher sales in Merck’s marketing territories and higher profit sharing from Bayer. Merck recorded sales related to Adempas of $238 million in the first nine months of 2018, growth of 7% compared with the same period of 2017 including a 3% favorable effect from foreign exchange. Sales growth in the first nine months of 2018 reflects higher sales in Merck’s marketing territories, partially offset by lower profit sharing from Bayer, due in part to lower pricing in the United States.

Diabetes

Worldwide combined sales of Januvia (sitagliptin) and Janumet (sitagliptin/metformin HCl), medicines that help lower blood sugar levels in adults with type 2 diabetes, were $1.5 billion in the third quarter of 2018, a decline of 2% compared with the third quarter of 2017 including a 1% unfavorable effect from foreign exchange. Global combined sales of Januvia and Janumet were $4.4 billion in the first nine months of 2018, essentially flat compared with the same period of 2017 excluding a 2% favorable effect from foreign exchange. Sales performance in both periods reflects continued pricing pressure, particularly in the United States, partially offset by higher demand globally. The Company expects pricing pressure to continue.

Women’s Health

Worldwide sales of NuvaRing (etonogestrel/ethinyl estradiol vaginal ring), a vaginal contraceptive product, were $234 million in the third quarter of 2018 and $686 million in the first nine months of 2018, increases of 9% and 20%, respectively, compared with the same periods of 2017. Foreign exchange unfavorably affected global sales performance by 1% in the third quarter of 2018 and favorably affected global sales performance by 1% in first nine months of 2018. Sales growth in both periods was driven primarily by higher pricing in the United States. The patent that provided U.S. market exclusivity for NuvaRing expired in April 2018 and the Company anticipates a significant decline in U.S. NuvaRing sales in future periods as a result of generic competition.

~~Other Segments~~

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

~~Animal Health~~

Animal Health includes pharmaceutical and vaccine products for the prevention, treatment and control of disease in all major farm and companion animal species. The Animal Health segment met the criteria for separate reporting and became a reportable segment in the first quarter of 2018. Animal Health sales are affected by competition and the frequent introduction of

generic products. Global sales of Animal Health products totaled $1.0 billion for the third quarter of ~~2017,~~2018, an increase of ~~16%~~2% compared with ~~sales of $865 million in~~ the third quarter of ~~2016.~~2017 including a 4% unfavorable effect from foreign exchange. Worldwide sales of Animal Health products ~~were $2.9 billion in the first nine months of 2017, an increase of 12%, compared with sales of $2.6~~totaled $3.2 billion for the first nine months of ~~2016. Foreign exchange favorably affected global sales performance by 2% and 1% in~~2018, an increase of 10% compared with the ~~third quarter and first nine months~~same period of 2017 ~~respectively.~~including a 2% favorable effect from foreign exchange. Sales growth in both periods ~~primarily reflects~~was driven by higher sales of companion animal products, ~~driven largely by~~primarily the Bravecto (fluralaner) line of products that kill fleas and ticks in dogs and cats for up to 12 weeks, due in part to the timing of customer purchases and ~~by companion animal vaccines. Sales growth in both periods also reflects~~a delayed flea and tick season, as well as higher sales of ~~ruminant~~livestock products, including ~~the impact of the Vallée S.A. acquisition in March (see Note 2 to the condensed consolidated financial statements), swine~~ruminant and poultry products.

Costs, Expenses and Other

Materials and Production

Materials and production costs were $~~3.3~~3.6 billion for the third quarter of ~~2017, a decline~~2018, an increase of 4%9% compared with the third quarter of ~~2016,~~2017 and were ~~$9.4~~$10.2 billion infor the first nine months of ~~2017, a decline~~2018, an increase of ~~11%~~8% compared with the same period of 2017. Costs in the third quarter and first nine months of ~~2016. Costs~~2018 include a $420 million aggregate charge related to the termination of a collaboration agreement with Samsung Bioepis Co., Ltd. (Samsung) (see Note 3 to the condensed consolidated financial statements). Additionally, costs in the third quarter of 2018 and 2017 ~~and 2016~~ include ~~$765~~$679 million and ~~$772~~$765 million, respectively, and for the first nine months of 2018 and 2017 ~~and 2016~~ include ~~$2.3~~$2.1 billion and ~~$2.9~~$2.3 billion, respectively, of expenses for the amortization of intangible assets recorded in connection with business acquisitions. ~~Additionally,~~Also, in the first nine months of 2018, the Company recorded $135 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 condensed consolidated financial statements). In addition, costs ~~for~~in the first nine months of 2017 ~~and 2016~~ include ~~$47~~$123 million ~~and $347 million, respectively,~~ of intangible asset impairment charges, including $47 million related to a marketed ~~products~~product (see Note 68 to the condensed consolidated financial statements). and $76 million 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 the first nine months of 2017 also include a $76 million intangible asset impairment charge related to a licensing agreement. Included~~Also included in materials and production costs are expenses associated with restructuring activities which amounted to $252 million and ~~$36~~

$25 million in the third quarter of ~~2017~~2018 and ~~2016,~~2017, respectively, and ~~$121~~$11 million and ~~$149~~$121 million for the first nine months of ~~2017~~2018 and ~~2016,~~2017, respectively, including accelerated depreciation and asset write-offs related to the planned sale or closure of manufacturing facilities. Separation costs associated with manufacturing-related headcount reductions have been incurred and are reflected in Restructuring costs as discussed below.

Gross margin was ~~68.3%~~66.5% in the third quarter of 2018 compared with 68.0% in the third quarter of 2017 and was 67.3% for the first nine months of 2018 compared with ~~67.6%~~68.1% in the first nine months of 2017. The declines in gross margin primarily reflect an aggregate charge recorded in conjunction with the termination of a collaboration agreement with Samsung as noted above. The gross margin decline in the year-to-date period also reflects cumulative amortization expense for potential future milestone payments related to collaborations also as noted above. The gross margin declines were partially offset by the favorable effects of foreign exchange and the amortization of unfavorable manufacturing variances recorded in the third quarter of ~~2016. Gross~~2017, resulting in part from the June 2017 cyber-attack. The gross margin declines in both periods ~~reflects a 7.7 percentage point~~were also partially offset by lower net ~~unfavorable impact~~impacts from the amortization of intangible assets intangible asset impairment charges and restructuring costs as noted above. The improvement in gross margin reflects the favorable effects of product mix, partially offset by manufacturing-related costs resulting from the cyber-attack. Gross margin was 68.4% in the first nine months of 2017 compared with 64.4% in the first nine months of 2016. The improvement in gross margin in the year-to-date period was driven primarily by a lower net impact from the amortization of intangible assets,related to business acquisitions, intangible asset impairment charges and restructuring costs as noted above, which ~~reduced~~unfavorably affected gross margin by 6.3 percentage points in the third quarter of 2018 compared with 7.7 percentage points in the third quarter of 2017 and by 6.9 percentage points in the first nine months of 2018 compared with 8.7 percentage points in the first nine months of 2017 compared with 11.6 percentage points in the first nine months of 2016. The gross margin improvement in the first nine months of 2017 is also attributable to the favorable effects of product mix. Costs related to the cyber-attack partially offset the gross margin improvement in the year-to-date period.2017.

Marketing and Administrative

Marketing and administrative (M&A) expenses were $2.4 billion in the third quarter of ~~2017, essentially flat as~~2018, a decline of 1% compared with the third quarter of ~~2016. Higher~~2017, reflecting lower selling and promotional costs and the favorable effects of foreign exchange, partially offset by higher administrative costs. M&A expenses were $7.5 billion for the first nine months of 2018, up slightly compared with the same period of 2017. The increase primarily reflects higher administrative costs ~~including costs associated with the Company operating its vaccines business in the European markets that were previously part of the SPMSD joint venture~~ and ~~remediation costs related to the cyber-attack, as well as~~ the unfavorable effects of foreign exchange, ~~and higher promotional expenses related to product launches were~~ offset by lower ~~acquisition~~promotional and divestiture-related costs and lower selling costs. M&A expenses increased 1% to $7.3 billion in the first nine months of 2017 compared with the same period of 2016. The increase was driven primarily by higher administrative costs and promotional expenses, partially offset by lower restructuring and acquisition and divestiture-related costs and lower selling expenses. M&A expenses for the first nine months of 2017 and 2016 include $3 million and $91 million, respectively, of restructuring costs, related primarily to accelerated depreciation for facilities to be closed or divested. Separation costs associated with sales force reductions have been incurred and are reflected in ~~Restructuring costs~~ as discussed below. M&A expenses also include acquisition and divestiture-related costs of $11 million and $36 million in the third quarter of 2017 and 2016, respectively, and $40 million and $56 million in the first nine months of 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 $~~4.4~~2.1 billion for the third quarter of ~~2017~~2018, a decline of 53% compared with ~~$1.7 billion for~~ the third quarter of ~~2016.~~2017. The ~~increase was driven~~decline primarily ~~by a~~reflects an aggregate charge recorded in third quarter of 2017 related to the formation of an oncology collaboration with AstraZeneca ~~higher~~and lower in-process research and development (IPR&D) impairment charges, partially offset by increased clinical development spending, in particular for oncology, higher licensing costs and ~~increased~~ investment in discovery and early drug development. R&D expenses were ~~$7.9~~$7.5 billion for the first nine months of ~~2017~~2018, a decline of 6% compared with ~~$5.5 billion in~~ the same period of ~~2016.~~2017. The ~~increase was driven~~decline primarily byreflects an aggregate charge recorded in the ~~charge~~first nine months of 2017 related to the formation of an oncology collaboration with AstraZeneca ~~collaboration noted above, higher licensing costs~~ and lower IPR&D impairment charges, partially offset by ~~lower restructuring costs.~~an aggregate charge in the first nine months of 2018 related to the formation of an oncology collaboration with Eisai, a charge for the acquisition of Viralytics, as well as higher clinical development spending and investment in discovery and early drug development.

R&D expenses are comprised of the costs directly incurred by Merck Research Laboratories (MRL), the Company’s research and development division that focuses on human health-related activities, which were $1.3 billion and $1.1 billion in ~~both~~ the third quarter of 2018 and 2017, ~~and 2016,~~respectively, and were ~~$3.4~~$3.7 billion and ~~$3.2~~$3.4 billion for the first nine months of ~~2017~~2018 and ~~2016,~~2017, respectively. Also included in R&D expenses are 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 approximately ~~$645~~$775 million and ~~$525~~$670 million for the third quarter of ~~2017~~2018 and ~~2016,~~2017, respectively, and were ~~approximately $1.9~~$2.1 billion and $2.0 billion for ~~both~~ the first nine months of 2018 and 2017, ~~and 2016.~~respectively. Additionally, R&D expenses in the first nine months of 2018 include a $1.4 billion aggregate charge related to the formation of an oncology collaboration with Eisai (see Note 4 to the condensed consolidated financial statements), as well as a $344 million charge for the acquisition of Viralytics (see Note 3 to the condensed consolidated financial statements). R&D expenses in the third quarter and first nine months of 2017 include a $2.35 billion aggregate charge related to the formation of an oncology collaboration with AstraZeneca (see Note 24 to the condensed consolidated financial statements). R&D expenses also include IPR&D impairment charges of $245 million and $253 million for the third quarter ~~of 2017,~~ and ~~$253 million and $225 million for the~~ first nine months of 2017, ~~and 2016,~~ respectively (see Note 68 to the condensed 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 charges could be material. ~~R&D expenses also reflect accelerated depreciation and asset abandonment costs associated with restructuring activities of $2 million and $14 million in the~~ ~~third~~ ~~quarter of 2017 and 2016, respectively, and $11 million and $133 million for the first nine months of 2017 and 2016, respectively (see Note 3 to the condensed consolidated financial statements).~~

Restructuring Costs

Restructuring costs, primarily representing separation and other related costs associated with these restructuring activities, were $~~153~~171 million and $~~161~~153 million for the third quarter of ~~2017~~2018 and ~~2016,~~2017, respectively, and were ~~$470~~$494 million and ~~$386~~$470 million for the first nine months of ~~2017~~2018 and ~~2016,~~2017, respectively. Separation costs 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 ~~205~~525 positions and ~~300~~205 positions in the third quarter of ~~2017~~2018 and ~~2016,~~2017, respectively, and 1,870 positions and 1,225 ~~and 1,355~~ positions ~~for~~in the first nine months of ~~2017~~2018 and ~~2016,~~2017, respectively, related to these restructuring activities. Also included in restructuring costs are asset abandonment, shut-down and other related costs, as well as employee-related costs such as curtailment, settlement and termination charges associated with pension and other postretirement benefit plans and share-based compensation plan costs. For segment reporting, restructuring costs are unallocated expenses.

Additional costs associated with the Company’s restructuring activities are included in Materials and production, Marketing and administrative and Research and development ~~as discussed above.~~. The Company recorded aggregate pretax costs of ~~$180~~$169 million and ~~$212~~$180 million in the third quarter of ~~2017~~2018 and ~~2016,~~2017, respectively, and ~~$605~~$508 million and ~~$759~~$605 million for the first nine months of ~~2017~~2018 and ~~2016,~~2017, respectively, related to restructuring program activities (see Note 35 to the condensed consolidated financial statements). ~~The~~While the Company ~~expects to~~has substantially ~~complete~~completed the ~~remaining~~ actions under the programs, ~~by the end of 2017 and incur~~ approximately ~~$250~~$50 million of additional pretax costs are expected to be incurred in the fourth quarter of 2018 relating to anticipated employee separations and remaining asset-related costs.

Other (Income) Expense, Net

Other (income) expense, net was $86172 million of income in the third quarter of 2018 compared with $207 million of income in the third quarter of 2017 ~~compared with~~ ~~$22 million~~ ~~of expense in the~~ ~~third~~ ~~quarter of 2016~~ and was ~~$30~~$512 million of ~~expense in~~income for the first nine months of ~~2017~~2018 compared with ~~$88~~$351 million of ~~expense in~~income for the first nine months of ~~2016.~~2017. For details on the components of Other (income) expense, net, see Note 1113 to the condensed consolidated financial statements.


Segment Profits
	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
($ in millions)	2017			2016			2017			2016			2018			2017			2018			2017
Pharmaceutical segment profits	$	5,929		$	6,162		$	16,722		$	16,698		$	6,479		$	5,906		$	18,109		$	16,657
Animal Health segment profits													409			389			1,273			1,202
Other non-reportable segment profits	482			389			1,442			1,129			5			93			94			234
Other	(6,211		)	(3,664		)	(13,522		)	(11,812		)	(4,228		)	(6,188		)	(13,379		)	(13,451		)
Income before income taxes	$	200		$	2,887		$	4,642		$	6,015
Income before taxes													$	2,665		$	200		$	6,097		$	4,642

~~Segment~~Pharmaceutical segment profits are comprised of segment sales less standard costs, ~~certain operating~~as well as marketing and administrative expenses and research and development costs directly incurred by the segment. Animal Health segment ~~components~~profits are comprised of ~~equity income or loss from affiliates~~segment sales, less all materials and ~~certain depreciation~~production costs, as well as marketing and ~~amortization expenses.~~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 materials and production costs ~~other than standard costs, the majority of~~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. Also excluded from the determination of segment profits are acquisition and divestiture-related costs, including the amortization of purchase accounting adjustments, intangible asset impairment charges and changes in the estimated fair value measurement of liabilities ~~related to~~for contingent consideration, restructuring costs, and a portion of equity income. 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 formation of a collaboration with AstraZeneca,~~ 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 17 to the condensed consolidated financial statements). Prior period amounts have been recast to conform to the new presentation.

Pharmaceutical segment profits ~~declined 4%~~grew 10% in the third quarter of ~~2017 driven primarily by lower sales partially offset by the favorable effects of product mix. Pharmaceutical segment profits were essentially flat~~2018 and 9% in the first nine months of ~~2017~~2018 compared with the ~~same period~~corresponding prior year periods driven primarily by higher sales and lower selling and promotional costs. Animal Health segment profits grew 5% in the third quarter of ~~2016~~2018 and 6% in the first nine months of 2018 compared to the corresponding prior year periods driven primarily ~~reflecting lower~~by higher sales, partially offset by ~~the favorable effects of product mix.~~increased selling and promotional costs.

Taxes on Income

Net Income (Loss) ~~Income~~ and Earnings (Loss) ~~Earnings~~ per Common Share

Net income (loss) ~~income~~ attributable to Merck & Co., Inc. was$2.0 billion for the third quarter of 2018 compared with $(56) million for the third quarter of 2017 ~~compared with~~ ~~$2.2~~and was $4.4 billion for the ~~third~~ ~~quarter~~first nine months of ~~2016 and was~~2018 compared with $3.4 billion for the first nine months of ~~2017 compared with $4.5 billion for the first nine months of 2016. (Loss) earnings~~2017. Earnings (loss) per common share assuming dilution attributable to Merck & Co., Inc. common shareholders (EPS) for the third quarter of ~~2017~~2018 were $~~(0.02)~~0.73 compared with $~~0.78~~(0.02) in the third quarter of ~~2016~~2017 and were ~~$1.25 in the first nine months of 2017 compared with $1.62~~$1.63 for the first nine months of ~~2016.~~2018 compared with $1.25 for the first nine months of 2017.

Non-GAAP Income and Non-GAAP EPS

Non-GAAP income and non-GAAP EPS are alternative views of the Company’s performance that Merck is providing because management believes this information enhances investors’ understanding of the Company’s results as it permits investors to understand how management assesses performance. Non-GAAP income and non-GAAP EPS exclude certain items because of the nature of these items and the impact that they have on the analysis of underlying business performance and trends. The excluded items (which should not be considered non-recurring) consist of acquisition and divestiture-related costs, restructuring costs and certain other items. These excluded items are significant components in understanding and assessing financial performance. Non-GAAP income and non-GAAP EPS are important internal measures for the Company. Senior management receives a monthly analysis of operating results that includes non-GAAP EPS. Management uses these measures internally for planning and forecasting purposes and to measure the performance of the Company along with other metrics. Senior management’s annual compensation is derived in part using non-GAAP income and non-GAAP EPS. Since non-GAAP income and non-GAAP EPS are not measures determined in accordance with GAAP, they have no standardized meaning prescribed by GAAP and, therefore, may not be comparable to the calculation of similar measures of other companies. The information on non-GAAP income and non-GAAP EPS should be considered in addition to, but not as a substitute for or superior to, net income and EPS prepared in accordance with generally accepted accounting principles in the United States (GAAP).

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


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,					Nine Months Ended September 30,
($ in millions except per share amounts)	2017			2016			2017			2016			2018		2017			2018			2017
Pretax income as reported under GAAP	$	200		$	2,887		$	4,642		$	6,015
Income before taxes as reported under GAAP													$	2,665	$	200		$	6,097		$	4,642
Increase (decrease) for excluded items:
Acquisition and divestiture-related costs	1,032			834			2,797			3,602			677		1,032			2,265			2,797
Restructuring costs	180			212			605			759			169		180			508			605
Aggregate charge related to the formation of an oncology collaboration with AstraZeneca	2,350			—			2,350			—
Other items:
Aggregate charge related to the termination of a collaboration with Samsung													420		—			420			—
Aggregate charge related to the formation of a collaboration with Eisai													—		—			1,400			—
Charge for the acquisition of Viralytics													—		—			344			—
Aggregate charge related to the formation of a collaboration with AstraZeneca													—		2,350			—			2,350
Other	—			(6		)	(9		)	(6		)	—		—			(54		)	(9		)
	3,762			3,927			10,385			10,370
Non-GAAP income before taxes													3,931		3,762			10,980			10,385
Taxes on income as reported under GAAP	251			699			1,186			1,487			707		251			1,682			1,186
Estimated tax benefit on excluded items ⁽¹⁾	218			235			593			801			38		218			400			593
Net benefit related to the settlement of certain federal income tax issues	234			—			234			—
Benefit related to settlement of state income tax issue	—			—			88			—
	703			934			2,101			2,288
Net tax benefit related to the settlement of certain federal income tax issues													—		234			—			234
Tax benefit related to the settlement of state income tax issue													—		—			—			88
Non-GAAP taxes on income													745		703			2,082			2,101
Non-GAAP net income	3,059			2,993			8,284			8,082			3,186		3,059			8,898			8,284
Less: Net income attributable to noncontrolling interests	5			4			16			13			8		5			22			16
Non-GAAP net income attributable to Merck & Co., Inc.	$	3,054		$	2,989		$	8,268		$	8,069		$	3,178	$	3,054		$	8,876		$	8,268
EPS assuming dilution as reported under GAAP	$	(0.02	)	$	0.78		$	1.25		$	1.62		$	0.73	$	(0.02	)	$	1.63		$	1.25
EPS difference ⁽²⁾	1.13			0.29			1.75			1.27			0.46		1.13			1.66			1.75
Non-GAAP EPS assuming dilution	$	1.11		$	1.07		$	3.00		$	2.89		$	1.19	$	1.11		$	3.29		$	3.00


⁽¹⁾	The estimated tax impact on the excluded items is determined by applying the statutory rate of the originating territory of the non-GAAP adjustments.


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

Acquisition and Divestiture-Related Costs

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

Restructuring Costs

Non-GAAP income and non-GAAP EPS exclude costs related to restructuring actions (see Note 35 to the condensed consolidated financial statements). These amounts include employee separation costs and accelerated depreciation associated with facilities to be closed or divested. Accelerated depreciation costs represent the difference between the depreciation expense to be recognized over the revised useful life of the asset, based upon the anticipated date the site will be closed or divested or the equipment disposed of, and depreciation expense as determined utilizing the useful life prior to the restructuring actions. Restructuring costs also include asset abandonment, shut-down and other related costs, as well as employee-related costs such as curtailment, settlement and termination charges associated with pension and other postretirement benefit plans and share-based compensation costs.

Certain Other Items

Non-GAAP income and non-GAAP EPS exclude certain other items. These items are adjusted for after evaluating them on an individual basis, considering their quantitative and qualitative aspects, and typically consist of items that are unusual in nature, significant to the results of a particular period or not indicative of future operating results. Excluded from non-GAAP income and non-GAAP EPS in 2018 is an aggregate charge related to the termination of a collaboration agreement with Samsung for insulin glargine (see Note 3 to the condensed consolidated financial statements), a charge for the acquisition of Viralytics (see Note 3 to the condensed consolidated financial statements) and an aggregate charge related to the formation of a collaboration with Eisai (see Note 4 to the condensed consolidated financial statements). Excluded from non-GAAP income and non-GAAP EPS in 2017 is an aggregate charge related to the formation of ~~an oncology~~a collaboration with AstraZeneca (see Note 24 to the condensed

consolidated financial statements), as well as 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 1214 to the condensed consolidated financial statements).

Research and Development Update

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

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. This approval was based on data from the Phase 3 KEYNOTE-407 trial, which were presented at the American Society of Clinical Oncology (ASCO) 2018 Annual Meeting. Keytrudais ~~currently approved~~under review for this indication in the EU.

In September 2018, the FDA accepted and granted Priority Review for a supplemental Biologics License Application (sBLA) seeking approval for Keytruda as monotherapy for first-line treatment of locally advanced or metastatic nonsquamous or squamous NSCLC in patients whose tumors express PD-L1 (TPS ≥1%) without EGFR or ALK genomic tumor aberrations. The application is based on data from the pivotal Phase 3 KEYNOTE-042 trial. Data from the trial were presented at the ASCO 2018 Annual Meeting. The FDA set a Prescription Drug User Fee Act (PDUFA) date of January 11, 2019.

Also in July 2018, the FDA accepted and granted Priority Review for an sBLA seeking approval for Keytruda for previously treated patients with advanced hepatocellular carcinoma. This sBLA, which is seeking accelerated approval for this new indication, is based on data from the Phase 2 KEYNOTE-224 trial, which were presented at the ASCO 2018 Annual Meeting and published simultaneously in The Lancet Oncology. The FDA set a PDUFA date of November 9, 2018.

Also, in September 2018, the FDA accepted and granted Priority Review for an sBLA seeking accelerated approval for Keytruda for the treatment of ~~certain~~adult and pediatric patients with ~~NSCLC, melanoma, cHL, HNSCC, urothelial~~recurrent locally advanced or metastatic Merkel cell carcinoma, ~~gastric or gastroesophageal junction adenocarcinoma,~~a rare form of skin cancer. This sBLA is based on data from the Phase 2 KEYNOTE-017 trial including overall response rate and ~~MSI-H or mismatch repair deficient cancer, and~~duration of response; these data were presented at the ASCO 2018 Annual Meeting. The FDA set a PDUFA date of December 28, 2018.

In June 2018, the FDA accepted for standard review an sBLA for Keytruda as adjuvant therapy in ~~combination with pemetrexed and carboplatin in certain~~the treatment of patients with ~~NSCLC (see “Pharmaceutical Segment” above)~~resected, high-risk stage III melanoma and granted a PDUFA date of February 16, 2019. This sBLA is based on a significant benefit in recurrence-free survival demonstrated by Keytruda in the pivotal Phase 3 EORTC1325/KEYNOTE-054 trial, which was conducted in collaboration with the European Organisation for Research and Treatment of Cancer (EORTC). These data were presented at the American Association of Cancer Research 2018 Annual Meeting and published in The New England Journal of Medicine. In October 2018, the CHMP of the EMA adopted a positive opinion recommending approval of Keytruda as adjuvant therapy in the treatment of patients with melanoma with lymph node involvement who have undergone complete surgical resection based on data from the EORTC1325/KEYNOTE-054 trial. The CHMP’s recommendation will now be reviewed by the EC for marketing authorization in EU. A final decision is expected in the fourth quarter of 2018.

In addition, Keytruda has received Breakthrough Therapy designation from the FDA ~~for the treatment of patients with primary mediastinal B-cell lymphoma that is refractory to or has relapsed after two prior lines of therapy.~~ ~~Keytruda~~ ~~has also recently received Breakthrough Therapy designation~~ in combination with axitnib as a first-line treatment for patients with advanced or metastatic renal cell carcinoma; and for the treatment of high-risk early-stage triple-negative breast cancer in combination with neoadjuvant ~~chemotherapy;~~chemotherapy. Also, 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 ~~Merkel cell~~certain patients with advanced and/or metastatic non-microsatellite instability high/proficient mismatch repair endometrial carcinoma. The Lenvima and Keytruda combination therapy is being jointly developed by Merck and Eisai. 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 ~~is amending~~announced the ~~KEYNOTE-189 study to include overall survival~~first presentation of interim data from the pivotal Phase 3 KEYNOTE-048 trial investigating Keytruda, as ~~a co-primary endpoint. The updated completion date is February 2019~~both monotherapy and ~~there will be opportunities~~in combination with chemotherapy, for the ~~Company to conduct~~first-line treatment of recurrent or metastatic HNSCC. These interim ~~analyses. KEYNOTE-189 is a Phase 3 study of platinum-pemetrexed chemotherapy with or without~~results were presented at the ESMO 2018 Congress. Interim data from KEYNOTE-048 showed Keytruda monotherapy improved overall survival (OS), a primary endpoint of the study, by 39% in patients whose tumors expressed PD-L1 with Combined Positive Score (CPS) ≥20, and by 22% in patients with CPS≥1, compared to the EXTREME regimen (cetuximab with carboplatin or cisplatin plus 5-fluorouracil (5-FU), the current standard of care. In addition, Keytruda in combination with chemotherapy (carboplatin or cisplatin plus 5-FU) (Keytruda combination) demonstrated improved OS compared to the EXTREME regimen by 23%, regardless of PD-L1 expression. At the final analysis, superiority for OS will be evaluated for Keytruda monotherapy in the total population and Keytruda combination in patients whose tumors express PD-L1 at CPS≥20 and CPS≥1; at this interim analysis, based upon the prespecified testing algorithm, non-inferiority for Keytruda monotherapy in the total population was demonstrated and statistical significance was not achieved for the Keytruda combination in the subset of patients whose tumors expressed PD-L1 at CPS ≥20 or ≥1. Additionally, at this time point there was no difference in progression-

free survival (PFS), a dual primary endpoint of the study, in any of the groups studied. Merck plans to file an sBLA with the FDA for a first-line indication based on KEYNOTE-048 data and will include data from the Phase 3 KEYNOTE-040 trial as supportive data. Based on these results, Merck has withdrawn the sBLA for KEYNOTE-040 for Keytruda as a second-line treatment in patients with recurrent or metastatic ~~nonsquamous NSCLC.~~HNSCC. The results from KEYNOTE-048 will also be submitted to regulatory authorities worldwide.

In ~~July 2017,~~October 2018, Merck announced that the ~~FDA has placed a full clinical hold on KEYNOTE-183 and KEYNOTE-185 and a partial clinical hold on Cohort 1 of KEYNOTE-023, three combination studies of~~ ~~Keytruda~~ with lenalidomide or pomalidomide versus lenalidomide or pomalidomide alone in the blood cancer multiple myeloma. This decision follows a review of data by the Data Monitoring Committee in which more deaths were observed in the ~~Keytruda~~ arms of KEYNOTE-183 and KEYNOTE-185 and which led to the pause in new patient enrollment, as announced on June 12, 2017. The FDA has determined that the data available at the present time indicate that the risks of ~~Keytruda~~ ~~plus pomalidomide or lenalidomide outweigh any potential benefit for patients with multiple myeloma. All patients enrolled in KEYNOTE-183 and KEYNOTE-185 and those in the~~ ~~Keytruda/lenalidomide/dexamethasone cohort in KEYNOTE-023 have discontinued investigational treatment with~~ ~~Keytruda. This clinical hold does not apply to other studies with~~ ~~Keytruda~~.

~~In October 2017, Merck announced it has withdrawn its European application for~~pivotal Phase 3 KEYNOTE-426 trial investigating Keytruda in combination with ~~pemetrexed~~Inlyta (axitinib), Pfizer’s tyrosine kinase inhibitor, met both primary endpoints of OS and ~~carboplatin as a~~PFS in the first-line treatment of advanced or metastatic renal cell carcinoma (RCC), the most common type of kidney cancer. Based on the first interim analysis by the independent Data Monitoring Committee, the Keytruda plus Inlyta combination resulted in statistically significant and clinically meaningful improvements in OS and PFS, compared to sunitinib monotherapy. These results will be presented at an upcoming medical meeting and submitted to regulatory authorities worldwide.

In October 2018, Merck announced the first presentation of results from an interim analysis of KEYNOTE-057, a Phase 2 trial evaluating Keytrudafor ~~metastatic nonsquamous NSCLC. The application~~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 ~~based on~~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, as well as other study findings, ~~from KEYNOTE-021, Cohort G.~~were presented at the ESMO 2018 Congress.

The Keytruda clinical development program consists of more than ~~600~~850 clinical trials, including more than ~~400~~500 trials that combine Keytruda with other cancer treatments. These studies encompass more than 30 cancer types including: bladder, colorectal, esophageal, gastric, ~~head and neck,~~HNSCC, hepatocellular, Hodgkin lymphoma, non-Hodgkin lymphoma, melanoma, mesothelioma, nasopharyngeal, NSCLC, ovarian, PMBCL, prostate, renal, small-cell lung cancer and triple-negative breast, many of which are currently in Phase 3 clinical development. Further trials are being planned for other cancers.

In June 2017, Merck in partnership with Pfizer Inc. (Pfizer) announced that two Phase 3 studies (VERTIS MET and VERTIS SITA) of ertugliflozin, an investigational oral SGLT-2 inhibitor in development to help improve glycemic control in adults with type 2 diabetes, met their primary endpoints. In the studies, both doses of ertugliflozin tested (5 mg and 15 mg daily) achieved statistically significant reductions in A1C, a measure of average blood glucose over a two- to three-month timeframe, when added to metformin or in initial co-administration with sitagliptin. The results of these studies, along with 52-week extension data from three other studies in the VERTIS clinical development program of ertugliflozin, were presented at the 77th Scientific Sessions of the American Diabetes Association. Marketing applications for ertugliflozin and for two fixed-dose combination products (ertugliflozin and ~~Januvia~~, ertugliflozin and metformin) are under review with the FDA and the EMA. The Prescription Drug User Fee Act (PDUFA) action date from the FDA is in December 2017 for the three New Drug Applications. Under the terms of the collaboration agreement with Pfizer, Merck made a $90 million milestone payment to Pfizer in the first nine months of 2017 recorded in ~~Research and development~~ ~~expenses.~~

In 2017, Merck filed regulatory applications for the approval of MK-8228, letermovir, in the United States and EU. Letermovir is an investigational, once-daily, antiviral candidate administered orally or by intravenous infusion for the prophylaxis of clinically-significant cytomegalovirus (CMV) infection and disease. Letermovir has received Orphan Drug Status and Breakthrough Therapy designation in the United States and in the EU it has received accelerated assessment. In October 2016, Merck announced that the pivotal Phase 3 clinical study of letermovir met its primary endpoint. The global, multicenter, randomized, placebo-controlled study evaluated the efficacy and safety of letermovir in adult (18 years and older) CMV-seropositive recipients of an allogeneic hematopoietic stem cell transplant. On November 2, 2017, letermovir received its first approval in Canada. Letermovir will be marketed under the global trademark ~~Prevymis~~.

In July 2017, Merck and AstraZeneca entered 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 ovarian cancer. The companies will develop and commercialize Lynparza, both as monotherapy and in combination trials with other potential medicines. Independently, Merck and AstraZeneca will develop and commercialize Lynparza in combinations with their respective PD-1 and PD-L1 medicines, ~~Keytruda~~ (pembrolizumab) and Imfinzi (durvalumab). The companies will also jointly develop and commercialize AstraZeneca’s selumetinib, an oral, potent, selective inhibitor of MEK, part of the mitogen-activated protein kinase (MAPK) pathway, currently being developed for multiple indications including thyroid cancer (see Note 2 to the condensed consolidated financial statements). In October 2017,April 2018, Merck and AstraZeneca announced that the ~~FDA accepted and granted priority~~EMA validated for review ~~for a supplemental New Drug~~the Marketing Authorization Application for ~~the~~Lynparza for use ~~of Lynparza tablets~~ in patients with ~~germline BRCA-mutated,~~deleterious or suspected deleterious BRCA-mutated, HER2-negative metastatic breast cancer who have been previously treated with chemotherapy ~~either~~ in the neoadjuvant, adjuvant or metastatic ~~settings. The PDUFA action date~~setting. This is in the first ~~quarter of 2018. A New Drug Application was also submitted to Japan’s Pharmaceuticals~~regulatory submission for a PARP inhibitor in breast cancer in Europe.

In October 2018, Merck and ~~Medical Devices Agency.~~

~~Also in July 2017, Merck~~AstraZeneca announced ~~the presentation of~~ results from the ~~DRIVE-AHEAD study, the second of two pivotal~~ Phase 3 clinical trials evaluating the efficacy and safety of doravirine, the Company’s investigational, non-nucleoside reverse transcriptase inhibitor, for the treatment of HIV-1 infection. At 48 weeks, the study showed that a once-daily single tablet, fixed-dose combination of doravirine (DOR), lamivudine (3TC), and tenofovir disoproxil fumarate (TDF) met its primary efficacy endpoint of non-inferiority based on the proportion of participants achieving levels of HIV-1 RNA less than 50 copies/mL at 48 weeks of treatment, compared to a fixed-dose combination of efavirenz (EFV), emtricitabine (FTC), and TDF, in treatment-naïve adults infected with HIV-1. The study also met its primary safety endpoint, showing that treatment with DOR/3TC/TDF resulted in fewer patients reporting several pre-specified neuropsychiatric adverse events compared to EFV/FTC/TDF by week 48. Based on these findings, the Company plans to file regulatory applications for DOR bothSOLO-1 trial testing Lynparza as a ~~single-entity tablet and as a fixed-dose combination tablet (DOR/3TC/TDF) in the fourth quarter of 2017.~~

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

In the third quarter of 2017, Merck made a strategic decision to discontinue the development of the investigational combination regimens MK-3682B (grazoprevir/ruzasvir/uprifosbuvir) and MK-3682C (ruzasvir/uprifosbuvir) for themaintenance treatment of chronic HCV infection. This decision was made based on a review of available Phase 2 efficacy data and in consideration of the evolving marketplace and the growing number of treatment options available for patients with ~~chronic HCV infection, including~~newly-diagnosed advanced ~~Zepatier~~BRCA~~, which is currently marketed~~-mutated ovarian cancer who were in complete or partial response following first-line standard platinum-based chemotherapy. Results of the trial confirm the statistically-significant and clinically-meaningful improvement in PFS for Lynparza as compared to placebo, reducing the risk of disease progression or death by 70%. The data were presented at the ~~Company~~ESMO 2018 Congress and published simultaneously online in The New England Journal of Medicine.

As noted above, in March 2018, Merck and Eisai announced a strategic collaboration for the ~~treatment~~worldwide co-development and co-commercialization of ~~chronic HCV infection. As a result of this decision, the Company recorded an IPR&D impairment charge~~Lenvima (see Note 64 to the condensed 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 Lenvima/Keytruda 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.

In September 2018, the CHMP of the EMA adopted a positive opinion recommending granting of marketing authorization for MK-1439A, Delstrigo, a once-daily fixed-dose combination tablet of doravirine, lamivudine and tenofovir disoproxil fumarate; and MK-1439, Pifeltro (doravirine), a new non-nucleoside reverse transcriptase inhibitor to be administered in combination with other antiretroviral medicines. These two recommendations will now be reviewed by the EC for marketing authorization in the EU. Delstrigo and Pifeltro were approved by the FDA in August 2018.

In April 2018, Merck announced that a pivotal Phase 3 study of relebactam, the Company’s investigational beta-lactamase inhibitor, in combination with imipenem/cilastatin (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 regimen. Based on these results, the Company plans to submit a New Drug Application to the FDA seeking regulatory approval of a fixed-dose combination of imipenem/cilastatin and relebactam.

In June 2018, Merck began the first Phase 3 study of V114, its investigational polyvalent conjugate vaccine for the prevention of pneumococcal disease, which will evaluate the safety, tolerability and immunogenicity of V114 followed by Pneumococcal Vaccine Polyvalent one year later in healthy adult subjects 50 years of age or older. Two additional Phase 3 studies started in July 2018. One will evaluate the safety, tolerability and immunogenicity of V114 followed by Pneumococcal Vaccine Polyvalent administered eight weeks later in adults infected with HIV, and the other will evaluate the safety, tolerability, and

immunogenicity of V114 in adults ages 18 to 49 at increased risk for pneumococcal disease. In September 2018, two additional adult Phase 3 studies started. One will evaluate the safety, tolerability, and immunogenicity of V114 when administered concomitantly with influenza vaccine in healthy adults 50 years of age or older, and the other will evaluate the safety, tolerability, and immunogenicity of V114 in recipients of allogeneic hematopoietic stem cell transplant. In October 2018, Merck began the first Phase 3 study of V114 in healthy infants to evaluate the safety and tolerability of V114 and Prevnar 13.

V920 is an investigational rVSV-ZEBOV (Ebola) vaccine candidate being studied in large scale Phase 2/3 clinical trials. In November 2014, Merck and NewLink Genetics announced an exclusive licensing and collaboration agreement for the investigational Ebola vaccine. In December 2015, Merck announced that the application for Emergency Use Assessment and Listing (EUAL) for V920 was accepted for review by the World Health Organization (WHO). According to the WHO, the EUAL process is designed to expedite the availability of vaccines needed for public health emergencies such as another outbreak of Ebola. The 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. The Company intends to file the V920 Ebola vaccine with the FDA and EMA in 2019.

The chart below reflects the Company’s research pipeline as of November 1, ~~2017.~~2018. 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 oncology) and additional claims, line extensions or formulations for in-line products are not shown.



Phase 2	Phase 3 (Phase 3 entry date)	Under Review
~~Asthma~~ ~~MK-1029~~ Cancer MK-3475 Keytruda Advanced Solid Tumors ~~Ovarian~~Cutaneous Squamous Cell Carcinoma ~~PMBCL (Primary Mediastinal Large B-Cell Lymphoma)~~Ovarian Prostate ~~Cough, including cough with Idiopathic Pulmonary Fibrosis~~MK-7902 Lenvima⁽¹⁾ ~~MK-7264~~Biliary Tract Non-Small-Cell Lung V937 Cavatak Melanoma MK-7690⁽²⁾ Colorectal Cytomegalovirus V160 Diabetes Mellitus MK-8521⁽³⁾ ~~Pneumoconjugate Vaccine~~HIV-1 Infection ~~V114~~MK-8591 Pediatric Neurofibromatosis Type 1 MK-5618 (selumetinib)⁽¹⁾⁽⁴⁾ Schizophrenia MK-8189 Respiratory Syncytial Virus MK-1654	~~Alzheimer’s Disease~~ ~~MK-8931 (verubecestat) (December 2013)~~ Bacterial Infection MK-7655A (relebactam+imipenem/cilastatin) (October 2015) Cancer MK-3475 Keytruda Breast (October 2015) Colorectal (November 2015) Esophageal (December 2015) Gastric (May 2015) (EU) ~~Head and Neck (November 2014) (EU)~~ Hepatocellular (May 2016) (EU) Mesothelioma (May 2018) Nasopharyngeal (April 2016) Renal (October 2016) Small-Cell Lung (May 2017) MK-7339 Lynparza⁽¹⁾ Pancreatic (December 2014) Prostate (April 2017) ~~MK-5618 (selumetinib)~~MK-7902 Lenvima⁽¹⁾ ~~Thyroid~~Endometrial (June ~~2013)~~2018)⁽²⁾ Cough MK-7264 (gefapixant) (March 2018) Ebola Vaccine V920 (March 2015) Heart Failure MK-1242 (vericiguat) (September 2016)⁽¹⁾ Herpes Zoster V212 (inactivated VZV vaccine) ~~(December~~ (December 2010)⁽³⁾ ~~HIV~~Pneumoconjugate Vaccine V114 (June 2018)	New Molecular Entities/Vaccines HIV-1 Infection MK-1439 (doravirine) ~~(December 2014)~~(EU) MK-1439A (doravirine/lamivudine/tenofovir disoproxil fumarate) ~~(June 2015)~~	~~New Molecular Entities/Vaccines~~ ~~CMV Prophylaxis in Transplant Patients~~ ~~MK-8228 (letermovir) (U.S./EU)~~ ~~Diabetes Mellitus~~ ~~MK-0431J (sitagliptin+ipragliflozin) (Japan)~~⁽¹⁾ ~~MK-8835 (ertugliflozin) (U.S./EU)~~⁽¹⁾ ~~MK-8835A (ertugliflozin+sitagliptin) (U.S./EU)~~⁽¹⁾ ~~MK-8835B (ertugliflozin+metformin) (U.S./EU)~~⁽¹⁾(EU) Pediatric Hexavalent Combination Vaccine V419 (U.S.)^(2)(1)(5) Certain Supplemental Filings Cancer MK-3475 Keytruda • First-Line Metastatic Squamous Non-Small-Cell Lung Cancer KEYNOTE-407 (EU) • First-Line Metastatic Nonsquamous or Squamous Non- Small-Cell Lung Cancer KEYNOTE-042 (U.S.) (EU) • Second-Line Hepatocellular Carcinoma KEYNOTE-224 (U.S.) • First-Line Merkel Cell Carcinoma KEYNOTE-017 (U.S.) • Adjuvant Therapy in Advanced Melanoma KEYNOTE-054 (U.S.) (EU) MK-7339 Lynparza⁽¹⁾ • Second-Line Metastatic Breast Cancer ~~(U.S.)~~ (EU)
		Footnotes: ⁽¹⁾ Being developed in a collaboration. ⁽²⁾ Being developed in combination with Keytruda. ⁽³⁾Development is currently on hold. ⁽⁴⁾This is a registrational study. ⁽⁵⁾ V419 is an investigational pediatric hexavalent combination vaccine, DTaP5-IPV-Hib-HepB, that is being developed and, if approved, will be commercialized through a partnership of Merck and Sanofi. In November 2015, the FDA issued a CRL with respect to V419. ~~Both companies are reviewing~~Merck and Sanofi provided a response to the CRL, which was deemed complete and ~~plan to have further communication with the FDA.~~acceptable for review.

~~Selected Joint Venture and Affiliate Information~~

~~Sanofi Pasteur MSD~~

On December 31, 2016, Merck and Sanofi terminated their equally-owned joint venture, SPMSD, which developed and marketed vaccines in Europe. Total vaccine sales reported by SPMSD were $351 million and $725 million in the ~~third~~ ~~quarter and first nine months of 2016, respectively, which included $61 million and $161 million, respectively, of sales of~~ ~~Gardasil/Gardasil~~ ~~9. The Company recorded the results from its interest in SPMSD in~~ ~~Other (income) expense, net~~ ~~(see Note 11 to the condensed consolidated financial statements).~~

Liquidity and Capital Resources


($ in millions)	September 30, 2017			December 31, 2016			September 30, 2018			December 31, 2017
Cash and investments	$	23,401		$	25,757		$	17,891		$	20,623
Working capital	8,452			13,410			8,250			6,152
Total debt to total liabilities and equity	29.4		%	26.0		%	27.7		%	27.8		%

Cash provided by operating activities was $~~2.4~~7.3 billion in the first nine months of ~~2017~~2018 compared with ~~$6.7~~$2.4 billion in the first nine months of ~~2016. The decline~~2017. Cash provided by operating activities in the first nine months of 2018 reflects $750 million of upfront payments made by the Company related to the formation of a collaboration with Eisai (see Note 4 to the condensed consolidated financial statements). Cash provided by operating activities in the first nine months of 2017 reflects a $2.8 billion payment related to the settlement of certain federal income tax issues (see Note 1214 to the condensed consolidated financial statements), a $1.6 billion upfront payment made by the Company related to the formation of a collaboration with AstraZeneca (see Note 24 to the condensed consolidated financial statements), and a $625 million payment made by the Company related to the previously disclosed settlement of worldwide Keytruda patent litigation (see Note 7 to the condensed consolidated financial statements). Cash provided by operating activities in the first nine months of 2016 includes a net payment of approximately $680 million to fund the ~~Vioxx~~ ~~shareholder class action litigation settlement not covered by insurance proceeds.~~litigation. Cash provided by operating activities continues to be the Company’s primary source of funds to finance operating needs, capital expenditures, ~~a portion of~~ treasury stock purchases and dividends paid to shareholders.

Cash provided by investing activities was $2.1 billion in the first nine months of 2018 compared with $2.7 billion in the first nine months of ~~2017 compared with a use of~~2017. The decline in cash of ~~$647 million~~ ~~in the first~~ ~~nine~~ ~~months of 2016. The change~~provided by investing activities was driven primarily by lower ~~purchases of securities and other investments, higher~~ proceeds from the sales of securities and other investments and higher capital expenditures, as well as a $350 million milestone payment in 2018 related to a collaboration with Bayer (see Note 4 to the condensed consolidated financial statements), partially offset by lower ~~use~~purchases of ~~cash for the acquisitions of businesses.~~securities and other investments.

Cash used in financing activities was$7.6 billion in the first nine months of 2018 compared with $4.2 billion in the first nine months of ~~2017 compared with~~ ~~$7.1 billion~~ ~~in the first~~ ~~nine~~ ~~months~~2017. The higher use of ~~2016. The decrease in~~ cash ~~used~~ in financing activities was driven primarily by ~~lower~~higher payments on debt, higher purchases of treasury stock and ~~an increase in short-term borrowings,~~payment of contingent consideration related to a prior year business acquisition, partially offset by ~~lower proceeds from the exercise of stock options.~~

At ~~September 30, 2017, the total of worldwide cash and investments was~~ ~~$23.4 billion, including~~ ~~$11.2 billion~~ ~~of cash, cash equivalents and~~higher short-term ~~investments and~~ ~~$12.2 billion~~ of long-term investments. Generally 80%-90% of cash and investments are held by foreign subsidiaries that would be subject to significant tax payments if such cash and investments were repatriated in the form of dividends. The Company records U.S. deferred tax liabilities for certain unremitted earnings, but when amounts earned overseas are expected to be indefinitely reinvested outside of the United States, no accrual for U.S. taxes is provided. The amount of cash and investments held by U.S. and foreign subsidiaries fluctuates due to a variety of factors including the timing and receipt of payments in the normal course of business. Cash provided by operating activities in the United States continues to be the Company’s primary source of funds to finance domestic operating needs, capital expenditures, a portion of treasury stock purchases and dividends paid to shareholders. The decline in working capital from December 31, 2016 to September 30, 2017 primarily reflects the reclassification of $3.0 billion of notes due in the first half of 2018 from long-term debt to short-term debt and the $1.6 billion upfront payment related to the formation of the AstraZeneca collaboration discussed above.borrowings.

Capital expenditures totaled $~~1.2~~1.7 billion and $~~1.1~~1.2 billion for the first nine months of 2018 and 2017, ~~and 2016,~~ respectively. In October 2018, the Company announced it now plans to invest approximately $16 billion on new capital projects, up $4 billion from its prior five-year plan of $12 billion announced in February 2018. The focus of this investment will be to increase manufacturing capacity across Merck’s key businesses.

Dividends paid to stockholders were $3.9 billion for both the first nine months of ~~2017~~2018 and ~~2016.~~2017. In May ~~2017,~~2018, the Board of Directors declared a quarterly dividend of $0.48 per share on the Company’s common stock for the third quarter ~~of $0.47 per share~~ that was paid in July ~~2017.~~2018. In July ~~2017,~~2018, the Board of Directors declared a quarterly dividend of $0.48 per share on the Company’s common stock for the fourth quarter ~~of $0.47 per share~~ that was paid in October ~~2017.~~2018. In October 2018, Merck announced that its Board of Directors approved a 15% increase to the Company’s quarterly dividend, raising it to $0.55 per share from $0.48 per share on the Company’s outstanding common stock. Payment will be made in January 2019.

In ~~March 2015,~~November 2017, Merck’s ~~board~~Board of ~~directors~~Directors authorized purchases of up to $10 billion of Merck’s common stock for its treasury. The treasury stock purchase has no time limit and ~~is being~~will be made over time in open-market transactions, block transactions on or off an exchange, or in privately negotiated transactions. During the first nine months of ~~2017,~~2018, the Company purchased ~~$2.3~~$3.2 billion ~~(36~~(53 million shares) for its ~~treasury.~~treasury under this and a previously authorized share repurchase program. As of September 30, ~~2017,~~2018, the Company’s remaining share repurchase authorization was ~~$2.7~~$7.9 billion. In October 2018, Merck’s Board of Directors authorized an additional $10 billion of treasury stock purchases with no time limit for completion. The Company entered into a $5 billion accelerated share repurchase (ASR) program under its expanded authorization as discussed below.

On October 25, 2018, the Company entered into an ASR agreement with Goldman Sachs & Co. and JP Morgan Chase (Dealers). Under the ASR, 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 current market price, made by the Dealers to Merck, and payment of $5 billion made by Merck to the Dealers on October 29, 2018, which was funded with existing cash and investments, as well as short-term borrowings. The payment to the Dealers will be recorded as a reduction to shareholders’ equity, consisting of a $4 billion increase in treasury stock, which reflects the value of the initial 56.7 million shares received upon execution, 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 final number of shares of Merck’s common stock that Merck may receive, or may be required to remit, upon settlement under the ASR will be based upon the average daily volume weighted-average price of Merck’s common stock during the term of the ASR program. Final settlement of the transaction under the ASR agreement is expected to occur in the first half of 2019, and may occur earlier at the option of the Dealers, or later under certain circumstances. The terms of the transaction under the ASR agreement are subject to adjustment if Merck were to enter into or announce certain types of transactions. If Merck is obligated to make an

adjustment payment to the Dealers under the ASR, Merck may elect to satisfy such obligation in cash or in shares of Merck’s common stock.

In ~~February 2017, $300 million~~January 2018, $1.0 billion of ~~floating rate notes matured in accordance with their terms and were repaid. In January 2016, $850 million of 2.2%~~1.10% notes matured in accordance with their terms and were repaid. In May ~~2016,~~2018, $1.0 billion of ~~0.70%~~1.30% notes and ~~$500 million~~$1.0 billion of ~~floating rate~~floating-rate notes matured in accordance with their terms and were repaid.

On November 6, 2017, Merck announced the commencement of offers to purchase certain of its outstanding long-term notes (Notes). The offers are being made upon, and are subject to, the terms and conditions set forth in the Offer to Purchase, dated November 6, 2017, which conditions include that Merck will not pay more than $850 million, plus accrued interest, in the aggregate for the Notes.

The Company has a $6.0 billion ~~five-year~~ credit facility that matures in June ~~2022.~~2023. 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.

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.

The economy of Argentina was recently determined to be hyperinflationary; consequently, in accordance with U.S. GAAP, the Company began remeasuring its monetary assets and liabilities for those operations in earnings beginning in the third quarter of 2018. The impact to the Company’s results was immaterial.

Critical Accounting Policies

The Company’s significant accounting policies, which include management’s best estimates and judgments, are included in Note 2 to the consolidated financial statements for the year ended December 31, ~~2016~~2017 included in Merck’s Form 10‑K filed on February ~~28, 2017.~~27, 2018. Certain of these accounting policies are considered critical as disclosed in the Critical Accounting Policies section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Merck’s Form 10-K because of the potential for a significant impact on the financial statements due to the inherent uncertainty in such estimates. There have been no significant changes in the Company’s critical accounting policies since December 31, ~~2016.~~2017. See Note 1 to the condensed consolidated financial statements for information on the adoption of new accounting standards during 2018.

Recently Issued Accounting Standards

~~In May 2014, the Financial Accounting Standards Board (FASB)~~For a discussion of recently issued ~~amended~~ accounting guidance on revenue recognition that will be applied 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 Company will adopt the new standard on Januarystandards, see Note 1 2018 and currently plans to use the modified retrospective method. The majority of the Company’s business is ship and bill and, on that primary revenue stream, Merck does not expect significant differences. Additionally, the Company has not identified significant changes related to the recognition of revenue for its multiple element arrangements or discount and trade promotion programs when applying the new guidance. However, the Company’s analysis is preliminary and subject to change. The Company anticipates the adoption of the new guidance will result in some additional disclosures.

In January 2016, the FASB issued revised guidance for the accounting and reporting of financial instruments. 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 new guidance also simplifies the impairment testing of equity investments without readily determinable fair values and changes certain disclosure requirements. This guidance is effective for interim and annual periods beginning in 2018. The Company is currently assessing the impact of adoption on its consolidated financial statements. The impact of adoption will be recorded as a cumulative-effect adjustment to retained earnings.

In October 2016, the FASB issued guidance on the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Under existing guidance, the recognition of current and deferred income taxes for an intra-entity asset transfer is prohibited until the asset has been sold to a third party. The new guidance will require 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. The guidance is effective for interim and annual periods beginning in 2018. The new guidance is to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings in the beginning of the period of adoption. The Company is currently evaluating the impact of adoption on its consolidated financial statements.

In 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 guidance is effective for interim and annual periods beginning in 2018 and should be applied using a retrospective transition method to each period presented. Early adoption is permitted. The Company does not anticipate the adoption of the new guidance will have a material effect on its Consolidated Statement of Cash Flows.

In March 2017, the FASB amended the guidance 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 new guidance is effective for interim and annual periods in 2018. Entities must use a retrospective transition method to adopt the requirement for separate presentation in the income statement of service costs and other components and a prospective transition method to adopt the requirement to limit the capitalization of benefit costs to the service cost component. The Company is currently evaluating the impact of adoption on its consolidated financial statements.

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 new guidance is effective prospectively for interim and annual periods beginning in 2018. Early adoption is permitted. The Company does not anticipate the adoption of the new guidance will have a material effect on its consolidated financial statements.

In February 2016, the FASB issued new accounting guidance for the accounting and reporting of leases. 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 guidance will be effective for interim and annual periods beginning in 2019. Early adoption is permitted. The Company is currently evaluating the impact of adoption on its consolidated financial statements.

In August 2017, the FASB issued new guidance on hedge accounting 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 new guidance is effective for interim and annual periods beginning in 2019. Early application is permitted in any interim period. The Company does not anticipate the adoption of the new guidance will have a material effect on its consolidated financial statements and may elect to early adopt this guidance.

losses (and subsequent recoveries). The new guidance is effective for interim and annual periods beginning in 2020, with earlier application permitted in 2019. The Company is currently evaluating the impact of adoption on its consolidated financial statements.

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 new guidance is effective for interim and annual periods in 2020. Early adoption is permitted. The Company does not anticipate the adoption of the new guidance will have a material effect on itscondensed consolidated financial statements.

Item 4. Controls and Procedures

Management of the Company, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures over financial reporting for the period covered by this Form 10–Q. Based on this assessment, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, ~~2017~~2018, the Company’s disclosure controls and procedures are effective. For the period covered by this report, 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.

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.~~meaning, or negative variations of any of the foregoing. One can also identify them by the fact that they do not relate strictly to historical or current facts. These statements are likely to address the Company’s growth strategy, financial results, product development, product approvals, product potential and development programs. One must carefully consider any such statement and should understand that many factors could cause actual results to differ materially from the Company’s forward-looking statements. These factors include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actual future results may vary materially.

The Company does not assume the obligation to update any forward-looking statement. One should carefully evaluate such statements in light of factors, including risk factors, described in the Company’s filings with the Securities and Exchange Commission, especially on Forms 10-K, 10-Q and 8-K. In Item 1A. “Risk Factors” of the Company’s Annual Report on Form 10‑K for the year ended December 31, ~~2016,~~2017, as filed on February ~~28, 2017,~~27, 2018, the Company discusses in more detail various important risk factors that could cause actual results to differ from expected or historic results. The Company notes these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. One should understand that it is not possible to predict or identify all such factors. Consequently, the reader should not consider any such list to be a complete statement of all potential risks or uncertainties.

PART II - Other Information

Item 1. Legal Proceedings

The information called for by this Item is incorporated herein by reference to Note 79 included in Part I, Item 1, Financial Statements (unaudited) — Notes to Condensed Consolidated Financial Statements.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer purchases of equity securities for the three months ended September 30, ~~2017~~2018 were as follows:

ISSUER PURCHASES OF EQUITY SECURITIES


			($ in millions)			($ 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⁾	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⁾
July 1 - July 31	—	$0.00	$2,902	11,274,234	$62.31	$8,176
August 1 - August 31	720,907	$62.46	$2,857	2,386,135	$67.30	$8,016
September 1 - September 30	1,758,726	$64.68	$2,743	1,901,599	$69.79	$7,883
Total	2,479,633	$64.04	$2,743	15,561,968	$63.99	$7,883

⁽¹⁾

Shares purchased during the period were made as part of a plan approved by the Board of Directors in March 2015 to purchase up to $10 billion of Merck’s common stock for its treasury. In October 2018, the Board of Directors authorized an additional $10 billion of treasury stock purchases with no time limit for completion. The Company entered into a $5 billion accelerated share repurchase program under its expanded authorization.

Item 6. Exhibits



Number		Description

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

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

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

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

32.1	—	Section 1350 Certification of Chief Executive Officer

32.2	—	Section 1350 Certification of Chief Financial Officer

101	—	The following materials from Merck & Co., Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, ~~2017,~~2018, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statement of Income, (ii) the Condensed Consolidated Statement of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheet, (iv) the Condensed Consolidated Statement of Cash Flows, and (v) Notes to the Condensed Consolidated Financial Statements.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		MERCK & CO., INC.

Date: November ~~7, 2017~~6, 2018		/s/ ~~Michael J. Holston~~Jennifer Zachary
		~~MICHAEL J. HOLSTON~~JENNIFER ZACHARY
		Executive Vice President and General Counsel

Date: November ~~7, 2017~~6, 2018		/s/ Rita A. Karachun
		RITA A. KARACHUN
		Senior Vice President Finance - Global Controller

EXHIBIT INDEX



Number		Description

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

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

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

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

32.1	—	Section 1350 Certification of Chief Executive Officer

32.2	—	Section 1350 Certification of Chief Financial Officer

101	—	The following materials from Merck & Co., Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, ~~2017,~~2018, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statement of Income, (ii) the Condensed Consolidated Statement of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheet, (iv) the Condensed Consolidated Statement of Cash Flows, and (v) Notes to the Condensed Consolidated Financial Statements.

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($ in millions)	September 30, 2017
Debt Instrument	Par Value of Debt		Number of Interest Rate Swaps Held	Total Swap Notional Amount
1.30% notes due 2018	$	1,000	4	$	1,000
5.00% notes due 2019	1,250		3	550
1.85% notes due 2020	1,250		5	1,250
3.875% notes due 2021	1,150		5	1,150
2.40% notes due 2022	1,000		4	1,000
2.35% notes due 2022	1,250		5	1,250