0000310158 us-gaap:OperatingSegmentsMember country:US mrk:PharmaceuticalsegmentMember 2018-04-01 2018-06-30

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~~

For the quarterly period ended June 30, 2019



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

	~~For the transition period from ______ to ______~~

For the transition period from ______ to ______

Commission File No. 1-6571

Merck & Co., Inc.

~~2000 Galloping Hill Road~~

~~Kenilworth, N.J. 07033~~

~~(908) 740-4000~~(Exact name of registrant as specified in its charter)



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

~~Identification No. 22-1918501~~2000 Galloping Hill Road
Kenilworth	New Jersey	07033
(Address of principal executive offices) (zip code)

~~The~~(Registrant’s telephone number, ~~of shares of common stock outstanding as of the close of business on~~ ~~October 31, 2017: 2,724,436,835~~including area code)(908)740-4000



	Not Applicable
(Former name, former address and former fiscal year, if changed since last report.)

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

Indicate by check mark whether the registrant has submitted electronically ~~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 ☒



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

The number of shares of common stock outstanding as of the close of business on July 31, 2019: 2,560,374,643

Part I - Financial Information

Item 1. Financial Statements

MERCK & CO., INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF INCOME

(Unaudited, $ in millions except per share amounts)

Three Months Ended
September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
Sales $ 10,325
$ 10,536
$ 29,689
$ 29,692
Costs, Expenses and Other
Materials and production 3,274
3,409
9,369
10,559
Marketing and administrative 2,401
2,393
7,251
7,169
Research and development 4,383
1,664
7,927
5,475
Restructuring costs 153
161
470
386
Other (income) expense, net (86 ) 22
30
88
10,125
7,649
25,047
23,677
Income Before Taxes 200
2,887
4,642
6,015
Taxes on Income 251
699
1,186
1,487
Net (Loss) Income (51 ) 2,188
3,456
4,528
Less: Net Income Attributable to Noncontrolling Interests 5
4
16
13
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



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Sales	$	11,760		$	10,465		$	22,575		$	20,502
Costs, Expenses and Other
Cost of sales	3,401			3,417			6,453			6,601
Selling, general and administrative	2,712			2,508			5,138			5,016
Research and development	2,189			2,274			4,119			5,470
Restructuring costs	59			228			212			323
Other (income) expense, net	140			(48		)	327			(340		)
	8,501			8,379			16,249			17,070
Income Before Taxes	3,259			2,086			6,326			3,432
Taxes on Income	615			370			820			975
Net Income	2,644			1,716			5,506			2,457
Less: Net (Loss) Income Attributable to Noncontrolling Interests	(26		)	9			(79		)	14
Net Income Attributable to Merck & Co., Inc.	$	2,670		$	1,707		$	5,585		$	2,443
Basic Earnings per Common Share Attributable to Merck & Co., Inc. Common Shareholders	$	1.04		$	0.64		$	2.17		$	0.91
Earnings per Common Share Assuming Dilution Attributable to Merck & Co., Inc. Common Shareholders	$	1.03		$	0.63		$	2.15		$	0.90

MERCK & CO., INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Unaudited, $ in millions)

Three Months Ended
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 June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Net Income Attributable to Merck & Co., Inc.	$	2,670		$	1,707		$	5,585		$	2,443
Other Comprehensive (Loss) Income Net of Taxes:
Net unrealized (loss) gain on derivatives, net of reclassifications	(52		)	266			(100		)	196
Net unrealized gain (loss) on investments, net of reclassifications	44			3			126			(96		)
Benefit plan net gain and prior service credit, net of amortization	11			30			26			66
Cumulative translation adjustment	(19		)	(361		)	131			(104		)
	(16		)	(62		)	183			62
Comprehensive Income Attributable to Merck & Co., Inc.	$	2,654		$	1,645		$	5,768		$	2,505

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

MERCK & CO., INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited, $ in millions except per share amounts)


	September 30, 2017			December 31, 2016			June 30, 2019			December 31, 2018
Assets
Current Assets
Cash and cash equivalents	$	7,901		$	6,515		$	6,659		$	7,965
Short-term investments	3,294			7,826			446			899
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 $122 in 2019 and $119 in 2018)							7,964			7,071
Inventories (excludes inventories of $1,464 in 2019 and $1,417 in 2018 classified in Other assets - see Note 6)							5,847			5,440
Other current assets	3,790			4,389			3,382			4,500
Total current assets	27,919			30,614			24,298			25,875
Investments	12,206			11,416			3,779			6,233
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 $17,049 in 2019 and $16,324 in 2018							13,862			13,291
Goodwill	18,340			18,162			19,490			18,253
Other Intangibles, Net	15,138			17,305			13,381			11,431
Other Assets	5,884			5,854			9,155			7,554
	$	91,676		$	95,377		$	83,965		$	82,637
Liabilities and Equity
Current Liabilities
Loans payable and current portion of long-term debt	$	5,157		$	568		$	3,816		$	5,308
Trade accounts payable	2,620			2,807			3,142			3,318
Accrued and other current liabilities	9,992			10,274			11,054			10,151
Income taxes payable	396			2,239			634			1,971
Dividends payable	1,302			1,316			1,439			1,458
Total current liabilities	19,467			17,204			20,085			22,206
Long-Term Debt	21,838			24,274			22,771			19,806
Deferred Income Taxes	4,159			5,077			2,089			1,702
Other Noncurrent Liabilities	7,713			8,514			11,283			12,041
Merck & Co., Inc. Stockholders’ Equity
Common stock, $0.50 par value Authorized - 6,500,000,000 shares Issued - 3,577,103,522 shares in 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 2019 and 2018							1,788			1,788
Other paid-in capital	39,823			39,939			39,484			38,808
Retained earnings	43,701			44,133			45,295			42,579
Accumulated other comprehensive loss	(4,945		)	(5,226		)	(5,362		)	(5,545		)
	80,367			80,634			81,205			77,630
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: 1,010,308,500 shares in 2019 and 984,543,979 shares in 2018							53,570			50,929
Total Merck & Co., Inc. stockholders’ equity	38,248			40,088			27,635			26,701
Noncontrolling Interests	251			220			102			181
Total equity	38,499			40,308			27,737			26,882
	$	91,676		$	95,377		$	83,965		$	82,637

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,						Six Months Ended June 30,
	2017			2016			2019			2018
Cash Flows from Operating Activities
Net income	$	3,456		$	4,528		$	5,506		$	2,457
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	3,509			4,286			1,871			2,427
Intangible asset impairment charges	376			572			252			—
Charge for future payments related to AstraZeneca collaboration license options	750			—
Charge for future payments related to collaboration license options							—			650
Deferred income taxes	(601		)	(65		)	(149		)	(258		)
Share-based compensation	232			225			204			170
Other	(31		)	200			114			365
Net changes in assets and liabilities	(5,259		)	(3,002		)	(3,378		)	(1,274		)
Net Cash Provided by Operating Activities	2,432			6,744			4,420			4,537
Cash Flows from Investing Activities
Capital expenditures	(1,173		)	(1,063		)	(1,377		)	(1,033		)
Purchases of securities and other investments	(8,397		)	(10,084		)	(1,810		)	(5,248		)
Proceeds from sales of securities and other investments	12,533			11,300			4,935			7,403
Acquisitions of businesses, net of cash acquired	(347		)	(778		)
Acquisition of Antelliq Corporation, net of cash acquired							(3,620		)	—
Other acquisitions, net of cash acquired							(270		)	(372		)
Other	121			(22		)	85			(274		)
Net Cash Provided by (Used in) Investing Activities	2,737			(647		)
Net Cash (Used in) Provided by Investing Activities							(2,057		)	476
Cash Flows from Financing Activities
Net change in short-term borrowings	1,962			909			(3,532		)	2,069
Payments on debt	(301		)	(2,386		)	—			(3,008		)
Proceeds from issuance of debt							4,958			—
Purchases of treasury stock	(2,312		)	(2,418		)	(2,325		)	(2,162		)
Dividends paid to stockholders	(3,884		)	(3,853		)	(2,896		)	(2,610		)
Proceeds from exercise of stock options	481			790			304			299
Other	(167		)	(109		)	(207		)	(277		)
Net Cash Used in Financing Activities	(4,221		)	(7,067		)	(3,698		)	(5,689		)
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							28			(108		)
Net Decrease in Cash, Cash Equivalents and Restricted Cash							(1,307		)	(784		)
Cash, Cash Equivalents and Restricted Cash at Beginning of Year (includes restricted cash of $2 million at January 1, 2019 included in Other Assets)							7,967			6,096
Cash, Cash Equivalents and Restricted Cash at End of Period (includes restricted cash of $1 million at June 30, 2019 included in Other Assets)							$	6,660		$	5,312

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

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, 2019.

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

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 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 January 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 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. 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.

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

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.~~leases (ASU 2016-02) and subsequently issued several updates to the new guidance (ASC 842 or new guidance). The new guidance requires that lessees recognize a right-of-use asset and a lease liability ~~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~~previous operating leases), while finance leases will result in more expense being recognized in the earlier years of the lease term (similar to ~~current~~previous capital leases). The Company adopted the new ~~guidance will be effective~~standard on January 1, 2019 using a modified retrospective approach. Merck elected 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 ~~is currently evaluating~~also elected available practical expedients. Upon adoption, the ~~impact~~Company recognized $1.1 billion of ~~adoption~~additional assets and related liabilities 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.balance sheet (see Note 7). 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~~did not impact the Company’s consolidated ~~financial~~ statements ~~and may elect to early adopt this guidance.~~of income or cash flows.

Recently Issued Accounting Standards Not Yet Adopted

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

In ~~January 2017,~~April 2018, 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~~on the accounting for costs incurred to implement a cloud computing arrangement that is considered a service arrangement. The new guidance requires the ~~extent~~capitalization of such costs, aligning it with the ~~carrying amount of a reporting unit exceeds its fair value~~accounting for costs associated with ~~certain limitations.~~developing or obtaining internal-use software. The new guidance is effective for interim and annual periods beginning in 2020. Early adoption is permitted, including adoption in any interim period. Prospective adoption for eligible costs incurred on or after the date of adoption or retrospective adoption is permitted. The Company is currently evaluating the impact of adoption on its consolidated financial statements.

In November 2018, the FASB issued new guidance for collaborative arrangements intended to reduce diversity in practice by clarifying whether certain transactions between collaborative arrangement participants should be accounted for under revenue recognition guidance (ASC 606). The new guidance is effective for interim and annual periods beginning in 2020. Early adoption is permitted, including adoption in any interim period. The new guidance is to be applied on a retrospective basis through a cumulative-effect adjustment directly to retained earnings. The Company does not anticipate the adoption of ~~the new guidance~~this standard will have a material effect on its consolidated financial statements.


2.	Acquisitions, ~~Divestitures,~~ Research Collaborations and License Agreements

The Company continues to pursue acquisitions and the ~~acquisition of businesses and~~ establishment of external alliances such as research collaborations and licensing agreements to complement its internal research capabilities. These arrangements often include upfront payments, as well as expense reimbursements or payments to the third party, and milestone, royalty or profit share arrangements, contingent upon the occurrence of certain future events linked to the success of the asset in development. The Company also reviews its marketed products and pipeline to examine candidates which may provide more value through out-licensing and, as part of its portfolio assessment process, may also divest certain assets. Pro forma financial information for acquired businesses is not presented if the historical financial results of the acquired entity are not significant when compared with the Company’s financial results.

In ~~October 2017,~~July 2019, Merck acquired ~~Rigontec GmbH (Rigontec). Rigontec~~Peloton Therapeutics, Inc. (Peloton), a clinical-stage biopharmaceutical company focused on the development of novel small molecule therapeutic candidates targeting hypoxia-inducible factor-2α (HIF-2α) for the treatment

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

of patients with cancer and other non-oncology diseases. Peloton’s lead candidate, MK-6482 (formerly PT2977), is a ~~leader~~novel oral HIF-2α inhibitor 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 Ilate-stage development ~~evaluating treatment in patients with various tumors. Under the terms of the agreement,~~for renal cell carcinoma. Merck made an upfront ~~cash~~ payment of ~~€119 million ($140 million) and may make additional contingent payments of~~$1.05 billion in cash; additionally, former Peloton shareholders will be eligible to receive up to ~~€349 million based on the attainment~~an additional $1.15 billion contingent upon successful achievement of ~~certain clinical, development,~~future regulatory and ~~commercial~~sales-based milestones. The ~~transaction~~acquisition will be accounted for as an acquisition of an ~~asset~~asset.

On April 1, 2019, Merck acquired Antelliq Corporation (Antelliq), a leader in digital animal identification, traceability and monitoring solutions. These solutions help veterinarians, farmers and pet owners gather critical data to improve management, health and well-being of livestock and pets. Merck paid $2.3 billion to acquire all outstanding shares of Antelliq and spent $1.3 billion to repay Antelliq’s debt. The transaction was accounted for as an acquisition of a business.

The estimated fair value of assets acquired and liabilities assumed from Antelliq is as follows:



($ in millions)	April 1, 2019
Cash and cash equivalents	$	31
Accounts receivable	73
Inventories	97
Property, plant and equipment	62
Identifiable intangible assets (useful lives ranging from 18-24 years) ⁽¹⁾	2,689
Deferred income tax liabilities	(563		)
Other assets and liabilities, net	(81		)
Total identifiable net assets	2,308
Goodwill ⁽²⁾	1,343
Consideration transferred	$	3,651


⁽¹⁾	The estimated fair values of identifiable intangible assets relate primarily to trade names and were determined using an income approach. The future net cash flows were discounted to present value utilizing a discount rate of 11.5%. Actual cash flows are likely to be different than those assumed.


⁽²⁾	The goodwill recognized is largely attributable to anticipated synergies expected to arise after the acquisition and was allocated to the Animal Health segment. The goodwill is not deductible for tax purposes.

The Company’s results for the ~~upfront payment will be~~second quarter of 2019 include two months of activity for Antelliq. The Company incurred $47 million of transaction costs directly related to the acquisition of Antelliq, consisting largely of advisory fees, which are reflected ~~within~~ ~~Research~~in Selling, general and ~~development~~administrative expenses in the ~~fourth~~second quarter of ~~2017.~~2019.

~~In July 2017,~~Also in April 2019, Merck ~~and AstraZeneca entered into~~acquired Immune Design, a ~~global strategic oncology collaboration~~late-stage immunotherapy company employing next-generation in vivo approaches to ~~co-develop and co-commercialize AstraZeneca’s Lynparza (olaparib)~~enable the body’s immune system to fight disease, 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). 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$301 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.cash. The transaction was accounted for as an acquisition of a business. Merck recognized intangible assets of $291 million related to currently marketed products, net deferred tax liabilities of $93 million, other net assets of $15 million and noncontrolling interest of $25 million. In addition, the Company recorded liabilities of $37 million for contingencies identified at the acquisition date and corresponding indemnification assets of $37 million, representing the amounts to be reimbursed to Merck if and when the contingent liabilities are paid. The excess of the consideration transferred over the fair value of net assets acquired of $170 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 July 2016, Merck acquired Afferent Pharmaceuticals (Afferent), a privately held pharmaceutical company focused on the development of therapeutic candidates targeting the P2X3 receptor for the treatment of common, poorly-managed, neurogenic conditions. Afferent’s lead investigational candidate, MK-7264 (formerly AF-219), is a selective, non-narcotic, orally-administered P2X3 antagonist being evaluated in a Phase 2b clinical trial for 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 payments to settle equity awards attributable to precombination service and cash paid for transaction costs on behalf of Afferent. In addition, former Afferent shareholders are eligible to receive a total of up to an additional $750 million contingent upon the attainment of certain clinical development and commercial milestones for multiple indications and candidates, including MK-7264. This transaction was accounted for as an acquisition of a business. The Company determined the fair value of the contingent consideration was $223 million at the acquisition date utilizing a probability-weighted estimated cash flow stream adjusted for the expected timing of each payment using an appropriate discount rate dependent on the nature and timing of the milestone payment. Merck recognized an intangible asset for in-process research and development (IPR&D) of ~~$832~~$156 million, ~~net deferred tax liabilities~~cash of ~~$258~~$83 million and other net assets of $29 million (primarily consisting of cash acquired). The excess of the consideration transferred over the fair value of net assets acquired of $130 million was recorded as goodwill that was allocated to the Pharmaceutical segment and is not deductible for tax purposes. The fair value of the identifiable intangible asset related to IPR&D was determined using an income approach. The asset’s probability-adjusted future net cash flows were then discounted 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).

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

StayWell is a health engagement company that helps its clients engage and educate people to improve health and business results. Under the terms 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$31 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 allocated to the Healthcare Services segment 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, and medical information and solutions content, which are being amortized over a five-year useful life.

In June 2016, Merck and Moderna Therapeutics (Moderna) entered into a strategic collaboration and license agreement to develop and commercialize novel messenger RNA (mRNA)-based personalized cancer vaccines. The development program will entail multiple studies in several types of cancer and include the evaluation of mRNA-based personalized cancer vaccines in combination with Merck’s ~~Keytruda. Pursuant to the terms of the agreement, Merck made an upfront cash payment to Moderna of $200 million, which was recorded in~~ ~~Research and development~~ expenses. Following human proof of concept studies, Merck has the right to elect to make an additional payment to Moderna. If Merck exercises this right, the two companies will then equally share costs and profits under a worldwide collaboration for the development of personalized cancer vaccines. Moderna will have the right to elect to co-promote the personalized cancer vaccines in the United States. The agreement entails exclusivity around combinations with ~~Keytruda. Moderna and Merck each have the ability to combine mRNA-based personalized cancer vaccines with other (non-PD-1) agents.~~

In January 2016, Merck acquired IOmet Pharma Ltd (IOmet), a privately held UK-based drug discovery company focused on the development of innovative medicines for the treatment of cancer, with a particular emphasis on the fields of cancer immunotherapy and cancer metabolism. The acquisition 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 consideration in the transaction included a cash payment of $150 million and future additional milestone payments of up to $250 million contingent upon certain clinical and regulatory milestones being achieved. The Company determined the fair value of the contingent consideration was $94 million at the acquisition date utilizing a probability-weighted estimated cash flow stream adjusted for the expected timing of each payment utilizing a discount rate of 10.5%. Merck recognized intangible assets for IPR&D of $155 million and net deferred tax assets of $32 million. The excess of the consideration transferred over the fair value of net assets acquired of $57$31 million was recorded as goodwill that was allocated to the Pharmaceutical segment and is not deductible for tax purposes. The fair values of the identifiable intangible assets related to IPR&D were determined using an income approach. ~~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 June 2018, Merck acquired Viralytics Limited (Viralytics), an Australian publicly traded company focused on oncolytic immunotherapy treatments for a range of cancers, for AUD 502 million ($378 million). The transaction provided Merck with full rights to Cavatak (V937, formerly CVA21), Viralytics’s investigational oncolytic immunotherapy. Cavatak is based on Viralytics’s proprietary formulation of an oncolytic virus (Coxsackievirus Type A21) that has been shown to preferentially infect and kill cancer cells. Cavatak is currently being evaluated in multiple Phase 1 and Phase 2 clinical trials, both as an intratumoral and intravenous agent, including in combination with Keytruda. Under a previous agreement between Merck and Viralytics, a study is investigating the use of the Keytruda and Cavatak combination in melanoma, prostate, lung and bladder cancers. The transaction was accounted for as an acquisition of an asset. Merck recorded net assets of $34 million (primarily cash) at the acquisition date and Research and development expenses of $344 million in the second quarter and first six months of 2018 related to the transaction. There are no future contingent payments associated with the acquisition.

In March 2018, Merck and Eisai Co., Ltd. (Eisai) entered into a strategic collaboration for the worldwide co-development and co-commercialization of Lenvima, an orally available tyrosine kinase inhibitor discovered by Eisai (see Note 3).

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

3. Collaborative Arrangements

Merck has entered into collaborative arrangements that provide the Company with varying rights to develop, produce and market products together with its collaborative partners. Both parties in these arrangements are active participants and exposed to significant risks and rewards dependent on the commercial success of the activities of the collaboration. Merck’s more significant collaborative arrangements are discussed below.

AstraZeneca

In July 2017, Merck ~~made~~and AstraZeneca PLC (AstraZeneca) entered into a ~~$100 million payment~~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 ~~a result~~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 ~~achievement of a clinical milestone, which was accrued~~mitogen-activated protein kinase (MAPK) pathway, currently being developed for ~~at estimated fair value at the time of acquisition as noted above.~~

~~Additionally, in January 2016, Merck sold the U.S. marketing rights to Cortrophin and Corticotropin Zinc Hydroxide to ANI Pharmaceuticals, Inc. (ANI).~~multiple indications. Under the terms of the agreement, ~~ANI~~AstraZeneca and Merck will share the development and commercialization costs for Lynparza and selumetinib monotherapy and non-PD-L1/PD-1 combination therapy opportunities.

Gross profits from Lynparza and selumetinib product sales generated through monotherapies or combination therapies are shared equally. Merck will fund all development and commercialization costs of Keytruda in combination with Lynparza or selumetinib. AstraZeneca will fund all development and commercialization costs of Imfinzi in combination with Lynparza or selumetinib. AstraZeneca is the principal on Lynparza sales transactions. Merck records its share of Lynparza product sales, net of cost of sales and commercialization costs, as alliance revenue within the Pharmaceutical segment and its share of development costs associated with the collaboration as part of Research and development costs. Reimbursements received from AstraZeneca for research and development expenses are recognized as reductions to Research and development costs.

As part of the agreement, Merck made an upfront payment to AstraZeneca of $1.6 billion in 2017 and will make payments of up to $750 million over a multi-year period for certain license options (of which $250 million was paid in December 2017, $400 million was paid in December 2018 and $100 million is expected to be paid in December 2019). The Company recorded an aggregate charge of $2.35 billion in Research and development expenses in 2017 related to the upfront payment and future license option payments. In addition, the agreement provides for additional contingent payments from Merck to AstraZeneca related to the successful achievement of sales-based and regulatory milestones.

In the second quarter of 2019, Merck determined it was probable that annual sales of Lynparza in the future would trigger a $300 million sales-based milestone payment from Merck to AstraZeneca. Accordingly, in the second quarter of 2019, Merck recorded a $300 million liability and a corresponding increase to the intangible asset related to Lynparza and also recognized $52 million of cumulative amortization expense within Cost of sales. Prior to 2019, Merck accrued sales-based milestone payments aggregating $700 million related to Lynparza. Of these amounts, $250 million has been paid to AstraZeneca. Potential future sales-based milestone payments of $3.1 billion have not yet been accrued as they are not deemed by the Company to be probable at this time.

In April 2019, Lynparza received regulatory approval in the European Union (EU) as a monotherapy for the treatment of certain adult patients with advanced breast cancer, triggering a $30 million capitalized milestone payment from Merck to AstraZeneca. In June 2019, Lynparza received regulatory approval in the EU as a monotherapy for the maintenance treatment of certain adult patients with BRCA-mutated advanced ovarian cancer, triggering a $30 million capitalized milestone payment from Merck to AstraZeneca. In 2018, Lynparza received regulatory approvals triggering capitalized milestone payments of $140 million in the aggregate from Merck to AstraZeneca. Potential future regulatory milestone payments of $1.7 billion remain under the agreement.

The asset balance related to Lynparza (which includes capitalized sales-based and regulatory milestone payments) was $1.0 billion at June 30, 2019 and is included in Other Assets on the Consolidated Balance Sheet. The amount is being amortized over its estimated useful life through 2028 as supported by projected future cash flows, subject to impairment testing.

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

Summarized financial information related to this collaboration is as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
($ in millions)	2019		2018		2019		2018
Alliance revenue	$	111	$	44	$	190	$	76

Cost of sales⁽¹⁾	73		24		92		36
Selling, general and administrative	33		9		59		16
Research and development	33		42		78		71

($ in millions)					June 30, 2019		December 31, 2018
Receivables from AstraZeneca included in Other current assets					$	105	$	52
Payables to AstraZeneca included in Accrued and other current liabilities⁽²⁾					605		405
Payables to AstraZeneca included in Other Noncurrent Liabilities⁽³⁾					300		250

⁽¹⁾Represents amortization of capitalized milestone payments.

⁽²⁾Includes accrued milestone and license option payments.

⁽³⁾Includes accrued milestone payments.

Eisai

In March 2018, Merck and Eisai announced a strategic collaboration for the worldwide co-development and co-commercialization of Lenvima, an orally available tyrosine kinase inhibitor discovered by Eisai. Under the agreement, Merck and Eisai will develop and commercialize Lenvima jointly, both as monotherapy and in combination with Merck’s anti-PD-1 therapy, Keytruda. Eisai records Lenvima product sales globally (Eisai is the principal on Lenvima sales transactions), and Merck and Eisai share gross profits equally. Merck records its share of Lenvima product sales, net of cost of sales and commercialization costs, as alliance revenue. Expenses incurred during co-development, including for studies evaluating Lenvima as monotherapy, are shared equally by the two companies and reflected in Research and development costs.

Under the agreement, Merck made an upfront payment to Eisai of $750 million and will make payments of up to $650 million for certain option rights through 2021 (of which $325 million was paid in March 2019, $200 million is expected to be paid in March 2020 and $125 million is expected to be paid in March 2021). The Company recorded an aggregate charge of $1.4 billion in Research and development expenses in the first quarter of 2018 related to the upfront payment and future option payments. In addition, the agreement provides for Eisai to receive up to $385 million associated with the achievement of certain clinical and regulatory milestones and up to $3.97 billion for the achievement of milestones associated with sales of Lenvima.

In the first quarter of 2019, Merck determined it was probable that annual sales of Lenvima in the future would trigger $282 million of sales-based milestone payments from Merck to Eisai. Accordingly, in the first quarter of 2019, Merck recorded $282 million of liabilities and corresponding increases to the intangible asset related to Lenvima and also recognized $35 million of cumulative amortization expense within Cost of sales. Merck previously accrued sales-based milestone payments aggregating $268 million related to Lenvima in 2018. Of these amounts, $50 million has been paid to Eisai. Potential future sales-based milestone payments of $3.42 billion have not yet been accrued as they are not deemed by the Company to be probable at this time.

In 2018, Lenvima received regulatory approvals triggering capitalized milestone payments of $250 million in the aggregate from Merck to Eisai. Potential future regulatory milestone payments of $135 million remain under the agreement.

The asset balance related to Lenvima (which includes capitalized sales-based and regulatory milestone payments) was $687 million at June 30, 2019 and is included in Other Assets on the Consolidated Balance Sheet. The amount is being amortized over its estimated useful life through 2026 as supported by projected future cash flows, subject to impairment testing.

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

Summarized financial information related to this collaboration is as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
($ in millions)	2019		2018		2019		2018
Alliance revenue	$	97	$	35	$	171	$	35

Cost of sales⁽¹⁾	23		1		74		1
Selling, general and administrative	19		2		38		2
Research and development ⁽²⁾	62		36		109		1,436

($ in millions)					June 30, 2019		December 31, 2018
Receivables from Eisai included in Other current assets					$	98	$	71
Payables to Eisai included in Accrued and other current liabilities ⁽³⁾					709		375
Payables to Eisai included in Other Noncurrent Liabilities ⁽³⁾					125		543

⁽¹⁾Represents amortization of capitalized milestone payments.

⁽²⁾Amount for the first six months of 2018 includes the upfront payment and future option payments.

⁽³⁾Includes accrued milestone and option payments.

Bayer AG

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

In the first quarter of 2018, Merck made a $350 million sales-based milestone payment ~~of $75 million,~~to Bayer, which was accrued for in 2016 when Merck deemed the payment to be probable. In the second quarter of 2018, Merck determined it was probable that annual worldwide sales of Adempas in the future would trigger a $375 million sales-based milestone payment from Merck to Bayer; accordingly, Merck recorded in ~~Sales~~,a $375 million liability and ~~may make additional payments~~a corresponding increase to the intangible asset related to Adempas and also recognized $106 million of cumulative amortization expense within Cost of sales. There is an additional $400 million potential future sales-based milestone payment that has not yet been accrued as it is not deemed by the Company ~~based~~ to be probable at this time.

The intangible asset balance related to Adempas (which includes the acquired intangible asset balance, as well as capitalized sales-based milestone payments) was $956 million at June 30, 2019 and is included in Other Intangibles, Net on the Consolidated Balance Sheet. The amount is being amortized over its estimated useful life through 2027 as supported by projected future ~~sales. Merck does not have any ongoing supply or other performance obligations after the closing date.~~cash flows, subject to impairment testing.

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

Summarized financial information related to this collaboration is as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
($ in millions)	2019		2018		2019		2018
Net product sales recorded by Merck	$	53	$	47	$	100	$	90
Merck’s profit share from sales in Bayer’s marketing territories	51		28		94		53
Total sales	104		75		194		143

Cost of sales⁽¹⁾	29		132		58		159
Selling, general and administrative	11		10		20		17
Research and development	32		28		62		56

($ in millions)					June 30, 2019		December 31, 2018
Receivables from Bayer included in Other current assets					$	41	$	32
Payables to Bayer included in Other Noncurrent Liabilities ⁽²⁾					375		375

⁽¹⁾Includes amortization of intangible assets.

⁽²⁾Represents accrued milestone payment.


3.4.	Restructuring

~~The Company incurs substantial costs for~~Merck recently approved a new global restructuring program ~~activities related to Merck’s productivity~~(2019 Restructuring Program) as part of a worldwide initiative focused primarily on further optimizing the Company’s manufacturing and ~~cost reduction initiatives,~~supply network, as well as in connection with the integration of certain acquired businesses. In 2010 and 2013, the Company commenced actions under global restructuring programs designed to streamline its cost structure. The actions under these programs include the elimination of positions in sales, administrative and headquarters organizations, as well as the sale or closure of certain manufacturing and research and development sites and the consolidation of office facilities. The Company also continues to reducereducing its global real estate footprint. This program is a continuation of the Company’s plant rationalization and builds on prior restructuring programs. The Company will continue to evaluate its global footprint and ~~improve the efficiency of its manufacturing and supply network.~~

~~The Company recorded total pretax costs of $180 million and $212 million~~overall operating model, which could result in the ~~third quarter~~identification of ~~2017 and 2016, respectively, and $605 million and $759 million for~~additional actions over time. The actions contemplated under the ~~first nine months of 2017 and 2016, respectively, related~~2019 Restructuring Program are expected to ~~restructuring program activities. Since inception of the programs through~~ ~~September 30, 2017~~, Merck has recorded total pretax accumulated costs of approximately $13.2 billion and eliminated approximately 42,120 positions comprised of employee separations, as well as the elimination of contractors and vacant positions. The Company expects tobe substantially ~~complete the remaining actions under these programs~~completed by the end of ~~2017 and incur~~2023, with the cumulative pretax costs to be incurred by the Company to implement the program estimated to be approximately ~~$250~~$800 million ~~of additional pretax costs.~~to $1.2 billion. The Company estimates that approximately ~~two-thirds~~55% of the cumulative pretax costs ~~are~~will result in cash outlays, primarily related to employee separation ~~expense.~~

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

expense and facility shut-down costs. Approximately ~~one-third~~45% of the cumulative pretax costs ~~are~~will be non-cash, relating primarily to the accelerated depreciation of facilities to be closed or divested. The Company expects to record charges of approximately $500 million in 2019 related to the program. Actions under previous global restructuring programs have been substantially completed.

The Company recorded total pretax costs of $159 million and $235 million in the second quarter of 2019 and 2018, respectively, and $346 million and $339 million for the first six months of 2019 and 2018, respectively, related to restructuring program activities. For segment reporting, restructuring charges are unallocated expenses.

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


	Three Months Ended September 30, 2017								Nine Months Ended September 30, 2017								Three Months Ended June 30, 2019								Six Months Ended June 30, 2019
($ in millions)	Separation Costs		Accelerated Depreciation		Other		Total		Separation Costs		Accelerated Depreciation		Other		Total		Separation Costs		Accelerated Depreciation		Other		Total		Separation Costs		Accelerated Depreciation		Other		Total
Materials and production	$	—	$	5	$	20	$	25	$	—	$	52	$	69	$	121
Marketing and administrative	—		—		—		—		—		2		1		3
Cost of sales																	$	—	$	64	$	1	$	65	$	—	$	98	$	1	$	99
Selling, general and administrative																	—		32		—		32		—		32		—		32
Research and development	—		1		1		2		—		7		4		11		—		2		1		3		—		2		1		3
Restructuring costs	100		—		53		153		302		—		168		470		25		—		34		59		153		—		59		212
	$	100	$	6	$	74	$	180	$	302	$	61	$	242	$	605	$	25	$	98	$	36	$	159	$	153	$	132	$	61	$	346



	Three Months Ended June 30, 2018								Six Months Ended June 30, 2018
($ in millions)	Separation Costs		Accelerated Depreciation		Other		Total		Separation Costs		Accelerated Depreciation			Other		Total
Cost of sales	$	—	$	—	$	3	$	3	$	—	$	—		$	9	$	9
Selling, general and administrative	—		—		1		1		—		1			1		2
Research and development	—		—		3		3		—		(3		)	8		5
Restructuring costs	200		—		28		228		255		—			68		323
	$	200	$	—	$	35	$	235	$	255	$	(2	)	$	86	$	339

Three Months Ended September 30, 2016 Nine Months Ended September 30, 2016
($ in millions)
Separation
Costs

Accelerated
Depreciation
Other Total
Separation
Costs

Accelerated
Depreciation
Other Total
Materials and production $ —
$ 18
$ 18
$ 36
$ —
$ 69
$ 80
$ 149
Marketing and administrative —
1
—
1
—
8
83
91
Research and development —
14
—
14
—
133
—
133
Restructuring costs 61
—
100
161
172
—
214
386
$ 61
$ 33
$ 118
$ 212
$ 172
$ 210
$ 377
$ 759

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 2017 and 2016, approximately 205 positions and 300 positions, respectively, and for the first nine months of 2017 and 2016, approximately 1,225 positions and 1,355 positions, respectively, were eliminated under restructuring program activities.

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

Accelerated depreciation costs primarily relate to manufacturing, research and administrative facilities and equipment to be sold or closed as part of the programs. Accelerated depreciation costs represent the difference between the depreciation expense to be recognized over the revised useful life of the asset, based upon the anticipated date the site will be closed or divested or the equipment disposed of, and depreciation expense as determined utilizing the useful life prior to the restructuring actions. All of the sites have and will continue to operate up through the respective closure dates and, since future undiscounted cash flows ~~were~~are sufficient to recover the respective book values, Merck is recording accelerated depreciation over the revised useful life of the site assets. Anticipated site closure dates, particularly related to manufacturing locations, have been and may continue to be adjusted to reflect changes resulting from regulatory or other factors.

Other activity in ~~2017~~2019 and ~~2016~~2018 includes asset abandonment, shut-down and other related costs, as well as pretax gains and losses resulting from sales of facilities and related assets. Additionally, other activity includes certain employee-related costs associated with pension and other postretirement benefit plans (see Note ~~10)~~11) and share-based compensation.

The following table summarizes the charges and spending relating to restructuring program activities for the ~~nine~~six months ended ~~September~~June 30, ~~2017:~~2019:


($ 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, 2019													$	443		$	—		$	91		$	534
Expense	302			61			242			605			153			132			61			346
(Payments) receipts, net	(224		)	—			(339		)	(563		)	(126		)	—			(77		)	(203		)
Non-cash activity	—			(61		)	74			13			—			(132		)	(2		)	(134		)
Restructuring reserves September 30, 2017 ⁽¹⁾	$	473		$	—		$	123		$	596
Restructuring reserves June 30, 2019 ⁽¹⁾													$	470		$	—		$	73		$	543


⁽¹⁾	The remaining cash outlays are expected to be substantially completed by the end of ~~2020.~~2023.

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


4.5.	Financial Instruments

Derivative Instruments and Hedging Activities

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

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

Foreign Currency Risk Management

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

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

The fair values of these derivative contracts are recorded as either assets (gain positions) or liabilities (loss positions) in the Condensed Consolidated Balance Sheet. Changes in the fair value of derivative contracts are recorded each period in either current earnings or Other comprehensive income (OCI), depending on whether the derivative is designated as part of a hedge transaction and, if so, the type of hedge transaction. For derivatives that are designated as cash flow hedges, the ~~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 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.

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

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

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

The Company ~~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. The Company recognizes in earnings the initial value of the excluded component on a straight-line basis over the life of the derivative instrument, rather than using the mark-to-market approach. The cash flows from these contracts are reported as investing activities in the Condensed Consolidated Statement of Cash Flows.

~~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~~Company’s net investment hedges on OCI and the Consolidated Statement of Income are ~~pretax losses~~shown below:



	Amount of Pretax (Gain) Loss Recognized in Other Comprehensive Income⁽¹⁾											Amount of Pretax (Gain) Loss Recognized in Other (income) expense, net for Amounts Excluded from Effectiveness Testing
	Three Months Ended June 30,					Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
($ in millions)	2019		2018			2019			2018			2019			2018			2019			2018
Net Investment Hedging Relationships
Foreign exchange contracts	$	17	$	(12	)	$	7		$	(14	)	$	(8	)	$	(3	)	$	(15	)	$	(3	)
Euro-denominated notes	28		(271		)	(2		)	(92		)	—			—			—			—

⁽¹⁾ No amounts were reclassified from AOCI into income related to the sale of ~~$467 million~~ ~~and~~ ~~$60 million~~ ~~for the first nine months 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.

At ~~September~~June 30, ~~2017,~~2019, the Company was a party to 2619 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)


						June 30, 2019
($ in millions)	September 30, 2017					Par Value of Debt	Number of Interest Rate Swaps Held	Total Swap Notional Amount
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		1,250	5	1,250
3.875% notes due 2021	1,150		5	1,150		1,150	5	1,150
2.40% notes due 2022	1,000		4	1,000		1,000	4	1,000
2.35% notes due 2022	1,250		5	1,250		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)	June 30, 2019		December 31, 2018		June 30, 2019			December 31, 2018
Balance Sheet Line Item in which Hedged Item is Included
Loans payable and current portion of long-term debt	$	1,244	$	—	$	(6	)	$	—
Long-Term Debt	3,406		4,560		11			(82		)

Presented in the table below is the fair value of derivatives on a gross basis segregated between those derivatives that are designated as hedging instruments and those that are not designated as hedging instruments:



		June 30, 2019						December 31, 2018
		Fair Value of Derivative				U.S. Dollar Notional		Fair Value of Derivative				U.S. Dollar Notional
($ in millions)	Balance Sheet Caption	Asset		Liability		U.S. Dollar Notional		Asset		Liability		U.S. Dollar Notional
Derivatives Designated as Hedging Instruments
Interest rate swap contracts	Other Assets	$	14	$	—	$	2,150	$	—	$	—	$	—
Interest rate swap contracts	Accrued and other current liabilities	—		6		1,250		—		—		—
Interest rate swap contracts	Other Noncurrent Liabilities	—		2		1,250		—		81		4,650
Foreign exchange contracts	Other current assets	168		—		6,389		263		—		6,222
Foreign exchange contracts	Other Assets	49		—		2,790		75		—		2,655
Foreign exchange contracts	Accrued and other current liabilities	—		13		1,252		—		7		774
Foreign exchange contracts	Other Noncurrent Liabilities	—		—		—		—		1		89
		$	231	$	21	$	15,081	$	338	$	89	$	14,390
Derivatives Not Designated as Hedging Instruments
Foreign exchange contracts	Other current assets	$	70	$	—	$	6,665	$	116	$	—	$	5,430
Foreign exchange contracts	Accrued and other current liabilities	—		63		4,982		—		71		9,922
		$	70	$	63	$	11,647	$	116	$	71	$	15,352
		$	301	$	84	$	26,728	$	454	$	160	$	29,742

September 30, 2017 December 31, 2016
Fair Value of Derivative
U.S. Dollar
Notional
Fair Value of Derivative
U.S. Dollar
Notional
($ in millions) Balance Sheet Caption Asset Liability Asset Liability
Derivatives Designated as Hedging Instruments
Interest rate swap contracts Other assets $ 15
$ —
$ 2,700
$ 20
$ —
$ 2,700
Interest rate swap contracts Accrued and other current liabilities —
3
1,000
—
—
—
Interest rate swap contracts Other noncurrent liabilities —
23
2,500
—
29
3,500
Foreign exchange contracts Other current assets 83
—
4,385
616
—
6,063
Foreign exchange contracts Other assets 46
—
1,979
129
—
2,075
Foreign exchange contracts Accrued and other current liabilities —
88
1,574
—
1
48
Foreign exchange contracts Other noncurrent liabilities —
1
25
—
1
12
$ 144

$ 115

$ 14,163

$ 765

$ 31

$ 14,398
Derivatives Not Designated as Hedging Instruments
Foreign exchange contracts Other current assets $ 77
$ —
$ 3,927
$ 230
$ —
$ 8,210
Foreign exchange contracts Accrued and other current liabilities —
112
6,383
—
103
2,931
$ 77
$ 112
$ 10,310
$ 230
$ 103
$ 11,141
$ 221

$ 227

$ 24,473

$ 995

$ 134

$ 25,539

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



	June 30, 2019						December 31, 2018
($ in millions)	Asset			Liability			Asset			Liability
Gross amounts recognized in the consolidated balance sheet	$	301		$	84		$	454		$	160
Gross amounts subject to offset in master netting arrangements not offset in the consolidated balance sheet	(69		)	(69		)	(121		)	(121		)
Cash collateral received	(32		)	—			(107		)	—
Net amounts	$	200		$	15		$	226		$	39

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

September 30, 2017 December 31, 2016
($ in millions) Asset Liability Asset Liability
Gross amounts recognized in the consolidated balance sheet $ 221
$ 227
$ 995
$ 134
Gross amount subject to offset in master netting arrangements not offset in the consolidated
balance sheet
(137 ) (137 ) (131 ) (131 )
Cash collateral received (8 ) —
(529 ) —
Net amounts $ 76
$ 90
$ 335
$ 3

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 June 30,					Three Months Ended June 30,					Three Months Ended June 30,						Six Months Ended June 30,				Six Months Ended June 30,						Six Months Ended June 30,
($ in millions)	2019		2018			2019			2018		2019			2018			2019	2018			2019			2018			2019			2018
Financial Statement Line Items in which Effects of Fair Value or Cash Flow Hedges are Recorded	$	11,760	$	10,465		$	140		(48	)	$	(16	)	$	(62	)	22,575	$	20,502		$	327		$	(340	)	$	183		$	62
(Gain) loss on fair value hedging relationships
Interest rate swap contracts
Hedged items	—		—			55			(15	)	—			—			—	—			88			(77		)	—			—
Derivatives designated as hedging instruments	—		—			(45		)	22		—			—			—	—			(68		)	84			—			—
Impact of cash flow hedging relationships
Foreign exchange contracts
Amount of income (loss) recognized in OCI on derivatives	—		—			—			—		10			264			—	—			—			—			(2		)	84
Increase (decrease) in Sales as a result of AOCI reclassifications	75		(73		)	—			—		(75		)	73			119	(166		)	—			—			(119		)	166
Interest rate contracts
Amount of gain recognized in Other (income) expense, net on derivatives	—		—			(1		)	(1	)	—			—			—	—			(2		)	(2		)	—			—
Amount of loss recognized in OCI on derivatives	—		—			—			—		(1		)	(1		)	—	—			—			—			(5		)	(2		)

⁽¹⁾~~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 June 30,						Six Months Ended June 30,
($ in millions)	Income Statement Caption	2019			2018			2019		2018
Derivatives Not Designated as Hedging Instruments
Foreign exchange contracts⁽¹⁾	Other (income) expense, net	$	2		$	(195	)	$	120	$	(167	)
Foreign exchange contracts ⁽²⁾	Sales	(6		)	(14		)	4		(5		)

⁽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~~June 30, ~~2017~~2019, the Company estimates $~~164~~76 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:



	June 30, 2019									December 31, 2018
	Amortized Cost		Gross Unrealized					Fair Value		Amortized Cost		Gross Unrealized					Fair Value
($ in millions)	Amortized Cost		Gains		Losses			Fair Value		Amortized Cost		Gains		Losses			Fair Value
Corporate notes and bonds	$	2,666	$	36	$	(2	)	$	2,700	$	4,985	$	3	$	(68	)	$	4,920
Asset-backed securities	789		4		(1		)	792		1,285		1		(11		)	1,275
U.S. government and agency securities	575		10		—			585		895		2		(5		)	892
Foreign government bonds	41		—		—			41		167		—		(1		)	166
Mortgage-backed securities	5		—		—			5		8		—		—			8
Total debt securities	$	4,076	$	50	$	(3	)	$	4,123	$	7,340	$	6	$	(85	)	$	7,261
Publicly traded equity securities ⁽¹⁾								756									456
Total debt and publicly traded equity securities								$	4,879								$	7,717

September 30, 2017 December 31, 2016

Fair
Value

Amortized
Cost
Gross Unrealized
Fair
Value

Amortized
Cost
Gross Unrealized
($ in millions) Gains Losses Gains Losses
Corporate notes and bonds $ 10,259
$ 10,242
$ 31
$ (14 ) $ 10,577
$ 10,601
$ 15
$ (39 )
U.S. government and agency securities 1,924
1,934
—
(10 ) 2,232
2,244
1
(13 )
Asset-backed securities 1,473
1,473
2
(2 ) 1,376
1,380
1
(5 )
Mortgage-backed securities 704
708
1
(5 ) 796
801
1
(6 )
Commercial paper 695
695
—
—
4,330
4,330
—
—
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 )
⁽¹⁾Unrealized net (losses) gains recognized in Other (income) expense, net on equity securities still held at June 30, 2019 were $(39) million and $7 million, for the second quarter of 2019 and 2018, respectively, and were $75 million and $50 million for the first six months of 2019 and 2018, respectively.

At June 30, 2019, the Company also had $465 million of equity investments without readily determinable fair values included in Other Assets. During the first six months of 2019, the Company recognized unrealized gains of $4 million on certain of these equity investments recorded in Other (income) expense, net based on favorable observable price changes from transactions involving similar investments of the same investee. In addition, during the first six months of 2019, the Company recognized unrealized losses of $10 million in Other (income) expense, net related to certain of these investments based on unfavorable observable price changes. Since January 1, 2018, cumulative unrealized gains and cumulative unrealized losses based on observable prices changes for investments in equity investments without readily determinable fair values were $172 million and $21 million, respectively.

Available-for-sale debt securities included in Short-term investments totaled ~~$3.0 billion~~$398 million at ~~September~~June 30, ~~2017~~.2019. Of the remaining debt securities, ~~$11.2~~$3.4 billion mature within five years. At ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, there were no debt securities pledged as collateral.

Fair Value Measurements

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

~~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								June 30, 2019								December 31, 2018
Assets
Investments
Corporate notes and bonds	$	—	$	10,110	$	—	$	10,110	$	—	$	10,389	$	—	$	10,389	$	—	$	2,660	$	—	$	2,660	$	—	$	4,835	$	—	$	4,835
Asset-backed securities⁽¹⁾																	—		788		—		788		—		1,253		—		1,253
U.S. government and agency securities	68		1,622		—		1,690		29		1,890		—		1,919		—		508		—		508		—		731		—		731
Asset-backed securities⁽¹⁾	—		1,395		—		1,395		—		1,257		—		1,257
Commercial paper	—		695		—		695		—		4,330		—		4,330
Foreign government bonds	—		639		—		639		—		518		—		518		—		41		—		41		—		166		—		166
Mortgage-backed securities ⁽¹⁾	—		603		—		603		—		628		—		628
Equity securities	368		—		—		368		201		—		—		201
Publicly traded equity securities																	228		—		—		228		147		—		—		147
	436		15,064		—		15,500		230		19,012		—		19,242		228		3,997		—		4,225		147		6,985		—		7,132
Other assets ⁽²⁾
U.S. government and agency securities	—		234		—		234		—		313		—		313		58		19		—		77		55		106		—		161
Corporate notes and bonds	—		149		—		149		—		188		—		188		—		40		—		40		—		85		—		85
Mortgage-backed securities ⁽¹⁾	—		101		—		101		—		168		—		168
Mortgage-backed securities																	—		5		—		5		—		8		—		8
Asset-backed securities⁽¹⁾	—		78		—		78		—		119		—		119		—		4		—		4		—		22		—		22
Foreign government bonds	—		1		—		1		—		1		—		1
Equity securities	171		—		—		171		148		—		—		148
Publicly traded equity securities																	528		—		—		528		309		—		—		309
	171		563		—		734		148		789		—		937		586		68		—		654		364		221		—		585
Derivative assets ⁽³⁾
Purchased currency options	—		119		—		119		—		644		—		644		—		158		—		158		—		213		—		213
Forward exchange contracts	—		87		—		87		—		331		—		331		—		129		—		129		—		241		—		241
Interest rate swaps	—		15		—		15		—		20		—		20		—		14		—		14		—		—		—		—
	—		221		—		221		—		995		—		995		—		301		—		301		—		454		—		454
Total assets	$	607	$	15,848	$	—	$	16,455	$	378	$	20,796	$	—	$	21,174	$	814	$	4,366	$	—	$	5,180	$	511	$	7,660	$	—	$	8,171
Liabilities
Other liabilities
Contingent consideration	$	—	$	—	$	945	$	945	$	—	$	—	$	891	$	891	$	—	$	—	$	753	$	753	$	—	$	—	$	788	$	788
Derivative liabilities ⁽³⁾
Forward exchange contracts	—		201		—		201		—		93		—		93		—		73		—		73		—		74		—		74
Interest rate swaps	—		26		—		26		—		29		—		29		—		8		—		8		—		81		—		81
Written currency options	—		—		—		—		—		12		—		12		—		3		—		3		—		5		—		5
	—		227		—		227		—		134		—		134		—		84		—		84		—		160		—		160
Total liabilities	$	—	$	227	$	945	$	1,172	$	—	$	134	$	891	$	1,025	$	—	$	84	$	753	$	837	$	—	$	160	$	788	$	948

⁽¹⁾

Primarily all of the asset-backed securities are highly-rated (Standard & Poor’s rating of AAA and Moody’s Investors Service rating of Aaa), secured primarily by auto loan, credit card and student loan receivables, with weighted-average lives of primarily 5 years or less. ~~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~~six months of ~~2017.~~2019. As of ~~September~~June 30, ~~2017~~2019, Cash and cash equivalents of $~~7.9~~6.7 billion included ~~$7.1~~$5.9 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,						Six Months Ended June 30,
($ in millions)	2017			2016			2019			2018
Fair value January 1	$	891		$	590		$	788		$	935
Changes in fair value⁽¹⁾	151			29
Changes in estimated fair value⁽¹⁾							50			122
Additions	3			300			—			8
Payments	(100		)	(25		)	(85		)	(235		)
Fair value September 30 ⁽²⁾	$	945		$	894
Fair value June 30 ⁽²⁾							$	753		$	830

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

⁽²⁾ ~~Includes $234~~ Balance at June 30, 2019 includes $114 million recorded as a current liability for amounts expected to be paid within the next 12 months.

~~The additions to contingent consideration reflected in the table above in the first nine months of 2016 relate to the acquisitions of Afferent and IOmet (see Note 2).~~ The payments of contingent consideration in ~~2017 relate~~both periods include payments related to liabilities recorded in connection with the 2016 termination of the Sanofi-Pasteur MSD joint venture. The payments of contingent consideration in the first six months of 2018 also include $175 million related to the achievement of a clinical development milestone for MK-7264 (gefapixant), a program obtained in connection with the acquisition of ~~IOmet (see Note 2) and in 2016 relate to the first commercial sale of~~ ~~Zerbaxa~~ ~~in the European Union.~~Afferent Pharmaceuticals.

Other Fair Value Measurements

Some of the Company’s financial instruments, such as cash and cash equivalents, receivables and payables, are reflected in the balance sheet at carrying value, which approximates fair value due to their short-term nature.

The estimated fair value of loans payable and long-term debt (including current portion) at ~~September~~June 30, ~~2017~~2019, was $~~28.3~~28.6 billion compared with a carrying value of $~~27.0~~26.6 billion and at December 31, ~~2016~~2018, was $~~25.7~~25.6 billion compared with a carrying value of $~~24.8~~25.1 billion. Fair value was estimated using recent observable market prices and would be considered Level 2 in the fair value hierarchy.

Concentrations of Credit Risk

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

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

Derivative financial instruments are executed under International Swaps and Derivatives Association master agreements. The master agreements with several of the Company’s financial institution counterparties also include credit support annexes. These annexes contain provisions that require collateral to be exchanged depending on the value of the derivative assets and liabilities, the Company’s credit rating, and the credit rating of the counterparty. ~~As of~~ ~~September 30, 2017~~ ~~and~~ ~~December 31, 2016~~,Cash received by the Company ~~had received cash collateral of~~ ~~$8 million~~ ~~and~~ ~~$529 million, respectively,~~ from various counterparties was $32 million and ~~the~~$107 million at June 30, 2019 and December 31, 2018, respectively. The obligation to return such collateral is recorded in Accrued and other current liabilities. ~~The Company had not advanced any~~No cash collateral was advanced by the Company to counterparties as of ~~September~~June 30, ~~2017~~2019 or December 31, ~~2016~~.2018.

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


5.6.	Inventories

Inventories consisted of:



($ in millions)	June 30, 2019			December 31, 2018
Finished goods	$	1,750		$	1,658
Raw materials and work in process	5,388			5,004
Supplies	202			194
Total (approximates current cost)	7,340			6,856
(Decrease) increase to LIFO costs	(29		)	1
	$	7,311		$	6,857
Recognized as:
Inventories	$	5,847		$	5,440
Other assets	1,464			1,417

($ in millions) September 30, 2017 December 31, 2016
Finished goods $ 1,364
$ 1,304
Raw materials and work in process 4,588
4,222
Supplies 198
155
Total (approximates current cost) 6,150
5,681
Increase to LIFO costs 142
302
$ 6,292
$ 5,983
Recognized as:
Inventories $ 5,263
$ 4,866
Other assets 1,029
1,117

Amounts recognized as Other assets are comprised almost entirely of raw materials and work in process inventories. At ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018, these amounts included ~~$957 million~~$1.3 billion and ~~$1.0~~$1.4 billion, respectively, of inventories not expected to be sold within one year. In addition, these amounts included ~~$72~~$118 million and ~~$80~~$7 million at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018, respectively, of inventories produced in preparation for product launches.


6.	~~Other Intangibles~~

In connection with acquisitions, the Company measures the fair value of marketed products and research and development pipeline programs and capitalizes these amounts. See Note 2 for information on intangible assets acquired as a result of business acquisitions in the first nine months of 2017 and 2016.

~~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 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 intangible asset related to uprifosbuvir.

During the first nine months of 2016, the Company recorded $225 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.

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

~~The Company may recognize additional non-cash impairment charges in the future related to other marketed products or pipeline programs and such charges could be material.~~


7.	Loans Payable, Long-Term Debt and Leases

Long-Term Debt

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

Leases

As discussed in Note 1, on January 1, 2019, Merck adopted new guidance for the accounting and reporting of leases. The Company has operating leases primarily for manufacturing facilities, research and development facilities, corporate offices, employee housing, vehicles and certain equipment. As permitted under the transition guidance in ASC 842, the Company elected a package of practical expedients which, among other provisions, allowed the Company to carry forward historical lease classifications. The Company determines if an arrangement is a lease at inception. When evaluating contracts for embedded leases, the Company exercises judgment to determine if there is an explicit or implicit identified asset in the contract and if Merck controls the use of that asset. Embedded leases, primarily associated with contract manufacturing organizations, are immaterial.

Under ASC 842 transition guidance, Merck elected the hindsight practical expedient to determine the lease term for existing leases, which permits companies to consider available information prior to the effective date of the new guidance as to the actual or likely exercise of options to extend or terminate the lease. The lease term includes options to extend or terminate the lease when it is reasonably certain that Merck will exercise that option. Real estate leases for facilities have an average remaining lease term of eight years, which include options to extend the leases for up to four years where applicable. Vehicle leases are generally in effect for four years. The Company has made an accounting policy election not to record short-term leases (leases with an initial term of 12 months or less) on the balance sheet; however, Merck currently has no short-term leases.

Lease expense for operating lease payments is recognized on a straight-line basis over the term of the lease. Operating lease assets and liabilities are recognized based on the present value of lease payments over the lease term. Since most of the Company’s leases do not have a readily determinable implicit discount rate, the Company uses its incremental borrowing rate to calculate the present value of lease payments. As a practical expedient, the Company has made an accounting policy election not to separate lease components (e.g. payments for rent, real estate taxes and insurance costs) from non-lease components (e.g. common-area maintenance costs) in the event that the agreement contains both. Merck includes both the lease and non-lease components for purposes of calculating the right-of-use asset and related lease liability (if the non-lease components are fixed). For vehicle leases and employee housing, the Company applies a portfolio approach to effectively account for the operating lease assets and liabilities.

Certain of the Company’s lease agreements contain variable lease payments that are adjusted periodically for inflation or for actual operating expense true-ups compared with estimated amounts; however, these amounts are immaterial. Sublease income and activity related to sale and leaseback transactions are immaterial. Merck’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

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

Operating lease cost was $82 million and $165 million for the second quarter and first six months of 2019, respectively. Cash paid for amounts included in the measurement of operating lease liabilities was $65 million and $138 million for the second quarter and first six months of 2019, respectively.

Supplemental balance sheet information related to operating leases is as follows:



($ in millions)	June 30, 2019
Assets
Other Assets ⁽¹⁾	$	1,063
Liabilities
Accrued and other current liabilities	$	241
Other Noncurrent Liabilities	752
	$	993

Weighted-average remaining lease term (years)	7.5
Weighted-average discount rate	3.4		%

⁽¹⁾ Includes prepaid leases that have no related lease liability.

Maturities of operating leases liabilities are as follows:



($ in millions)	June 30, 2019
2019 (excluding the six months ended June 30, 2019)	$	138
2020	232
2021	172
2022	146
2023	98
Thereafter	339
Total lease payments	1,125
Less: imputed interest	(132		)
	$	993

As of June 30, 2019, the Company had entered into additional real estate operating leases that had not yet commenced. The obligations associated with these leases totaled $127 million, of which $72 million related to a lease that commenced in July 2019 and has a lease term of 10 years.

As of December 31, 2018, prior to the adoption of ASC 842, the minimum aggregate rental commitments under noncancellable leases were as follows: 2019, $188 million; 2020, $198 million; 2021, $150 million; 2022, $134 million; 2023, $84 million and thereafter, $243 million.


8.	Contingencies

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

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

The Company records accruals for contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. These accruals are adjusted periodically as assessments change or additional information becomes available. For product liability claims, a portion of the overall accrual is actuarially determined and considers such factors as past experience, number of claims reported and estimates of claims incurred but not yet reported. Individually significant contingent

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

losses are accrued when probable and reasonably estimable. Legal defense costs expected to be incurred in connection with a loss contingency are accrued when probable and reasonably estimable.

The Company’s decision to obtain insurance coverage is dependent on market conditions, including cost and availability, existing at the time such decisions are made. The Company has evaluated its risks and has determined that the cost of obtaining product liability insurance outweighs the likely benefits of the coverage that is available and, as such, has no insurance for most product liabilities effective August 1, 2004.

Product Liability Litigation

Fosamax

As previously disclosed, Merck is a defendant in product liability lawsuits in the United States involving Fosamax (Fosamax Litigation). As of ~~September~~June 30, ~~2017~~2019, approximately ~~4,125~~3,900 cases ~~are~~have been filed and either are pending or conditionally dismissed (as noted below) against Merck in either federal or state court. ~~In approximately~~ 15Plaintiffs in the vast majority 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~~ ~~of these actions~~cases 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, Merck reached an agreement in principle with the Plaintiffs’ Steering Committee (PSC) in the~~ ~~Fosamax~~ ~~ONJ MDL to resolve pending ONJ cases not on appeal 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 level of $27.3 million since the participation level was approximately 95%. Merck has fully funded the ONJ Master Settlement Agreement and 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.

~~Discovery is currently ongoing 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.~~

~~Cases Alleging Femur Fractures~~

In March 2011, Merck submitted a Motion to Transfer to the ~~JPML~~Judicial Panel on Multidistrict Litigation (JPML) seeking to have all federal cases alleging Femur Fractures consolidated into one multidistrict litigation for coordinated pre-trial proceedings. ~~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,~~2018, and an oral argument before the ~~Femur Fracture MDL court granted Merck summary judgment in~~Supreme Court was held on January 7, 2019. On May 20, 2019, the ~~Gaynor v. Merck~~ ~~case~~Supreme Court issued its opinion and ~~found~~decided 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 the Femur Fracture MDL court’s findings with respect to 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~~had incorrectly concluded that the ~~Femur Fracture MDL court enter~~issue of preemption should be resolved by a ~~further order requiring all plaintiffs~~jury, and accordingly vacated the judgment of the Third Circuit and remanded the proceedings back to the Third Circuit to address the issue in a manner consistent with the ~~Femur Fracture MDL who claim that~~Supreme Court’s opinion. The Third Circuit has requested, by August 6, 2019, ten page letters from each side addressing two specific issues central to the ~~2011~~ ~~Fosamax~~ ~~label is inadequate and the proximate cause~~appeal.

Accordingly, as 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.~~

~~As of September~~June 30, ~~2017, approximately 520~~2019, 11 cases were actively pending in the Femur Fracture MDL, ~~following the reinstatement of the~~and approximately 1,060 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~~June 30, ~~2017~~2019, approximately ~~2,795~~2,555 cases alleging Femur Fractures have been filed in New Jersey state court and are pending before Judge James Hyland in Middlesex County. The parties selected an initial group of 30cases 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.

As of ~~September~~June 30, ~~2017~~2019, 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 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~~presently stayed in the Femur Fracture MDL and in the state ~~courts where Femur Fracture~~court cases ~~are pending and the Company~~in California. Merck intends to defend against these lawsuits.

Januvia/Janumet

As previously disclosed, Merck is a defendant in product liability lawsuits in the United States involving Januvia and/or Janumet. As of ~~September~~June 30, ~~2017~~2019, Merck is aware of approximately ~~1,225~~1,350 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~~

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

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 - in~~Court-in separate ~~opinions - granted~~opinions-granted summary judgment to defendants on grounds of federal preemption. Of

Plaintiffs appealed in both forums. In November 2017, the ~~approximately 1,225 product user claims, these rulings resulted~~U.S. Court of Appeals for the Ninth Circuit vacated the judgment and remanded for further discovery, which is ongoing. In November 2018, the California state appellate court reversed and remanded on similar grounds. In March 2019, the parties in ~~the dismissal of approximately 1,175 product user claims.~~

~~Plaintiffs are appealing~~ the MDL and the California ~~State Court~~coordinated proceeding agreed to coordinate and adopt a schedule for completing discovery on general causation and preemption ~~rulings.~~issues and for renewing summary judgment and Daubert motions. Under the stipulated case management schedule, the filing deadline for Daubert and summary judgment motions will take place in May 2020.

As of ~~September~~June 30, ~~2017,~~2019, seven 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~~appealed, and the Illinois appellate court affirmed in December 2018. Merck filed a petition for leave to appeal ~~that order on an interlocutory basis and was granted a stay of proceedings~~to the Illinois Supreme Court in February 2019. In April 2019, the ~~trial court. As a result, trials for certain~~Illinois Supreme Court stayed consideration of the ~~product users~~pending petition to appeal until the United States Supreme Court issued its opinion in Merck Sharp & Dohme Corp. v. Albrecht, No. 17-290. Merck filed the opinion in Albrecht with the Illinois ~~have been delayed.~~Supreme Court in June 2019. The petition for leave to appeal remains pending.

In addition to the claims noted above, the Company has agreed to toll the statute of limitations for approximately 50 additional claims. The Company intends to continue defending against these lawsuits.

~~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 filed in various federal courts and in state court in New Jersey. The federal lawsuits have been 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 consolidated before Judge Hyland in Middlesex County. In addition, there is one matter pending in state court in California, one matter pending in state court in Ohio, and one matter on appeal in the Massachusetts Supreme Judicial Court. The Company intends to defend against these lawsuits.

Governmental Proceedings

In ~~July 2017,~~the fall of 2018, the Company ~~learned~~received a records subpoena from the U.S. Attorney’s Office for the District of Vermont (VT USAO) pursuant to Section 248 of the Health Insurance Portability and Accountability Act of 1996 (HIPAA) relating to an investigation of potential health care offenses. The subpoena sought information relating to any actual or potential business relationship or arrangement Merck has had with Practice Fusion, Inc. (PFI), a cloud-based, electronic health records (EHR) company that was acquired by Allscripts in January 2018. The Company cooperated with the government and responded to that subpoena. Subsequently, on May 21, 2019, Merck received a second records subpoena from the VT USAO that broadened the government’s information request by seeking information relating to Merck’s relationship with any EHR company. Shortly thereafter, the VT USAO served a Civil Investigation Demand (CID) upon Merck similarly seeking information on the Company’s relationships with EHR vendors. The CID explains that the ~~Prosecution Office of Milan, Italy~~government is ~~investigating interactions between~~conducting a False Claims Act investigation concerning whether Merck and/or PFI submitted claims to federal healthcare programs that violate the Company’s Italian subsidiary, certain employees of the subsidiary 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 CompanyFederal Anti-Kickback Statute. Merck is cooperating with the government’s investigation.

~~From~~On April 15, 2019, Merck received a set of investigative interrogatories from the California Attorney General’s Office pursuant to its investigation of conduct and agreements that allegedly affected or delayed competition to Lantus in the insulin market. The interrogatories seek information concerning Merck’s development of an insulin glargine product, and its subsequent termination, as well as Merck’s patent litigation against Sanofi S.A. concerning Lantus and the resolution of that litigation. Merck is cooperating with the California Attorney General’s investigation.

As previously disclosed, the Company’s subsidiaries in China have, in the past, received and may continue to receive inquiries regarding their operations from various Chinese governmental agencies. Some of these inquiries may be related to matters involving other multinational pharmaceutical companies, as well as Chinese entities doing business with such companies. The Company’s policy is to cooperate with these authorities and to provide responses as appropriate.

As previously disclosed, from time to time, the Company receives inquiries and is the subject of preliminary investigation activities from competition and other governmental authorities in markets outside the United States. These authorities may include regulators, administrative authorities, and law enforcement and other similar officials, and these preliminary investigation activities may include site visits, formal or informal requests or demands for documents or materials, inquiries or interviews and similar matters. Certain of these preliminary inquiries or activities may lead to the commencement of formal proceedings. Should those proceedings be determined adversely to the Company, monetary fines and/or remedial undertakings may be required.

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

Commercial and Other Litigation

~~K-DUR~~ Zetia Antitrust Litigation

~~In June 1997~~As previously disclosed, Merck, MSD, Schering Corporation and ~~January 1998, Schering-Plough Corporation (Schering-Plough) settled patent litigation with Upsher-Smith, Inc. (Upsher-Smith)~~MSP Singapore Company LLC (collectively, the Merck Defendants) are defendants in putative class action 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 hadopt-out lawsuits filed ~~Abbreviated New Drug Applications (ANDAs). Putative class and non-class action suits were then filed~~in 2018 on behalf of direct and indirect purchasers of ~~K‑DUR against Schering-Plough, Upsher-Smith~~Zetia alleging violations of federal and ~~Lederle~~state antitrust laws, as well as other state statutory and ~~were~~common law causes of action. The cases have been consolidated for pretrial purposes in a federal multidistrict litigation before Judge Rebecca Beach Smith in the ~~U.S. District Court for the~~Eastern District of ~~New Jersey.~~Virginia. In ~~February 2016,~~December 2018, the court denied the ~~Company’s motion for summary judgment relating~~Merck Defendants’ motions to ~~all of~~dismiss or stay the direct ~~purchasers’ claims concerning~~purchaser putative class actions pending bilateral arbitration. On February 6, 2019, the ~~settlement with Upsher-Smith~~magistrate judge issued a report and ~~granted~~recommendation recommending that the ~~Company’s motion for summary judgment relating~~district judge grant in part and deny in part defendants’ motions to ~~all of~~dismiss on non-arbitration issues. On February 20, 2019, defendants and retailer opt-out plaintiffs filed objections to the ~~direct purchasers’ claims concerning~~report and recommendation. The parties await a decision from the ~~settlement with Lederle.~~district judge. Trial is currently scheduled to begin on September 30, 2020.

Merck KGaA Litigation

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~~January 2016, to ~~the class. Merck will contribute approximately $80 million~~protect its long-established brand rights in the ~~aggregate towards~~United States, the ~~overall settlement. On April 5, 2017,~~Company filed a lawsuit against Merck KGaA, Darmstadt, Germany (KGaA), historically operating as the ~~claims~~EMD Group in the United States, alleging it improperly uses the name “Merck” in the United States. KGaA has filed suit against the Company in France, the UK, Germany, Switzerland, Mexico, India, Australia, Singapore, Hong Kong, and China alleging, among other things, unfair competition, trademark infringement and/or corporate name infringement. In the UK, Australia, Singapore, Hong Kong, and India, KGaA also alleges breach of the ~~opt-outs were dismissed~~parties’ coexistence agreement. The litigation is ongoing in the United States with ~~prejudice pursuant to a written settlement agreement with those parties. On May 15, 2017, Merck~~no trial date set, 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 claimsalso ongoing in numerous jurisdictions outside of the ~~class with prejudice.~~

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

United States; the Company is defending those suits in each jurisdiction.

Patent Litigation

From time to time, generic manufacturers of pharmaceutical products file ~~ANDAs~~abbreviated New Drug Applications (NDAs) with the U.S. Food and Drug Administration (FDA) seeking to market generic forms of the Company’s products prior to the expiration of relevant patents owned by the Company. To protect its patent rights, the Company may file patent infringement lawsuits against such generic companies. ~~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 —The patents protecting Inegy in Europe expired; supplemental protection certificates (SPCs) in many European countries expired in April 2019. The Company filed actions for patent infringement seeking damages against those companies that launched generic products before April 2019.

Januvia, Janumet, Janumet XR— In ~~July 2014,~~February 2019, Par Pharmaceutical, Inc. (Par Pharmaceutical) filed suit against the Company in the U.S. District Court for the District of New Jersey, seeking a declaratory judgment of invalidity of a patent ~~infringement lawsuit was filed~~owned by the Company covering certain salt and polymorphic forms of sitagliptin that expires in ~~the United States against Hospira, Inc. (Hospira) in respect of Hospira’s application to the FDA seeking pre-patent expiry approval to market a generic version of~~ ~~Invanz. The trial in this matter was held in April 2016 and, in October 2016, the district court ruled that the patent is valid and infringed.~~2026. 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.~~

~~Noxafil~~ —~~In August 2015,~~response, 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 this decision. 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 2017, the parties reached a settlement whereby Roxane can launch its generic version upon 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. 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, the Company filed a lawsuit against a subsidiary of Allergan plc 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~~. 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, the Company filed a lawsuit against Teva Pharma 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~~.

As previously disclosed, the Company and BMS and Ono were engaged in worldwide litigation, including in the United States, over the validity and infringement of the ’878 patent, the ’336 patent and their equivalents.

~~In January 2017, the Company announced that it had entered into a settlement and license agreement with BMS and Ono resolving the worldwide~~ patent infringement ~~litigation related to the use of an anti-PD-1 antibody for the treatment of cancer, such as~~ ~~Keytruda.~~ Under the settlement and license agreement, the Company made a one-time payment of $625 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 ~~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~~Delaware against Par Pharmaceutical and additional companies that ~~two Company patents were invalid~~also indicated an intent to market generic versions of Januvia, Janumet, and ~~not infringed~~Janumet XR following expiration of key patent protection in 2022, but prior to the expiration of the later-granted patent owned by the ~~sale~~Company covering certain salt and polymorphic forms of ~~their two sofosbuvir containing products, Sovaldi~~sitagliptin that expires in 2026, and ~~Harvoni.~~a later granted patent owned by the Company covering the Janumet formulation which expires in 2028. Par Pharmaceutical dismissed its case in the U.S. District Court for the District of New Jersey against the Company and will litigate the action in the U.S. District Court for the District of Delaware. The Company filed a ~~counterclaim that~~patent infringement lawsuit against Mylan Pharmaceuticals Inc. and Mylan Inc. (Mylan) in the ~~sale~~Northern District 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.West Virginia. The Company has ~~appealed~~a pending, unopposed motion before the ~~court’s decision. Gilead has also asked~~Judicial Panel of Multidistrict Litigation to transfer the ~~court~~Company’s lawsuit against Mylan 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 of legal fees, of damages or royalties, if any, that it receives to Ionis Pharmaceuticals, Inc.

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 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 verdictU.S. District Court for the ~~Company, awarding damages~~District of ~~$2.54 billion.~~Delaware for coordinated and consolidated pretrial proceedings with the other cases pending in that district. The ~~Company submitted post-trial motions, including~~U.S. District Court for the District of Delaware has scheduled the lawsuits for a single 3-day trial on ~~the~~invalidity issues ~~of enhanced damages and future royalties. Gilead submitted post-trial motions for judgment as a matter of law. A hearing~~beginning October 4, 2021. The Court will schedule separate 1-day trials on the motions was held in September 2017. Also, in September 2017, the court denied the Company’s motion on enhanced damages, granted its motion on prejudgment interest and deferred its motion on future royalties. The Company is currently awaiting the court’s decision on Gilead’s post-trial motions for judgment as a matter of law. In Australia, the Company was initially unsuccessful 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, the patent was held invalid and no further appeal was filed. 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.infringement issues if necessary.

Other Litigation

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

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

Legal Defense Reserves

Legal defense costs expected to be incurred in connection with a loss contingency are accrued when probable and reasonably estimable. Some of the significant factors considered in the review of these legal defense reserves are as follows: the actual costs incurred by the Company; the development of the Company’s legal defense strategy and structure in light of the scope of its litigation; the number of cases being brought against the Company; the costs and outcomes of completed trials and the most current information regarding anticipated timing, progression, and related costs of pre-trial activities and trials in the associated litigation. The amount of legal defense reserves as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 of approximately $~~170~~260 million and $~~185~~245 million, respectively, represents the Company’s best estimate of the minimum amount of defense costs to be incurred in connection with its outstanding litigation; however, events such as additional trials and other events that could arise in the course of its litigation could affect the ultimate amount of legal defense costs to be incurred by the Company. The Company will continue to monitor its legal defense costs and review the adequacy of the associated reserves and may determine to increase the reserves at any time in the future if, based upon the factors set forth, it believes it would be appropriate to do so.

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


8.	~~Equity~~

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
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
Net income attributable to Merck & Co., Inc. —
—
—
3,440
—
—
—
—
3,440
Other comprehensive income, net of taxes —
—
—
—
281
—
—
—
281
Cash dividends declared on common stock —
—
—
(3,872 ) —
—
—
—
(3,872 )
Treasury stock shares purchased —
—
—
—
—
36
(2,312 ) —
(2,312 )
Share-based compensation plans and other —
—
(116 ) —
—
(13 ) 739
—
623
Acquisition of Vallée —
—
—
—
—
—
—
25
25
Net income attributable to noncontrolling interests —
—
—
—
—
—
—
16
16
Distributions attributable to noncontrolling interests —
—
—
—
—
—
—
(10 ) (10 )
Balance at September 30, 2017 3,577
1,788
39,823
43,701
(4,945 ) 851
(42,119 ) 251
38,499


9.	Equity



	Three Months Ended June 30,
	Common Stock			Other Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Treasury Stock					Non- Controlling Interests			Total
($ and shares in millions except per share amounts)	Shares	Par Value		Other Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Shares		Cost			Non- Controlling Interests			Total
Balance at April 1, 2018	3,577	$	1,788	$	39,874		$	41,107		$	(5,060	)	885		$	(44,041	)	$	233		$	33,901
Net income attributable to Merck & Co., Inc.	—	—		—			1,707			—			—		—			—			1,707
Other comprehensive loss, net of taxes	—	—		—			—			(62		)	—		—			—			(62		)
Cash dividends declared on common stock ($0.48 per share)	—	—		—			(1,291		)	—			—		—			—			(1,291		)
Treasury stock shares purchased	—	—		—			—			—			27		(1,596		)	—			(1,596		)
Share-based compensation plans and other	—	—		(133		)	—			—			(5	)	236			—			103
Net income attributable to noncontrolling interests	—	—		—			—			—			—		—			9			9
Distributions attributable to noncontrolling interests	—	—		—			—			—			—		—			(5		)	(5		)
Balance at June 30, 2018	3,577	$	1,788	$	39,741		$	41,523		$	(5,122	)	907		$	(45,401	)	$	237		$	32,766
Balance at April 1, 2019	3,577	$	1,788	$	38,768		$	44,065		$	(5,346	)	994		$	(51,736	)	$	131		$	27,670
Net income attributable to Merck & Co., Inc.	—	—		—			2,670			—			—		—			—			2,670
Other comprehensive loss, net of taxes	—	—		—			—			(16		)	—		—			—			(16		)
Cash dividends declared on common stock ($0.55 per share)	—	—		—			(1,440		)	—			—		—			—			(1,440		)
Treasury stock shares purchased	—	—		1,000			—			—			24		(2,235		)	—			(1,235		)
Share-based compensation plans and other	—	—		(284		)	—			—			(8	)	401			—			117
Net loss attributable to noncontrolling interests	—	—		—			—			—			—		—			(26		)	(26		)
Other changes in noncontrolling ownership interests	—	—		—			—			—			—		—			(3		)	(3		)
Balance at June 30, 2019	3,577	$	1,788	$	39,484		$	45,295		$	(5,362	)	1,010		$	(53,570	)	$	102		$	27,737

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



	Six Months Ended June 30,
	Common Stock			Other Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Treasury Stock					Non- Controlling Interests			Total
($ and shares in millions except per share amounts)	Shares	Par Value		Other Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Shares		Cost			Non- Controlling Interests			Total
Balance at January 1, 2018	3,577	$	1,788	$	39,902		$	41,350		$	(4,910	)	880		$	(43,794	)	$	233		$	34,569
Net income attributable to Merck & Co., Inc.	—	—		—			2,443			—			—		—			—			2,443
Adoption of new accounting standards	—	—		—			322			(274		)	—		—			—			48
Other comprehensive income, net of taxes	—	—		—			—			62			—		—			—			62
Cash dividends declared on common stock ($0.96 per share)	—	—		—			(2,592		)	—			—		—			—			(2,592		)
Treasury stock shares purchased	—	—		—			—			—			37		(2,162		)	—			(2,162		)
Share-based compensation plans and other	—	—		(161		)	—			—			(10	)	555			—			394
Net income attributable to noncontrolling interests	—	—		—			—			—			—		—			14			14
Distributions attributable to noncontrolling interests	—	—		—			—			—			—		—			(10		)	(10		)
Balance at June 30, 2018	3,577	$	1,788	$	39,741		$	41,523		$	(5,122	)	907		$	(45,401	)	$	237		$	32,766
Balance at January 1, 2019	3,577	$	1,788	$	38,808		$	42,579		$	(5,545	)	985		$	(50,929	)	$	181		$	26,882
Net income attributable to Merck & Co., Inc.	—	—		—			5,585			—			—		—			—			5,585
Other comprehensive income, net of taxes	—	—		—			—			183			—		—			—			183
Cash dividends declared on common stock ($1.10 per share)	—	—		—			(2,869		)	—			—		—			—			(2,869		)
Treasury stock shares purchased	—	—		1,000			—			—			38		(3,325		)	—			(2,325		)
Share-based compensation plans and other	—	—		(324		)	—			—			(13	)	684			—			360
Net loss attributable to noncontrolling interests	—	—		—			—			—			—		—			(79		)	(79		)
Balance at June 30, 2019	3,577	$	1,788	$	39,484		$	45,295		$	(5,362	)	1,010		$	(53,570	)	$	102		$	27,737

On October 25, 2018, the Company entered into accelerated share repurchase (ASR) agreements with two third-party financial institutions (Dealers). Under the ASR agreements, Merck agreed to purchase $5 billion of Merck’s common stock, in total, with an initial delivery of 56.7 million shares of Merck’s common stock, based on the then-current market price, made by the Dealers to Merck, and payments of $5 billion made by Merck to the Dealers on October 29, 2018, which were funded with existing cash and investments, as well as short-term borrowings. The payments to the Dealers were recorded as reductions to shareholders’ equity, consisting of a $4 billion increase in treasury stock, which reflected the value of the initial 56.7 million shares received on October 29, 2018, and a $1 billion decrease in other-paid-in capital, which reflected the value of the stock held back by the Dealers pending final settlement. Upon settlement of the ASR agreements in April 2019, Merck received an additional 7.7 million shares as determined by the average daily volume weighted-average price of Merck’s common stock during the term of the ASR program, less a negotiated discount, bringing the total shares received by Merck under this program to 64.4 million. The receipt of the additional shares was reflected as an increase to treasury stock and an increase to other-paid-in capital in the second quarter of 2019.


10.	Share-Based Compensation Plans

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

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



	Three Months Ended June 30,						Six Months Ended June 30,
($ in millions)	2019			2018			2019			2018
Pretax share-based compensation expense	$	111		$	90		$	204		$	170
Income tax benefit	(15		)	(13		)	(28		)	(28		)
Total share-based compensation expense, net of taxes	$	96		$	77		$	176		$	142

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

During the first ~~nine~~six months of ~~2017 and 2016,~~2019, the Company granted 56 million RSUs with a weighted-average grant date fair value of $~~63.96~~76.31 per RSU and 6during the first sixmonths of 2018 granted 7 million RSUs with a weighted-average grant date fair value of $~~54.61~~58.15 per ~~RSU, respectively.~~RSU. During the first ~~nine~~six months of ~~2017 and 2016,~~2019, the Company granted ~~4 million~~ ~~stock options~~609 thousand PSUs with a weighted-average ~~exercise price~~

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

grant date fair value of ~~$63.96~~$90.50 per ~~option~~PSU and 6during the first sixmonths of 2018 granted 855 thousand PSUs with a weighted-average grant date fair value of $56.70 per PSU.

During the first six months of 2019, the Company granted 3 million stock options with a weighted-average exercise price of ~~$54.62~~$80.00 per option ~~respectively.~~and during the first six months of 2018 granted 3 million stock options with a weighted-average exercise price of $57.72 per option. The weighted-average fair value of options granted ~~for~~during the first ~~nine~~six months of ~~2017~~2019 and ~~2016~~2018 was ~~$7.04~~$10.63 and ~~$5.89~~$8.19 per option, respectively, and was determined using the following assumptions:



	Six Months Ended June 30,
	2019		2018
Expected dividend yield	3.2	%	3.4	%
Risk-free interest rate	2.4	%	2.8	%
Expected volatility	18.7	%	19.1	%
Expected life (years)	5.9		6.1

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)~~

At ~~September~~June 30, ~~2017~~2019, there was $~~549~~800 million of total pretax unrecognized compensation expense related to nonvested stock options, RSU and PSU awards which will be recognized over a weighted-average period of ~~2.1~~2.2 years. For segment reporting, share-based compensation costs are unallocated expenses.


~~10.~~11.	Pension and Other Postretirement Benefit Plans

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


	Three Months Ended September 30,												Nine Months Ended September 30,												Three Months Ended June 30,												Six Months Ended June 30,
	2017						2016						2017						2016						2019						2018						2019						2018
($ 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		$	74		$	60		$	85		$	58		$	144		$	120		$	168		$	125
Interest cost	114			44			116			51			341			127			342			155			113			44			107			45			228			89			215			91
Expected return on plan assets	(210		)	(101		)	(203		)	(95		)	(646		)	(292		)	(623		)	(288		)	(205		)	(107		)	(211		)	(108		)	(411		)	(214		)	(425		)	(221		)
Amortization of unrecognized prior service credit	(13		)	(3		)	(14		)	(3		)	(40		)	(8		)	(41		)	(9		)	(12		)	(3		)	(13		)	(3		)	(25		)	(6		)	(25		)	(7		)
Net loss amortization	46			25			32			21			135			72			89			64			35			16			56			21			70			31			112			43
Termination benefits	3			1			6			1			11			2			11			2			3			1			7			—			5			1			17			—
Curtailments	4			(1		)	3			(2		)	8			(1		)	3			(1		)	—			—			5			(1		)	1			—			3			(1		)
Settlements																									—			—			—			4			—			—			1			4
	$	24		$	31		$	6		$	32		$	43		$	89		$	(7	)	$	102		$	8		$	11		$	36		$	16		$	12		$	21		$	66		$	34

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



	Three Months Ended June 30,						Six Months Ended June 30,
($ in millions)	2019			2018			2019			2018
Service cost	$	12		$	14		$	24		$	28
Interest cost	18			18			35			35
Expected return on plan assets	(18		)	(21		)	(36		)	(41		)
Amortization of unrecognized prior service credit	(21		)	(21		)	(43		)	(42		)
Termination benefits	—			1			—			2
Curtailments	(1		)	(2		)	(1		)	(6		)
	$	(10	)	$	(11	)	$	(21	)	$	(24	)

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

In connection with restructuring actions (see Note 3)4), termination charges were recorded on pension and other postretirement benefit plans related to expanded eligibility for certain employees exiting Merck. Also, in connection with these restructuring actions, curtailments and settlements were recorded on pension and other postretirement benefit plans as reflected in the tables above.

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

The components of net periodic benefit cost (credit) other than the service cost component are included in Other (income) expense, net (see Note 12), with the exception of certain amounts for termination benefits, curtailments and settlements, which are recorded in Restructuring costs if the event giving rise to the termination benefits, curtailment or settlement is related to restructuring actions as noted above.


~~11.~~12.	Other (Income) Expense, Net

Other (income) expense, net, consisted of:



	Three Months Ended June 30,						Six Months Ended June 30,
($ in millions)	2019			2018			2019			2018
Interest income	$	(75	)	$	(81	)	$	(164	)	$	(165	)
Interest expense	233			194			442			379
Exchange losses	27			71			128			77
Income from investments in equity securities, net ⁽¹⁾	(58		)	(153		)	(32		)	(178		)
Net periodic defined benefit plan (credit) cost other than service cost	(140		)	(130		)	(281		)	(265		)
Other, net	153			51			234			(188		)
	$	140		$	(48	)	$	327		$	(340	)

Three Months Ended
September 30, Nine Months Ended
September 30,
($ in millions) 2017 2016 2017 2016
Interest income $ (90 ) $ (87 ) $ (284 ) $ (244 )
Interest expense 189
170
564
513
Exchange (gains) losses (6 ) 3
5
79
Equity (income) loss from affiliates (18 ) (21 ) (11 ) (59 )
Other, net (161 ) (43 ) (244 ) (201 )
$ (86 ) $ 22
$ 30
$ 88

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

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


~~12.~~ ⁽¹⁾	Includes net realized and unrealized gains and losses from investments in equity securities either owned directly or through ownership interests in investments funds.

The higher exchange losses in the first six months of 2019 reflect losses on forward exchange contracts related to the acquisition of Antelliq.

Other, net (as reflected in the table above) in the second quarter and first six months of 2019 includes $78 million and $162 million of goodwill impairment charges related to certain businesses in the Healthcare Services segment. Other, net in the first six months of 2018 includes a $115 million gain on the settlement of certain patent litigation.

Interest paid for the six months ended June 30, 2019 and 2018 was $356 million and $341 million, respectively.


13.	Taxes on Income

The effective income tax rates of ~~125.5%~~18.9% and ~~24.2%~~17.8% for the ~~third~~second quarter of ~~2017~~2019 and ~~2016,~~2018, respectively, and ~~25.5%~~13.0% and ~~24.7%~~28.4% for the first ~~nine~~six months of ~~2017~~2019 and ~~2016,~~2018, respectively, reflect the impacts of acquisition and divestiture-related costs and restructuring costs, partially offset by the beneficial impact of foreign earnings. In addition, the effective income tax ~~rates~~rate for the ~~third quarter and~~ first ~~nine~~six 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 by2019 reflects the favorable impact of a $360 million net tax benefit ~~of $234 million~~ related to the settlement of certain federal income tax ~~issues~~matters (discussed below). The effective income tax rate for the first ~~nine~~six months of ~~2017 also includes a benefit of $88 million related to~~2018 reflects the ~~settlement~~unfavorable impact of a ~~state income~~$1.4 billion pretax charge recorded in connection with the formation of a collaboration with Eisai for which no 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~~.benefit was recognized.

In the ~~third~~first quarter of ~~2017,~~2019, the Internal Revenue Service (IRS) concluded its examinations of Merck’s ~~2006-2011~~2012-2014 U.S. federal income tax returns. As a result, the Company was required to make a payment of ~~approximately $2.8 billion.~~$107 million. The Company’s reserves for unrecognized tax benefits for the years under examination exceeded the adjustments relating to this examination period and therefore the Company recorded a $360 million net ~~$234 million~~ tax ~~provision~~ benefit in the ~~third quarter~~first six months of ~~2017.~~2019. This net benefit reflects reductions in reserves for unrecognized tax benefits for tax positions relating to the years that were under examination, partially offset by additional reserves for tax positions not previously reserved ~~for, as well as adjustments to reserves for unrecognized tax benefits relating to years which remain open to examination that are affected by this settlement.~~for.

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


~~13.~~14.	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 June 30,				Six Months Ended June 30,
($ and shares in millions except per share amounts)	2017			2016		2017		2016		2019		2018		2019		2018
Net (loss) income attributable to Merck & Co., Inc.	$	(56	)	$	2,184	$	3,440	$	4,515
Net income attributable to Merck & Co., Inc.										$	2,670	$	1,707	$	5,585	$	2,443
Average common shares outstanding	2,727			2,765		2,735		2,769		2,574		2,683		2,579		2,689
Common shares issuable ⁽¹⁾	—			21		19		22		14		13		17		13
Average common shares outstanding assuming dilution	2,727			2,786		2,754		2,791		2,588		2,696		2,596		2,702
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 per common share attributable to Merck & Co., Inc. common shareholders										$	1.04	$	0.64	$	2.17	$	0.91
Earnings per common share assuming dilution attributable to Merck & Co., Inc. common shareholders										$	1.03	$	0.63	$	2.15	$	0.90


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

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,~~ 4second quarter of 2019 and 2018, 3 million, and 13 million, respectively, and for the first ~~nine~~six months of ~~2017~~2019 and ~~2016,~~2018, 4 million and 1315 million, respectively, of common shares issuable under share-based compensation plans were excluded from the computation of earnings per common share assuming dilution because the effect would have been antidilutive.


15.	Other Comprehensive Income (Loss)

Changes in AOCI by component are as follows:



	Three Months Ended June 30,
($ in millions)	Derivatives				Investments				Employee Benefit Plans				Cumulative Translation Adjustment			Accumulated Other Comprehensive Income (Loss)
Balance April 1, 2018, net of taxes	$	(201	)		$	(167	)		$	(3,095	)		$	(1,597	)	$	(5,060	)
Other comprehensive income (loss) before reclassification adjustments, pretax	265				(17		)		(1		)		(301		)	(54		)
Tax	(56		)		—				1				(60		)	(115		)
Other comprehensive income (loss) before reclassification adjustments, net of taxes	209				(17		)		—				(361		)	(169		)
Reclassification adjustments, pretax	72			⁽¹⁾	20			⁽²⁾	40			⁽³⁾	—			132
Tax	(15		)		—				(10		)		—			(25		)
Reclassification adjustments, net of taxes	57				20				30				—			107
Other comprehensive income (loss), net of taxes	266				3				30				(361		)	(62		)
Balance June 30, 2018, net of taxes	$	65			$	(164	)		$	(3,065	)		$	(1,958	)	$	(5,122	)
Balance April 1, 2019, net of taxes	$	118			$	4			$	(3,541	)		$	(1,927	)	$	(5,346	)
Other comprehensive income (loss) before reclassification adjustments, pretax	10				55				—				(25		)	40
Tax	(2		)		—				—				6			4
Other comprehensive income (loss) before reclassification adjustments, net of taxes	8				55				—				(19		)	44
Reclassification adjustments, pretax	(76		)	⁽¹⁾	(11		)	⁽²⁾	14			⁽³⁾	—			(73		)
Tax	16				—				(3		)		—			13
Reclassification adjustments, net of taxes	(60		)		(11		)		11				—			(60		)
Other comprehensive income (loss), net of taxes	(52		)		44				11				(19		)	(16		)
Balance June 30, 2019, net of taxes	$	66			$	48			$	(3,530	)		$	(1,946	)	$	(5,362	)

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


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

~~Changes in~~ ~~AOCI~~ ~~by component are as follows:~~



	Six Months Ended June 30,
($ in millions)	Derivatives				Investments				Employee Benefit Plans				Cumulative Translation Adjustment			Accumulated Other Comprehensive Income (Loss)
Balance January 1, 2018, net of taxes	$	(108	)		$	(61	)		$	(2,787	)		$	(1,954	)	$	(4,910	)
Other comprehensive income (loss) before reclassification adjustments, pretax	84				(133		)		(2		)		18			(33		)
Tax	(18		)		1				4				(122		)	(135		)
Other comprehensive income (loss) before reclassification adjustments, net of taxes	66				(132		)		2				(104		)	(168		)
Reclassification adjustments, pretax	164			⁽¹⁾	36			⁽²⁾	81			⁽³⁾	—			281
Tax	(34		)		—				(17		)		—			(51		)
Reclassification adjustments, net of taxes	130				36				64				—			230
Other comprehensive income (loss), net of taxes	196				(96		)		66				(104		)	62

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

Balance June 30, 2018, net of taxes	$	65			$	(164	)		$	(3,065	)		$	(1,958	)	$	(5,122	)
Balance January 1, 2019, net of taxes	$	166			$	(78	)		$	(3,556	)		$	(2,077	)	$	(5,545	)
Other comprehensive income (loss) before reclassification adjustments, pretax	(3		)		131				(1		)		131			258
Tax	1				—				6				—			7
Other comprehensive income (loss) before reclassification adjustments, net of taxes	(2		)		131				5				131			265
Reclassification adjustments, pretax	(124		)	⁽¹⁾	(5		)	⁽²⁾	28			⁽³⁾	—			(101		)
Tax	26				—				(7		)		—			19
Reclassification adjustments, net of taxes	(98		)		(5		)		21				—			(82		)
Other comprehensive income (loss), net of taxes	(100		)		126				26				131			183
Balance June 30, 2019, net of taxes	$	66			$	48			$	(3,530	)		$	(1,946	)	$	(5,362	)

Three Months Ended September 30,
($ in millions) 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 )
Other comprehensive income (loss) before reclassification adjustments, pretax (88 ) 170
2
23
107
Tax 31
(19 ) (13 ) 44
43
Other comprehensive income (loss) before reclassification adjustments, net of taxes (57 ) 151
(11 ) 67
150
Reclassification adjustments, pretax (14 )
⁽¹⁾
(24 )
⁽²⁾
31
⁽³⁾
—
(7 )
Tax 5
8
(7 ) —
6
Reclassification adjustments, net of taxes (9 )
(16 )
24

—
(1 )
Other comprehensive income (loss), net of taxes (66 ) 135
13
67
149
Balance September 30, 2017, net of taxes $ (103 ) $ 210
$ (3,120 ) $ (1,932 ) $ (4,945 )

Nine Months Ended September 30,
($ in millions) 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 )
Other comprehensive income (loss) before reclassification adjustments, pretax (520 ) 283
27
261
51
Tax 182
(23 ) (7 ) 162
314
Other comprehensive income (loss) before reclassification adjustments, net of taxes (338 ) 260
20
423
365
Reclassification adjustments, pretax (159 )
⁽¹⁾
(73 )
⁽²⁾
86
⁽³⁾
—
(146 )
Tax 56
26
(20 ) —
62
Reclassification adjustments, net of taxes (103 ) (47 ) 66
—
(84 )
Other comprehensive income (loss), net of taxes (441 ) 213
86
423
281
Balance September 30, 2017, net of taxes $ (103 ) $ 210
$ (3,120 ) $ (1,932 ) $ (4,945 )


⁽¹⁾	Relates to foreign currency cash flow hedges that were reclassified from AOCI to ~~Sales.~~Sales.


⁽²⁾	Represents net realized (gains) losses on the sales of available-for-sale ~~investments~~debt securities that were reclassified from AOCI to Other (income) expense, net.


⁽³⁾	Includes net amortization of prior service cost and actuarial gains and losses included in net periodic benefit cost (see Note ~~10)~~11).

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


~~15.~~16.	Segment Reporting

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

The Pharmaceutical segment includes human health pharmaceutical and vaccine products. Human health pharmaceutical products consist of therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. The Company sells these human health pharmaceutical products primarily to drug wholesalers and retailers, hospitals, government agencies and managed health care providers such as health maintenance organizations, pharmacy benefit managers and other institutions. ~~Vaccine~~Human health vaccine products consist of preventive pediatric, adolescent and adult vaccines, primarily administered at physician offices. The Company sells these human health vaccines primarily to physicians, wholesalers, physician distributors and government entities. 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~~During 2019, as a result of ~~vaccines in most major European markets were marketed through~~changes to the Company’s ~~SPMSD joint venture until its termination~~internal reporting structure, certain costs that were previously included in the Pharmaceutical segment are now being included as part of non-segment expenses within Merck Research Laboratories. Prior period Pharmaceutical segment profits have been recast to reflect these changes on ~~December 31, 2016.~~a comparable basis.

The ~~Company also has an~~ Animal Health segment ~~that~~ discovers, develops, manufactures and markets animal health products, including ~~vaccines,~~pharmaceutical and vaccine products, for the prevention, treatment and control of disease in all major livestock and companion animal species, which the Company sells to veterinarians, distributors and animal producers.

The ~~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.

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

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

Sales of the Company’s products were as follows:


									Three Months Ended June 30,															Six Months Ended June 30,
	Three Months Ended September 30,				Nine Months Ended September 30,				2019							2018								2019							2018
($ in millions)	2017		2016		2017		2016		U.S.			Int’l		Total		U.S.			Int’l			Total		U.S.			Int’l		Total		U.S.			Int’l			Total
Primary Care and Women’s Health
Pharmaceutical:
Oncology
Keytruda									$	1,498		$	1,136	$	2,634	$	959		$	707		$	1,667	$	2,782		$	2,121	$	4,903	$	1,797		$	1,333		$	3,131
Emend									67			54		121		89			59			148		130			107		237		168			105			273
Alliance revenue - Lynparza									66			45		111		31			13			44		116			74		190		55			22			76
Alliance revenue - Lenvima									54			43		97		19			16			35		104			67		171		19			16			35
Vaccines
Gardasil/Gardasil 9									456			430		886		302			306			608		818			906		1,724		682			586			1,269
ProQuad/M-M-R II/Varivax									500			174		675		356			70			426		843			328		1,171		668			150			818
RotaTeq									104			68		172		99			57			156		258			125		383		250			99			349
Pneumovax 23									123			47		170		122			71			193		248			107		355		234			137			372
Vaqta									38			20		58		42			23			65		67			39		105		60			42			101
Hospital Acute Care
Bridion									129			149		278		95			145			240		248			285		533		175			269			444
Noxafil									100			93		193		87			100			188		191			192		383		168			195			363
Cubicin									22			45		67		48			46			94		64			91		155		95			97			192
Invanz									18			60		78		87			63			149		31			118		150		177			123			300
Primaxin									—			70		71		—			68			68		1			129		130		5			135			140
Cancidas									3			64		67		4			83			87		4			125		129		7			171			178
Immunology
Simponi									—			214		214		—			233			233		—			422		422		—			464			464
Remicade									—			98		98		—			157			157		—			221		221		—			324			324
Neuroscience
Belsomra									21			55		76		29			42			71		45			98		143		52			73			125
Virology
Isentress/Isentress HD									94			153		247		132			174			305		202			300		502		260			326			586
Zepatier									39			68		108		(10		)	123			113		72			149		221		(10		)	253			243
Cardiovascular
Zetia	$	320	$	671	$	1,021	$	1,985	6			150		156		8			218			226		6			290		296		25			505			531
Vytorin	142		273		565		843		3			73		76		3			152			155		6			167		174		11			311			322
Atozet	59		39		171		96		—			92		92		—			101			101		—			186		186		—			174			174
Adempas	70		48		221		120		—			104		104		—			75			75		—			194		194		—			143			143
Diabetes
Januvia	1,012		1,006		2,799		2,976		471			437		908		503			446			949		855			877		1,732		968			862			1,829
Janumet	513		548		1,572		1,624		166			366		533		209			377			585		333			730		1,063		401			729			1,129
General Medicine and Women’s Health
Women’s Health
NuvaRing	214		195		573		571		206			34		240		187			49			236		391			68		459		357			95			452
Implanon/Nexplanon	155		148		503		446		136			48		183		114			60			174		285			98		382		242			106			348
Diversified Brands
Singulair									8			153		160		5			180			185		13			338		352		11			350			360
Cozaar/Hyzaar									6			103		109		7			118			125		10			202		213		14			231			245
Nasonex									(1		)	73		72		—			81			81		(2		)	170		168		2			201			203
Arcoxia									—			75		75		—			84			84		—			149		149		—			166			166
Follistim AQ	72		101		232		268		24			39		63		27			43			70		53			67		121		56			81			138
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
Other pharmaceutical ⁽¹⁾									401			869		1,268		287			902			1,189		759			1,650		2,406		608			1,770			2,378
Total Pharmaceutical segment sales	9,156		9,443		26,101		26,247		4,758			5,702		10,460		3,841			5,442			9,282		8,933			11,190		20,123		7,557			10,644			18,201
Other segment sales ⁽³⁾	1,100		977		3,188		2,862
Animal Health:
Livestock									145			526		671		107			526			633		261			1,021		1,282		231			1,055			1,286
Companion Animals									190			263		453		204			253			457		367			500		867		387			482			869
Total Animal Health segment sales									335			789		1,124		311			779			1,090		628			1,521		2,149		618			1,537			2,155
Other segment sales ⁽²⁾									47			—		48		56			—			56		86			—		87		140			—			140
Total segment sales	10,256		10,420		29,289		29,109		5,140			6,491		11,632		4,208			6,221			10,428		9,647			12,711		22,359		8,315			12,181			20,496
Other ⁽⁴⁾	69		116		400		583
Other ⁽³⁾									4			125		128		54			(18		)	37		12			206		216		80			(74		)	6
	$	10,325	$	10,536	$	29,689	$	29,692	$	5,144		$	6,616	$	11,760	$	4,262		$	6,203		$	10,465	$	9,659		$	12,917	$	22,575	$	8,395		$	12,107		$	20,502

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

⁽¹⁾

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.


⁽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 and 2016 also includes $60 million and $75 million, respectively, related to the sale of the marketing rights to certain products.~~ sales.

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

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

Consolidated sales by geographic area where derived are as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
($ in millions)	2019		2018		2019		2018
United States	$	5,144	$	4,262	$	9,659	$	8,395
Europe, Middle East and Africa	3,163		3,144		6,265		6,334
Japan	921		855		1,720		1,592
China	763		559		1,509		1,045
Asia Pacific (other than Japan and China)	716		791		1,461		1,543
Latin America	658		594		1,219		1,126
Other	395		260		742		467
	$	11,760	$	10,465	$	22,575	$	20,502

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



	Three Months Ended June 30,						Six Months Ended June 30,
($ in millions)	2019			2018			2019			2018
Segment profits:
Pharmaceutical segment	$	7,115		$	5,975		$	13,690		$	11,914
Animal Health segment	405			450			820			864
Other segments	(2		)	26			—			88
Total segment profits	7,518			6,451			14,510			12,866
Other profits (losses)	94			(2		)	124			(89		)
Unallocated:
Interest income	75			81			164			165
Interest expense	(233		)	(194		)	(442		)	(379		)
Depreciation and amortization	(427		)	(332		)	(786		)	(682		)
Research and development	(2,093		)	(2,190		)	(3,935		)	(5,307		)
Amortization of purchase accounting adjustments	(378		)	(732		)	(775		)	(1,464		)
Restructuring costs	(59		)	(228		)	(212		)	(323		)
Other unallocated, net	(1,238		)	(768		)	(2,322		)	(1,355		)
	$	3,259		$	2,086		$	6,326		$	3,432

Three Months Ended
September 30, Nine Months Ended
September 30,
($ in millions) 2017 2016 2017 2016
Segment profits:
Pharmaceutical segment $ 5,929
$ 6,162
$ 16,722
$ 16,698
Other segments 482
389
1,442
1,129
Total segment profits 6,411
6,551
18,164
17,827
Other profits (78 ) 21
107
341
Unallocated:
Interest income 90
87
284
244
Interest expense (189 ) (170 ) (564 ) (513 )
Equity income from affiliates 23
(27 ) 16
(13 )
Depreciation and amortization (334 ) (365 ) (1,036 ) (1,228 )
Research and development (1,829 ) (1,444 ) (4,955 ) (4,651 )
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 )
Restructuring costs (153 ) (161 ) (470 ) (386 )
Gain on sale of certain migraine clinical development programs —
40
—
40
Other unallocated, net (626 ) (873 ) (2,232 ) (2,713 )
$ 200
$ 2,887
$ 4,642
$ 6,015

~~Segment~~Pharmaceutical segment profits are comprised of segment sales less standard costs, as well as selling, general and ~~certain operating~~administrative expenses directly incurred by the ~~segments.~~segment. Animal Health segment profits are comprised of segment sales, less all cost of sales, as well as selling, general and administrative expenses and research and development costs directly incurred by the segment. For internal management reporting presented to the chief operating decision maker, Merck does not allocate ~~materials and production costs, other than standard costs,~~ the ~~majority~~remaining cost of sales not included in segment profits as described above, research and development expenses incurred in Merck Research Laboratories, the Company’s research and development division that focuses on human health-related activities, or general and administrative expenses, nor the cost of financing these activities. Separate divisions maintain responsibility for monitoring and managing these costs, including depreciation related to fixed assets utilized by these divisions and, therefore, they are not included in segment profits. In addition, costs related to restructuring activities, as well as the amortization of purchase accounting adjustments are not allocated to segments.

Other profits are primarily comprised of miscellaneous corporate profits, as well as operating profits related to third-party manufacturing sales.

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

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

Recent Developments

Business Developments

In April 2019, Merck acquired Antelliq Corporation (Antelliq), a leader in digital animal identification, traceability and monitoring solutions. These solutions help veterinarians, farmers and pet owners gather critical data to improve management, health and well-being of livestock and pets. Merck paid $2.3 billion to acquire all outstanding shares of Antelliq and spent $1.3 billion to repay Antelliq’s debt (see Note 2 to the condensed consolidated financial statements).

Also in April 2019, Merck acquired Immune Design, a late-stage immunotherapy company employing next-generation in vivo approaches to enable the body’s immune system to fight disease, for $301 million in cash (see Note 2 to the condensed consolidated financial statements).

In July ~~2017,~~2019, Merck acquired Peloton Therapeutics, Inc. (Peloton), a clinical-stage biopharmaceutical company focused on the development of novel small molecule therapeutic candidates targeting hypoxia-inducible factor-2α (HIF-2α) for the treatment of patients with cancer and ~~AstraZeneca entered into~~other non-oncology diseases. Peloton’s lead candidate, MK-6482 (formerly PT2977), is a ~~global strategic oncology collaboration to co-develop and co-commercialize AstraZeneca’s Lynparza (olaparib)~~novel oral HIF-2α inhibitor in late-stage development 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 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. As part of the agreement,renal cell carcinoma. 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$1.05 billion in ~~Research and development~~ ~~expenses in the third quarter of 2017 related~~cash; additionally, former Peloton shareholders will be eligible to ~~the upfront payment and future license options payments. In addition, Merck will pay AstraZeneca~~receive up to an additional ~~$6.15~~$1.15 billion contingent upon successful achievement of future regulatory and ~~sales milestones for total aggregate consideration~~sales-based milestones.

Restructuring Program

Merck recently approved a new global restructuring program (2019 Restructuring Program) as part of ~~up to $8.5 billion (see Note 2 to~~a worldwide initiative focused primarily on further optimizing the ~~condensed consolidated financial statements).~~

~~In October 2017, Merck acquired Rigontec GmbH (Rigontec). Rigontec~~Company’s manufacturing and supply network, as well as reducing its global real estate footprint. This program 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, regulatory 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 to a disruption of its worldwide operations, including manufacturing, research and sales operations. Most~~continuation of the Company’s ~~manufacturing sites are now largely operational, manufacturing active pharmaceutical ingredient (API), formulating, packaging~~plant rationalization and ~~shipping product. The Company’s external manufacturing was not impacted. Throughout this time, Merck has continued to fulfill orders and ship product.~~

builds on prior restructuring programs. The Company ~~is confident~~will continue to evaluate its global footprint and overall operating model, which could result in the ~~continuous supply~~identification of ~~key products such as~~ ~~Keytruda~~, ~~Januvia~~ ~~(sitagliptin) and~~ ~~Zepatier~~ ~~(elbasvir and grazoprevir). However, as anticipated,~~additional actions over time. The actions contemplated under the 2019 Restructuring Program are expected to be substantially completed by the end of 2023, with the cumulative pretax costs to be incurred by the Company ~~was unable~~ to ~~fulfill orders for certain other products in certain markets, which had an unfavorable effect on sales for~~implement the ~~third quarter and first nine months of 2017~~program estimated to be approximately $800 million to $1.2 billion. The Company expects to record charges of approximately ~~$135 million. In addition, the Company recorded manufacturing-related expenses, primarily unfavorable manufacturing variances,~~$500 million in ~~Materials and Production~~ ~~costs, as well as expenses~~2019 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.~~program. The Company anticipates ~~a similar impact~~the actions under the 2019 Restructuring Program to ~~revenue and expenses~~result 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 2017annual net cost savings 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~~$500 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 billion for the first nine months of 2017, essentially flat as compared with sales in the first nine months of 2016 including a 1% unfavorable effect from foreign exchange. Sales were unfavorably affected by generic and biosimilar competition for ~~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~~end 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 2017.2023.

Pricing

Global efforts toward health care cost containment continue to exert pressure on product pricing and market access worldwide. In the United States, pricing ~~pressures continue~~pressure continues on many of the Company’s ~~products~~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 inprivate sector beneficiaries, have contributed to pricing pressure. In several international markets, government-mandated pricing actions have reduced prices of generic and patented drugs. In addition, ~~other austerity measures negatively affected~~ the Company’s revenue performance in the first ~~nine~~six months of ~~2017.~~2019 was negatively affected by other cost-reduction measures taken by governments and other third-parties to lower health care costs. The Company anticipates all of these ~~pricing~~ actions ~~and other austerity measures~~ will continue to negatively affect revenue performance for the remainder of ~~2017.~~2019.

Operating Results

Sales

Worldwide sales were $11.8 billion for the second quarter of 2019, an increase of 12% compared with the ~~Company’s products~~second quarter of 2018 including a 3% unfavorable effect from foreign exchange. Global sales were ~~as follows:~~

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

⁽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⁾	~~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. Other in the first nine months of 2017 and 2016 also includes ~~$60 million~~ ~~and $75 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 billion and $2.6$22.6 billion for the ~~three~~first six months ~~ended~~ ~~September 30, 2017~~of 2019, an increase of 10% compared with the same period of 2018 including a 3% unfavorable effect from foreign exchange. Sales growth in both periods was driven primarily by higher sales in the oncology franchise reflecting strong growth of Keytruda (pembrolizumab), as well as increased alliance revenue from Lynparza (olaparib) and ~~2016~~Lenvima (lenvatinib). Higher sales of vaccines, including human papillomavirus (HPV) vaccine Gardasil (Human Papillomavirus Quadrivalent [Types 6, 11, 16 and 18] Vaccine, Recombinant)/Gardasil 9 (Human Papillomavirus 9-valent Vaccine, Recombinant), and pediatric vaccines ProQuad (Measles, Mumps, Rubella and Varicella Virus Vaccine Live), M‑M‑R II (Measles, Mumps and Rubella Virus Vaccine Live) and Varivax (Varicella Virus Vaccine Live) also drove sales growth in the second quarter and first six months of 2019.

Sales growth in both periods was partially offset by the ongoing effects of generic competition for cardiovascular products Zetia (ezetimibe) and Vytorin (ezetimibe and simvastatin), hospital acute care product Invanz (ertapenem sodium), and biosimilar competition for immunology product Remicade (infliximab). Lower sales of products within the diversified brands franchise, diabetes products Januvia (sitagliptin) and Janumet (sitagliptin/metformin HCl) and HIV products Isentress/Isentress HD (raltegravir) also partially offset revenue growth in the quarter and year-to-date period. The diversified brands franchise

includes certain products that are approaching the expiration of their marketing exclusivity or that are no longer protected by patents in developed markets.

International sales represented 56% and 57% of total sales in the second quarter and first six months of 2019, respectively. Performance in international markets was led by China, which had total sales of $763 million and $1.5 billion in the second quarter and first six months of 2019, respectively, representing growth rates of 37% and 44%, respectively, compared with the same prior year periods. Foreign exchange unfavorably affected sales performance in China by 9% and ~~by $8.2 billion~~10% in the second quarter and ~~$7.1 billion for the nine~~first six months ~~ended September 30, 2017 and 2016,~~of 2019, 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 is an anti-PD-1 therapy that has been approved for the treatment of multiple malignancies including non-small-cell lung cancer (NSCLC), melanoma, classical Hodgkin lymphoma (cHL), head and ~~Women’s Health~~

~~Cardiovascular~~

~~Combined global sales of~~ ~~Zetia~~ ~~(marketed~~neck squamous cell carcinoma (HNSCC), urothelial carcinoma, cervical cancer, primary mediastinal large B-cell lymphoma (PMBCL), hepatocellular carcinoma, Merkel cell carcinoma, gastric or gastroesophageal junction adenocarcinoma and microsatellite instability-high (MSI-H) or mismatch repair deficient cancer. Keytruda was also recently approved in ~~most countries outside~~ the United States for the treatment of certain patients with esophageal cancer, renal cell carcinoma and small-cell lung cancer (SCLC) (see below). The Keytruda clinical development program includes studies across a broad range of cancer types (see “Research and Development” below).

In July 2019, the U.S. Food and Drug Administration (FDA) approved Keytrudaas ~~Ezetrol~~)monotherapy for the treatment of patients with recurrent locally advanced or metastatic squamous cell carcinoma of the esophagus whose tumors express PD-L1 (Combined Positive Score [CPS] ≥10) as determined by an FDA-approved test, with disease progression after one or more prior lines of systemic therapy.

In June 2019, the FDA approved Keytruda as monotherapy or in combination with chemotherapy for the first-line treatment of patients with metastatic or unresectable, recurrent HNSCC based on results from the pivotal Phase 3 KEYNOTE-048 trial. Keytruda was initially approved for the treatment of certain patients with recurrent or metastatic HNSCC under the FDA’s accelerated approval process based on data from the Phase 1b KEYNOTE-012 trial. In accordance with the accelerated approval process, continued approval was contingent upon verification and description of clinical benefit, which has now been demonstrated in KEYNOTE-048 and has resulted in the FDA converting the accelerated approval to a full (regular) approval.

Also in June 2019, the FDA approved Keytruda as monotherapy for the treatment of patients with metastatic SCLC with disease progression on or after platinum-based chemotherapy and at least one other prior line of therapy based on pooled data from the KEYNOTE-158 (cohort G) and KEYNOTE-028 (cohort C1) clinical trials.

In April 2019, the FDA approved Keytruda in combination with Inlyta (axitinib), ~~Vytorin~~ ~~(marketed outside~~a tyrosine kinase inhibitor, for the first-line treatment of patients with advanced renal cell carcinoma, the most common type of kidney cancer, based on findings from the pivotal Phase 3 KEYNOTE-426 trial.

Also in April 2019, the FDA approved an expanded label for Keytruda as monotherapy for the first-line treatment of patients with stage III NSCLC who are not candidates for surgical resection or definitive chemoradiation, or metastatic NSCLC, and whose tumors express PD-L1 (tumor proportion score [TPS] ≥1%) as determined by an FDA-approved test, with no EGFR or ALK genomic tumor aberrations. The approval is based on results from the Phase 3 KEYNOTE-042 trial.

Additionally, in April 2019, Merck announced that Keytruda was approved by China’s National Medical Products Administration in combination with pemetrexed and platinum chemotherapy for the first-line treatment of patients with metastatic nonsquamous NSCLC, with no EGFR or ALK genomic tumor aberrations, based on data from the pivotal Phase 3 KEYNOTE-189 trial.

In March 2019, the European Commission (EC) approved Keytruda in combination with carboplatin and either paclitaxel or nab-paclitaxel for the first-line treatment of adults with metastatic squamous NSCLC based on data from the Phase 3 KEYNOTE-407 trial. Keytruda was approved for this indication in the United States in October 2018.

In April 2019, the EC approved a new extended dosing schedule of 400 mg every six weeks (Q6W) delivered as ~~Inegy), and~~ ~~Atozet~~ ~~(ezetimibe and atorvastatin) (marketed in certain countries outside of the United States), medicines~~an intravenous infusion over 30 minutes for ~~lowering LDL cholesterol, were $521 million~~all approved monotherapy indications in the ~~third~~European Union (EU). The Q6W dose is available in addition to the formerly approved dose of Keytruda 200 mg every three weeks (Q3W) infused over 30 minutes.

Global sales of Keytruda were $2.6 billion in the second quarter of ~~2017~~2019 and ~~$1.8~~$4.9 billion ~~for~~in the first ~~nine~~six months of ~~2017, declines~~2019, representing growth of ~~47%~~58% and ~~40%~~57%, respectively, compared with the same periods of ~~2016.~~2018. Foreign exchange ~~favorably~~unfavorably affected global sales performance by 1% 5% in both the ~~third~~second quarter and first six months of ~~2017. The sales declines primarily reflect lower volumes and pricing of~~ ~~Zetia~~ ~~and~~ ~~Vytorin~~2019. Sales growth in both periods was driven by volume growth as the Company continues to launch Keytruda with multiple new indications globally. Sales in the United States ~~from generic competition. By agreement, a generic manufacturer launched a generic version of~~ ~~Zetia~~continue to build across the multiple approved indications, 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~~particular for the treatment of ~~pulmonary arterial hypertension, in countries outside the Americas while Bayer has lead rights~~NSCLC both as monotherapy, and combination with chemotherapy for either nonsquamous or squamous NSCLC. Other indications contributing to U.S. sales growth include HNSCC, bladder cancer, melanoma, and MSI-H cancer, along with uptake in the ~~Americas,~~recently launched

renal cell carcinoma and adjuvant melanoma indications. Keytruda sales growth in international markets was driven primarily by use in the treatment of NSCLC as monotherapy, as well as in combination with chemotherapy as that indication continues launching in multiple markets, including ~~the United States. The companies equally share profits under the collaboration. In 2016, Merck began promoting and distributing Adempas~~ in Europe. ~~Transition from Bayer~~The launch of multiple new indications in ~~other Merck territories will continue~~Japan and China also drove growth in ~~2017. Merck recorded~~the second quarter and first six months of 2019.

Global sales of ~~$70~~Emend (aprepitant), for the prevention of chemotherapy-induced and post-operative nausea and vomiting, were $121 million ~~and $48 million for Adempas~~ in the ~~third~~second quarter of ~~2017~~2019 and ~~2016, respectively, and $221 million and $120~~$237 million for the first ~~nine~~six months of ~~2017~~2019, declines of 18% and ~~2016,~~13%, 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 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.~~2018. 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 approved~~ ~~Zepatier~~ ~~for the treatment of chronic HCV genotype (GT) 1 or GT4 infection~~

~~in adults.~~ ~~Zepatier~~ ~~is indicated for use 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 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 for the treatment of HIV-1 infection, were~~ ~~$310 million~~ ~~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~~3% in both the second quarter and first ~~nine~~six months of ~~2017.~~2019. The sales declines primarily reflect lower demand in the United States due to ~~competitive pressures. Lower~~competition. The patent that provided U.S. market exclusivity for Emend expired in 2015 and the patent that provided market exclusivity in most major European markets expired in May 2019. The patent that provides U.S. market exclusivity for Emend for Injection expires in September 2019 and the patent that provides market exclusivity in major European markets expires in February 2020 (although six-month pediatric exclusivity may extend this date). The Company anticipates that sales of Emend in these markets will decline significantly after these patent expiries.

Lynparza, an oral poly (ADP-ribose) polymerase (PARP) inhibitor being developed as part of a collaboration with AstraZeneca PLC (AstraZeneca) (see Note 3 to the condensed consolidated financial statements), is currently approved for certain types of ovarian and breast cancer. Merck recorded alliance revenue related to Lynparza of $111 million in the second quarter of 2019 compared with $44 million in the second quarter of 2018 and $190 million for the first six months of 2019 compared with $76 million for the first six months of 2018. The increase in alliance revenue reflects, in part, uptake in the treatment of ovarian cancer following U.S. approval in December 2018 based on the Phase 3 SOLO-1 trial. In April 2019, the EC approved Lynparza as a monotherapy for the treatment of certain adult patients with germline BRCA1/2-mutations, and who have human epidermal growth factor receptor 2 (HER2)-negative locally advanced or metastatic breast cancer, triggering a $30 million milestone payment from Merck to AstraZeneca. The approval was based on the results of the Phase 3 OlympiAD trial. In June 2019, the EC approved Lynparza as monotherapy for the maintenance treatment of certain adult patients with BRCA-mutated advanced ovarian, fallopian tube or primary peritoneal cancer based on data from the SOLO-1 trial, triggering a $30 million milestone payment from Merck to AstraZeneca.

Lenvima, an oral receptor tyrosine kinase inhibitor being developed as part of a collaboration with Eisai entered into in March 2018 (see Note 3 to the condensed consolidated financial statements), is approved for certain types of thyroid cancer, hepatocellular carcinoma, and in combination for certain patients with renal cell carcinoma. Merck recorded alliance revenue of $97 million and $35 million in the second quarter of 2019 and 2018, respectively, related to Lenvima. Alliance revenue for Lenvima was $171 million for the first six months of 2019. Lenvima sales in 2019 reflect strong performance in hepatocellular carcinoma following recent worldwide launches.

Vaccines

Worldwide sales of Gardasil/Gardasil 9, vaccines to help prevent certain cancers and other diseases caused by certain types of HPV, were $886 million in the second quarter of 2019, an increase of 46% compared with the second quarter of 2018 including a 4% unfavorable effect from foreign exchange. Growth was driven primarily by public sector buying patterns, higher demand and pricing in the United States and the ongoing launch in China. Higher demand in Europe reflecting increased vaccination rates for both boys and girls also contributed to sales growth in the quarter. Global sales of Gardasil/Gardasil 9 were $1.7 billion for the first six months of 2019, an increase of 36% compared with the same period of 2018 including a 4% unfavorable effect from foreign exchange. Sales growth in the first six months of 2019 primarily reflects higher volumes in China, the United States and Europe.

Global sales of ProQuad, a pediatric combination vaccine to help protect against measles, mumps, rubella and varicella, were $204 million in the second quarter of 2019, an increase of 40% compared with $146 million in the second quarter of 2018. Worldwide sales of ProQuad were $356 million in the first six months of 2019, an increase of 33% compared with $269 million in the first six months of 2018. Foreign exchange unfavorably affected global sales performance by 2% and 1% in the second quarter and first six months of 2019, respectively. Sales growth in both periods was driven primarily by higher volumes and pricing in ~~Europe due~~the United States and volume growth in certain European markets.

Worldwide sales of M‑M‑R II, a vaccine to ~~competition also had an unfavorable effect on~~help protect against measles, mumps and rubella, were $199 million for the second quarter of 2019 compared with $95 million for the second quarter of 2018 and were $322 million in the first six months of 2019 compared with $188 million in the first six months of 2018. Growth in both periods was driven primarily by higher sales in the United Sates reflecting increased demand due to measles outbreaks, including private-sector buy-in, as well as higher pricing. Government tenders in Latin America also contributed to sales growth in the year-to-date period. ~~In May 2017, the FDA approved~~ ~~Isentress~~HD

Global sales of Varivax, a ~~1200 mg once-daily dose of~~ ~~Isentress~~vaccine to help prevent chickenpox (varicella), ~~to be administered orally as two 600 mg tablets, in combination with other antiretroviral agents,~~were $271 million for the ~~treatment~~second quarter of ~~HIV-1 infection~~2019, an increase of 46% compared with $186 million for the second quarter of 2018. Worldwide sales of Varivax were $492 million in ~~adults,~~the first six months of 2019, an increase of 36% compared with $361 million in the first six months of 2018. Foreign exchange unfavorably affected global sales performance by 4% and ~~pediatric patients weighing at least 40 kg, who are treatment-naïve or whose virus has been suppressed on an initial regimen~~5% in the second quarter and first six months 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~~2019,

respectively. Sales growth in both periods was driven primarily by government tenders in Brazil, as ~~it is known outside~~well as volume growth and pricing in the United ~~States)~~States.

Worldwide sales of RotaTeq (Rotavirus Vaccine, Live Oral, Pentavalent), a vaccine to help protect against rotavirus gastroenteritis in ~~combination with other antiretroviral medicinal products,~~infants and children, were $172 million in the second quarter of 2019 and were $383 million for the ~~treatment~~first six months of ~~HIV-1 infection~~2019, increases of 10% compared with the same periods of 2018. Foreign exchange unfavorably affected global sales performance by 3% and 2% in ~~adults~~the second quarter and ~~pediatric patients weighing at least 40 kg. Regulatory reviews are underway for once-daily versions~~first six months of ~~Isentress~~2019, respectively. Sales growth in ~~other countries and regions around~~both periods was driven primarily by continued uptake from the ~~world.~~launch in China.

Hospital Acute Care

Worldwide sales of Bridion, (sugammadex) Injection, for the reversal of two types of neuromuscular blocking agents used during surgery, were ~~$185~~$278 million in the ~~third~~second quarter of ~~2017, an increase of 33% compared with the third quarter of 2016. Global sales of~~ ~~Bridion~~ ~~were $495~~2019 and $533 million infor the first ~~nine~~six months of ~~2017, an increase~~2019, increases of ~~44%~~16% and 20%, respectively, compared with the same ~~period~~periods of ~~2016 including a 1% unfavorable effect from foreign exchange.~~2018. Foreign exchange unfavorably affected global sales performance by 4% and 5% in the second quarter and first six months of 2019, respectively. Sales growth in both periods was driven primarily ~~reflects~~by volume growth in the United States.

Worldwide sales of Noxafil (posaconazole), for the prevention of invasive fungal infections, were $193 million in the second quarter of 2019 and $383 million for the first six months of 2019, increases of 3% and 5%, respectively, compared with the same periods of 2018. Foreign exchange unfavorably affected global sales performance by 4% and 5% in the second quarter and first six months of 2019, respectively. The patent that provided U.S. market exclusivity for Noxafil expired in July 2019; accordingly, the Company anticipates declines in U.S. sales of Noxafil in future periods. Additionally, the patent for Noxafil will expire in a number of major European markets in December 2019. The Company anticipates sales of Noxafil in these markets will decline significantly thereafter.

Global sales of Invanz~~(ertapenem sodium)~~, for the treatment of certain infections, were ~~$159~~$78 million in the ~~third~~second quarter of ~~2017, an increase of 5% compared with the third quarter of 2016, driven by volume growth in certain international markets. Worldwide sales of~~ ~~Invanz~~ were $445 million in the first nine months of 2017, an increase of 9% compared with the same period of 2016, primarily reflecting higher pricing in the United States. Foreign exchange favorably affected global sales performance by 2%2019 and ~~1% in the third quarter and first nine months of 2017, respectively. The patent that provides U.S. market exclusivity for~~ ~~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~~$150 million for the first ~~nine~~six months of ~~2017,~~2019, declines of ~~34%~~48% and ~~19%~~50%, respectively, compared with the same periods of ~~2016.~~2018. Foreign exchange ~~favorably affected global sales performance by 1% in the third quarter of 2017 and~~ unfavorably affected global sales performance by 1%4% in both the second quarter and first ~~nine~~six months of ~~2017.~~2019. The sales ~~declines were~~decline in both periods was driven ~~primarily~~ by generic competition in ~~certain European markets.~~the United States. The ~~EU compound~~ patent that provided U.S. market exclusivity for ~~Cancidas~~Invanz expired in ~~April~~November 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~~significant decline in U.S. ~~Cubicin~~Invanz sales ~~from generic competition~~ and expects the decline to continue.

In June 2019, the FDA approved a supplemental New Drug Application for the use of Zerbaxa (ceftolozane and tazobactam) for the treatment of patients 18 years and older with hospital-acquired bacterial pneumonia and ventilator-associated bacterial pneumonia (HABP/VABP) caused by certain susceptible Gram-negative microorganisms based on the results of the pivotal Phase 3 ASPECT-NP trial. In July 2019, the Committee for Medicinal Products for Human Use (CHMP) of the European Medicines Agency (EMA) adopted a positive opinion recommending Zerbaxa for the treatment of hospital-acquired pneumonia, including ventilator-associated pneumonia in adults based on the results of the ASPECT-NP trial. Zerbaxa was previously approved in the United States and EU for the treatment of certain adult patients with complicated urinary tract infections, including pyelonephritis, and complicated intra-abdominal infections.

In July 2019, the FDA approved Recarbrio (imipenem, cilastatin, and relebactam) for injection, a new combination antibacterial for the treatment of complicated urinary tract infections, including pyelonephritis, caused by certain Gram-negative microorganisms in patients 18 years of age and older who have limited or no alternative treatment options. Merck anticipates making Recarbrio available later in 2019.

Immunology

Sales of Simponi (golimumab), a once-monthly subcutaneous treatment for certain inflammatory diseases (marketed by the Company in Europe, Russia and Turkey), were $214 million in the second quarter of 2019 and $422 million for the first six months of 2019, declines of 8% and 9%, respectively, compared with the same periods of 2018. Foreign exchange unfavorably affected sales performance by 7% in both the second quarter and first six months of 2019. The Company anticipates itsales of Simponi will ~~lose market exclusivity~~be unfavorably affected in future periods by the recent launch of biosimilars for ~~Cubicin~~ ~~in Europe later in 2017 or early in 2018.~~a competing product.

~~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~~$98 million in the second quarter of 2019 and $221 million for the first ~~nine~~six months of ~~2017,~~2019, declines of ~~31%~~37% and ~~35%~~32%, respectively, compared with the same periods of ~~2016.~~2018. Foreign exchange ~~favorably affected sales performance by 3% in the third quarter of 2017 and~~ unfavorably affected sales performance by 1%5% and 6% in the second quarter and first ~~nine~~six months of ~~2017.~~2019, respectively. The Company lost market exclusivity for Remicade in major European markets in 2015 and no longer has market exclusivity in any of its marketing territories. The Company is experiencing pricing and volume declines in these markets as a result of biosimilar competition and expects the declines to continue.

~~Sales~~Virology

Global combined sales of ~~Simponi~~ ~~(golimumab)~~Isentress/Isentress HD, ~~a once-monthly subcutaneous~~an HIV integrase inhibitor for use in combination with other antiretroviral agents for the treatment ~~for certain inflammatory diseases (marketed by the Company in Europe, Russia and Turkey),~~of HIV-1 infection, were ~~$219 million~~ ~~in the~~ ~~third~~ ~~quarter of 2017, growth of 13% compared with~~

~~the third quarter of 2016, and were $602~~$247 million in the second quarter of 2019 and $502 million for

the first ~~nine~~six months of ~~2017, an increase~~2019, declines of 4%19% and 14%, respectively, compared with the same ~~period~~periods of ~~2016.~~2018. Foreign exchange ~~favorably~~unfavorably affected global sales performance by 6% in both the second quarter and first six months of 2019. The sales declines were driven primarily by lower demand in the United States due to competitive pressure.

Cardiovascular

Combined global sales of Zetia (marketed in most countries outside the United States as Ezetrol), Vytorin (marketed outside the United States as Inegy), as well as Atozet (ezetimibe and atorvastatin) and Rosuzet (ezetimibe and rosuvastatin) (both marketed in certain countries outside of the United States), medicines for lowering LDL cholesterol, were $376 million in the second quarter of 2019 and $721 million for the first six months of 2019, declines of 25% and 32%, respectively, compared with the same periods of 2018. Foreign exchange unfavorably affected global sales performance by 4% in both the ~~third~~second quarter and first six months of 2019. The sales declines were driven primarily by lower sales in Europe. The EU patents for Ezetrol and Inegy expired in April 2018 and April 2019, respectively. Accordingly, the Company is experiencing sales declines in these markets as a result of generic competition and expects the declines to continue. Merck lost market exclusivity in the United States for Zetia in 2016 and Vytorin in 2017 and has lost nearly all U.S. sales of these products as a result of generic competition. The sales declines were also attributable to loss of exclusivity in Australia. These declines were partially offset by the launch of Rosuzet in Japan.

Adempas (riociguat), a cardiovascular drug for the treatment of pulmonary arterial hypertension, is part of a worldwide clinical development collaboration with Bayer AG (Bayer) to market and develop soluble guanylate cyclase (sGC) modulators including Adempas (see Note 3 to the condensed consolidated financial statements). Revenue from Adempas includes sales in Merck’s marketing territories, as well as Merck’s share of profits from the sale of Adempas in Bayer’s marketing territories. Merck recorded revenue related to Adempas of $104 million in the second quarter of ~~2017~~2019 and $194 million for the first six months of 2019, increases of 39% and 36%, respectively, compared with the same periods of 2018. Foreign exchange unfavorably affected global sales performance by 1%4% in both the second quarter and first ~~nine~~six 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 $1.0 billion in the third quarter of 2017 compared with $356 million in the third quarter of 2016 and were $2.5 billion in the first nine months of 2017 compared with $919 million in the first nine months of 2016.2019. 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 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.~~higher profit sharing from Bayer.

Diabetes

Worldwide combined sales of ~~Keytruda~~ ~~grew to $604 million~~Januvia and ~~$1.5~~Janumet, medicines that help lower blood sugar levels in adults with type 2 diabetes, were $1.4 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) 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 and head and neck cancer, combined with the launch in bladder cancer, also contributed to growth in the third quarter and first nine months of 2017. Sales growth in international markets reflects positive performance in the melanoma indications, as well as a greater contribution from the treatment of patients with NSCLC as reimbursement is established in additional markets in the first- and second-line settings.

~~In 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~~ for the treatment of patients with recurrent or metastatic head and neck squamous cell carcinoma (HNSCC) with disease progression on or after platinum-containing chemotherapy. In July 2017, Merck announced that the pivotal Phase 3 KEYNOTE-040 trial investigating ~~Keytruda~~ in previously treated patients with recurrent or metastatic HNSCC did not meet its pre-specified primary endpoint of 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~~ ~~in the first-line treatment 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 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~~ ~~(see Note 7 to the condensed consolidated financial statements), the Company will pay royalties of 6.5% on net sales of~~ ~~Keytruda~~ ~~in 2017 through 2023; and 2.5% on net sales of~~ ~~Keytruda~~ ~~in 2024 through 2026.~~

~~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 million in the third~~second quarter of ~~2017~~2019 and ~~$550 million~~$2.8 billion for the first ~~nine~~six months of ~~2017,~~2019, declines of ~~33% and 22%, respectively,~~6% compared with the same periods of ~~2016.~~2018. Foreign exchange unfavorably affected global sales performance by 1%3% and 4% in ~~both~~ the ~~third~~second quarter and first ~~nine~~six months of ~~2017.~~2019, respectively. 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~~both periods reflects continued pricing pressure in ~~Japan and expects~~ the ~~decline to continue.~~United States, partially offset by higher demand globally. The Company ~~no longer has market exclusivity for~~ ~~Singulair~~ ~~in any major market.~~expects U.S. pricing pressure to continue.

~~Global~~Women’s Health

Worldwide sales of ~~Nasonex~~NuvaRing (etonogestrel/ethinyl estradiol vaginal ring), ~~an inhaled nasal corticosteroid for the treatment of nasal allergy symptoms, declined 55% to $42~~a vaginal contraceptive product, were $240 million in the ~~third~~second quarter of ~~2017,~~2019 and ~~decreased 37% to $266~~$459 million infor the first ~~nine~~six months of ~~2017,~~2019, increases of 2% 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 million and $265 million, respectively, of which approximately $65 million and $155 million, respectively, relate to ~~Gardasil/Gardasil~~ 9.

~~Merck’s sales of~~ ~~Gardasil~~ ~~(Human Papillomavirus Quadrivalent [Types 6, 11, 16 and 18] Vaccine, Recombinant)/Gardasil~~ ~~9, vaccines to help prevent certain cancers and diseases caused by certain types of human papillomavirus (HPV), were~~ ~~$675 million~~ in the third quarter of 2017, a decline of 22% compared with the third quarter of 2016, driven primarily by lower sales in the United States. 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, 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, and recognized a corresponding liability. The Company anticipates it will replenish the stockpile 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 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.

~~Merck’s 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 $169 million in the third quarter of 2017 compared with $150 million in the third quarter of 2016 driven primarily by higher pricing in the United States and volume growth in most international 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 sales of~~ ~~M‑M‑R~~ II (Measles, Mumps and Rubella Virus Vaccine Live), a vaccine to help protect against measles, mumps and rubella, were $124 million for the third quarter of 2017 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 in the first nine months of 2016. The increases were largely attributable to higher sales in Europe resulting from the termination of the SPMSD joint venture. Merck’s sales of ~~Varivax~~ (Varicella Virus Vaccine Live), a vaccine to help prevent chickenpox (varicella), were $226 million for the third quarter of 2017 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 in the first nine months of 2016. The declines are attributable to lower sales in the United States, reflecting lower volumes partially offset by higher pricing, and lower sales in Latin America due to the timing of shipments. These declines were partially offset by higher sales in Europe resulting from the termination of the SPMSD joint venture.

~~Merck’s sales of~~ ~~Pneumovax~~ 23 (pneumococcal vaccine polyvalent), a vaccine to help prevent pneumococcal disease, were $229 million in the third quarter of 2017, an increase of 31% compared with the third quarter of 2016. Merck’s sales of ~~Pneumovax~~ ~~23 were $558 million in the first nine months of 2017, an increase of 38% compared with the first nine months of 2016~~ including a 1% unfavorable effect from foreign ~~exchange. Sales growth~~exchange in both ~~periods was driven primarily by volume growth~~periods. The patent that provided U.S. market exclusivity for NuvaRing expired in April 2018 and ~~higher pricing~~the Company anticipates a significant decline in ~~the United States, as well as~~U.S. NuvaRing sales 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 in the first nine months of 2017, an increase of 18% compared with 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 bothfuture 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~~result 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.~~

~~Merck’s sales of~~ ~~RotaTeq~~ ~~(Rotavirus Vaccine, Live Oral, Pentavalent), a vaccine to help protect against rotavirus gastroenteritis in infants and children, were~~ ~~$179 million~~ ~~in the~~ ~~third~~ ~~quarter of 2017, growth of 4% compared with the third quarter of 2016 driven primarily by higher sales in Europe resulting from the termination of the SPMSD joint venture. Merck’s sales of~~ ~~RotaTeq~~ were $525 million in the first nine months of 2017, an increase of 7% compared with the first nine months of 2016. The increase was driven primarily by higher sales in Europe, as well as higher pricing and volumes in the United States.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. Animal Health sales are affected by competition and the frequent introduction of

~~generic products.~~ Global sales of Animal Health products totaled ~~$1.0~~$1.1 billion for the ~~third~~second quarter of ~~2017, an increase~~2019, growth of ~~16%~~3% compared with the second quarter of 2018 including a 6% unfavorable effect from foreign exchange. Growth in the second quarter was primarily driven by higher sales of ~~$865 million~~livestock products, predominantly due to products obtained in the ~~third~~Antelliq acquisition. Companion animal sales performance in the second quarter reflects volume growth in vaccine and insulin products, partially offset by the timing of ~~2016.~~customer purchases in the prior year for the Bravecto (fluralaner) line of products for parasitic control. 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 $2.1 billion for the first ~~nine~~six months of ~~2016. Foreign exchange favorably affected global sales~~2019, essentially flat compared with the first six months of 2018 including a 6% unfavorable effect from foreign exchange. Sales performance ~~by 2% and 1%~~ in the ~~third quarter~~year-to-date period was driven by livestock products, due to the Antelliq acquisition and ~~first nine months of 2017, respectively. Sales growth in both periods primarily reflects~~ higher ~~sales of~~demand for poultry products, as well as higher demand for companion animal products, ~~driven largely by~~primarily the Bravecto line of ~~products that kill fleas~~products.

In April 2019, Merck acquired Antelliq, a leader in digital animal identification, traceability and ticks in dogs and cats for up to 12 weeks, and by companion animal vaccines. Sales growth in both periods also reflects higher sales of ruminant products, including the impact of the Vallée S.A. acquisition in Marchmonitoring solutions (see Note 2 to the condensed consolidated financial statements)~~, swine and poultry products.~~.

Costs, Expenses and Other

~~Materials and Production~~Cost of Sales

~~Materials and production costs~~Cost of sales were $~~3.3~~3.4 billion for the ~~third~~second quarter of ~~2017,~~2019, essentially flat compared with the second quarter of 2018, and were $6.5 billion for the first six months of 2019, a decline of 4%2% compared with the ~~third quarter~~same period of ~~2016, and were $9.4 billion in the first nine months of 2017, a decline of 11% compared with the first nine months of 2016.~~2018. Costs in the ~~third~~second quarter of ~~2017~~2019 and ~~2016~~2018 include ~~$765~~$371 million and ~~$772~~$732 million, respectively, and for the first ~~nine~~six months of ~~2017~~2019 and ~~2016~~2018 include ~~$2.3 billion~~$768 million and ~~$2.9~~$1.5 billion, respectively, of expenses for the amortization of intangible assets recorded in connection

with business acquisitions. ~~Additionally, costs~~Cost of sales also include expenses for the amortization of amounts capitalized in connection with collaborations of $124 million and $157 million in the second quarter of 2019 and 2018, respectively, and $222 million and $195 million for the first ~~nine~~six months of ~~2017~~2019 and ~~2016~~2018, respectively. These amounts include ~~$47~~catch-up amortization from the accrual of sales-based milestones that were deemed by the Company to be probable in each period (see Note 3 to the condensed consolidated financial statements). In addition, cost of sales in the second quarter and first six months of 2019 include $69 million and ~~$347~~$81 million, respectively, of intangible asset impairment charges related to marketed products ~~(see Note 6 to the condensed consolidated financial statements).~~and other intangibles recorded in connection with business acquisitions. The Company may recognize additional non-cash impairment charges in the future related to intangible assets that were measured at fair value and capitalized in connection with business acquisitions and such charges could be material. ~~Costs~~Also included in ~~the first nine months~~cost of ~~2017 also include a $76 million intangible asset impairment charge related to a licensing agreement. Included in materials and production costs~~sales are expenses associated with restructuring activities which amounted to $2565 million and ~~$36~~$3 million in the ~~third~~second quarter of ~~2017~~2019 and ~~2016,~~2018, respectively, and ~~$121~~$99 million and ~~$149~~$9 million for the first ~~nine~~six months of ~~2017~~2019 and ~~2016,~~2018, respectively, including accelerated depreciation and asset write-offs related to the planned sale or closure of manufacturing facilities. Separation costs associated with manufacturing-related headcount reductions have been incurred and are reflected in Restructuring costs as discussed below.

Gross margin was ~~68.3%~~71.1% in the ~~third~~second quarter of ~~2017~~2019 compared with ~~67.6%~~67.3% in the ~~third~~second quarter of ~~2016. Gross~~2018 and was 71.4% in the first six months of 2019 compared with 67.8% for the first six months of 2018. The gross margin improvement in both periods largely reflects a ~~7.7 percentage point net unfavorable~~lower aggregate impact from the amortization of intangible assets ~~intangible asset impairment charges~~related to business acquisitions and restructuring costs as noted ~~above.~~above, which unfavorably affected gross margin by 4.3 percentage points in the second quarter of 2019 compared with 7.1 percentage points in the second quarter of 2018 and by 4.3 percentage points in the first six months of 2019 compared with 7.2 percentage points in the first six months of 2018. The gross margin improvement in ~~gross margin~~both periods also 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 aand lower ~~net impact from the~~ amortization of ~~intangible assets, intangible asset impairment charges and restructuring costs~~capitalized milestone payments related to collaborations as noted above, which reduced gross margin by 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.above.

~~Marketing~~Selling, General and Administrative

~~Marketing~~Selling, general and administrative (M(SG&A) expenses were $~~2.4~~2.7 billion in the ~~third~~second quarter of ~~2017, essentially flat as~~2019, an increase of 8% compared with the ~~third~~second quarter of ~~2016. Higher~~2018, reflecting 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 and divestiture-related costs (primarily related to the acquisition of Antelliq), restructuring costs, and ~~lower selling costs. M~~promotional costs, partially offset by the favorable effect of foreign exchange. SG&A expenses ~~increased 1% to $7.3~~were $5.1 billion infor the first ~~nine~~six months of ~~2017~~2019, an increase of 2% compared with the same period of ~~2016. The increase was~~2018, driven ~~primarily~~ by higher administrative costs, ~~and promotional expenses, partially offset by lower~~ restructuring costs, and acquisition and divestiture-related costs, partially offset by the favorable effect of foreign exchange and lower selling ~~expenses. M~~and promotional costs. SG&A expenses ~~for~~in the second quarter and first ~~nine~~six months of ~~2017 and 2016~~2019 include ~~$3 million and $91 million, respectively, of~~ restructuring costs of $32 million 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 billion~~ ~~for~~declined 4% in the ~~third~~second quarter of ~~2017~~2019 to $2.2 billion driven primarily by lower expenses for business development transactions, reflecting a $344 million charge in the second quarter of 2018 related to the acquisition of Viralytics Limited (Viralytics). The decline was partially offset by higher expenses related to clinical development and increased investment in discovery research and early drug development. R&D expenses were $4.1 billion in the first six months of 2019, a decline of 25% compared with ~~$1.7 billion for~~ the ~~third quarter~~same period of ~~2016.~~2018. The ~~increase~~decline was driven primarily by a $1.4 billion charge recorded in 2018 related to the formation of an oncology collaboration with ~~AstraZeneca,~~Eisai (see Note 3 to the condensed consolidated financial statements) and lower expenses related to business development transactions. The year-to-date decline also reflects the favorable effect of foreign exchange and a reduction in expenses related to a decrease in the estimated fair value measurement of liabilities for contingent consideration. Partially offsetting the decline were higher ~~in-process research and~~expenses related to clinical development ~~(IPR&D) impairment charges,~~ and increased investment in discovery research and early drug development. R&D expenses were $7.9 billion for the first nine months of 2017 compared with $5.5 billion in the same period of 2016. The increase was driven primarily by the charge related to the AstraZeneca collaboration noted above, higher licensing costs and IPR&D impairment charges, partially offset by lower restructuring costs.

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 ~~$1.1~~$1.5 billion and $1.4 billion in ~~both~~ the ~~third~~second quarter of ~~2017~~2019 and ~~2016,~~2018, respectively, and were ~~$3.4~~$2.9 billion and ~~$3.2~~$2.7 billion ~~for~~in the first ~~nine~~six months of ~~2017~~2019 and ~~2016,~~2018, respectively. Also included in R&D expenses are Animal Health research costs, licensing costs and costs incurred by other divisions in support of R&D activities, including depreciation, production and general and administrative, ~~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~~$715 million and $525 million for the ~~third~~second quarter of ~~2017~~2019 and ~~2016,~~2018, respectively, and were ~~approximately $1.9~~$1.3 billion ~~for both~~and $1.0 billion in the first ~~nine~~six months of ~~2017~~2019 and ~~2016. Additionally,~~2018, respectively. In addition, R&D expenses include expense or income related to changes 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 2 to the condensed consolidated financial statements). R&D expenses also include IPR&D impairment charges of $245 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 6 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 atestimated fair value ~~and capitalized~~measurement of liabilities for contingent consideration recorded 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~~acquisitions. During the first ~~nine~~six months of ~~2017 and 2016, respectively (see Note 3~~2019, the Company recorded a net reduction in expenses of $38 million to decrease the estimated fair value of liabilities for contingent consideration related to the ~~condensed consolidated financial statements).~~discontinuation or delay of certain programs.

Restructuring Costs

programs. The Company will continue to evaluate its global footprint and ~~improve~~overall operating model, which could result in the ~~efficiency~~identification of ~~its manufacturing and supply network.~~additional actions over time. The actions contemplated under the 2019 Restructuring Program are expected to be substantially completed by the end of 2023, with the cumulative pretax costs to be incurred by the Company to implement the program estimated to be approximately $800 million to $1.2 billion. The Company expects to record charges of approximately $500 million in 2019 related to the program. The Company anticipates the actions under the 2019 Restructuring Program to result in annual net cost savings of approximately $500 million by the end of 2023. Actions under previous global restructuring programs have been substantially completed.

Restructuring costs, primarily representing separation and other related costs associated with these restructuring activities, were $~~153~~59 million and $~~161~~228 million for the ~~third~~second quarter of ~~2017~~2019 and ~~2016,~~2018, respectively, and ~~were $470~~$212 million and ~~$386~~$323 million for the first ~~nine~~six months of ~~2017~~2019 and ~~2016,~~2018, 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 positions and 300 positions in the~~ ~~third~~ ~~quarter of 2017 and 2016, respectively, and 1,225 and 1,355 positions for the first nine months of 2017 and 2016, 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~~Cost of sales, Selling, general and ~~production~~, ~~Marketing~~administrative expenses and ~~administrative~~ ~~and~~ Research and development ~~as discussed above.~~ costs. The Company recorded aggregate pretax costs of ~~$180~~$159 million and ~~$212~~$235 million in the ~~third~~second quarter of ~~2017~~2019 and ~~2016,~~2018, respectively, and ~~$605~~$346 million and ~~$759~~$339 million for the first ~~nine~~six months of ~~2017~~2019 and ~~2016,~~2018, respectively, related to restructuring program activities (see Note 34 to the condensed consolidated financial statements). ~~The Company expects to substantially complete the remaining actions under the programs by the end of 2017 and incur approximately $250 million of additional pretax costs.~~

Other (Income) Expense, Net

Other (income) expense, net was $86140 million of expense in the second quarter of 2019 compared with $48 million of income in the ~~third~~second quarter of ~~2017 compared with~~ ~~$22 million~~ ~~of expense in the~~ ~~third~~ ~~quarter of 2016~~2018 and was ~~$30~~$327 million of expense in the first ~~nine~~six months of ~~2017~~2019 compared with ~~$88~~$340 million of ~~expense in~~income for the first ~~nine~~six months of ~~2016.~~2018. For details on the components of Other (income) expense, net, see Note 1112 to the condensed consolidated financial statements.


Segment Profits
	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
($ in millions)	2017			2016			2017			2016			2019			2018			2019			2018
Pharmaceutical segment profits	$	5,929		$	6,162		$	16,722		$	16,698		$	7,115		$	5,975		$	13,690		$	11,914
Animal Health segment profits													405			450			820			864
Other non-reportable segment profits	482			389			1,442			1,129			(2		)	26			—			88
Other	(6,211		)	(3,664		)	(13,522		)	(11,812		)	(4,259		)	(4,365		)	(8,184		)	(9,434		)
Income before income taxes	$	200		$	2,887		$	4,642		$	6,015
Income before taxes													$	3,259		$	2,086		$	6,326		$	3,432

~~Segment~~Pharmaceutical segment profits are comprised of segment sales less standard costs, ~~certain operating~~as well as selling, general and administrative expenses directly incurred by the segment. Animal Health segment ~~components~~profits are comprised of ~~equity income or loss from affiliates~~segment sales, less all cost of sales, as well as selling, general and ~~certain depreciation~~administrative expenses and ~~amortization expenses.~~research and development costs directly incurred by the segment. For internal

management reporting presented to the chief operating decision maker, Merck does not allocate ~~materials and production costs, other than standard costs,~~ the ~~majority~~remaining cost of sales not included in segment profits as described above, research and development expenses incurred in MRL, or general and administrative expenses, nor the cost of financing these activities. Separate divisions maintain responsibility for monitoring and managing these costs, including depreciation related to fixed assets utilized by these divisions and, therefore, they are not included in segment profits. Also excluded from the determination of segment profits are acquisition and divestiture-related costs, including the amortization of purchase accounting adjustments, intangible asset impairment charges and changes in the estimated fair value measurement of liabilities ~~related to~~for contingent consideration, and restructuring ~~costs, and a portion of equity income.~~costs. 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.

Pharmaceutical segment profits ~~declined 4%~~grew 19% in the ~~third~~second quarter of ~~2017 driven primarily by lower sales partially offset by the favorable effects of product mix. Pharmaceutical segment profits were essentially flat~~2019 and 15% in the first ~~nine~~six months of ~~2017~~2019 compared with the same periods of 2018 driven primarily by higher sales and lower selling costs and, for the year-to-date period, also lower promotional costs. Animal Health segment profits declined 10% in the second quarter of 2019 compared with the second quarter of 2018 reflecting the unfavorable effect of foreign exchange and higher selling and administrative costs, partially offset by higher sales. Animal Health segment profits declined 5% in the first six months of 2019 compared with the corresponding period of ~~2016 primarily~~2018 largely reflecting ~~lower sales offset by~~ the ~~favorable effects~~unfavorable effect of ~~product mix.~~foreign exchange and higher selling costs.

Taxes on Income

Net (Loss) Income Attributable to Noncontrolling Interests

Net (loss) income attributable to noncontrolling interests was $(26) million for the second quarter of 2019 compared with $9 million for the second quarter of 2018 and ~~(Loss)~~was $(79) million for the first six months of 2019 compared with $14 million for the first six months of 2018. The losses in 2019 primarily reflect the portion of goodwill impairment charges related to certain businesses in the Healthcare Services segment that are attributable to noncontrolling interests.

Net Income and Earnings per Common Share

Net ~~(loss)~~ income attributable to Merck & Co., Inc. was ~~$(56) million~~$2.7 billion for the ~~third~~second quarter of ~~2017~~2019 compared with ~~$2.2~~$1.7 billion for the ~~third~~second quarter of ~~2016~~2018 and was ~~$3.4~~$5.6 billion for the first ~~nine~~six months of ~~2017~~2019 compared with ~~$4.5~~$2.4 billion for the first ~~nine~~six months of ~~2016. (Loss) earnings~~2018. Earnings per common share assuming dilution attributable to Merck & Co., Inc. common shareholders (EPS) for the ~~third~~second quarter of ~~2017~~2019 were ~~$(0.02)~~$1.03 compared with ~~$0.78~~$0.63 in the ~~third~~second quarter of ~~2016~~2018 and were ~~$1.25 in the first nine months of 2017 compared with $1.62~~$2.15 for the first ~~nine~~six months of ~~2016.~~2019 compared with $0.90 for the first six months of 2018.

Non-GAAP Income and Non-GAAP EPS

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

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 June 30,						Six Months Ended June 30,
($ in millions except per share amounts)	2017			2016			2017			2016			2019			2018			2019			2018
Pretax income as reported under GAAP	$	200		$	2,887		$	4,642		$	6,015
Income before taxes as reported under GAAP													$	3,259		$	2,086		$	6,326		$	3,432
Increase (decrease) for excluded items:
Acquisition and divestiture-related costs	1,032			834			2,797			3,602			660			855			1,208			1,588
Restructuring costs	180			212			605			759			159			235			346			339
Aggregate charge related to the formation of an oncology collaboration with AstraZeneca	2,350			—			2,350			—
Other items:
Charge for the acquisition of Viralytics													—			344			—			344
Charge related to the formation of a collaboration with Eisai													—			—			—			1,400
Other	—			(6		)	(9		)	(6		)	48			(32		)	48			(54		)
	3,762			3,927			10,385			10,370
Non-GAAP income before taxes													4,126			3,488			7,928			7,049
Taxes on income as reported under GAAP	251			699			1,186			1,487			615			370			820			975
Estimated tax benefit on excluded items ⁽¹⁾	218			235			593			801			145			255			274			362
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 from the settlement of certain federal income tax matters													—			—			360			—
Tax charge related to finalization of treasury regulations for the Tax Cuts and Job Act of 2017													—			—			(67		)	—
Non-GAAP taxes on income													760			625			1,387			1,337
Non-GAAP net income	3,059			2,993			8,284			8,082			3,366			2,863			6,541			5,712
Less: Net income attributable to noncontrolling interests	5			4			16			13
Net (loss) income attributable to noncontrolling interests as reported under GAAP													(26		)	9			(79		)	14
Acquisition and divestiture-related costs attributable to noncontrolling interests													36			—			89			—
Non-GAAP net income attributable to noncontrolling interests													10			9			10			14
Non-GAAP net income attributable to Merck & Co., Inc.	$	3,054		$	2,989		$	8,268		$	8,069		$	3,356		$	2,854		$	6,531		$	5,698
EPS assuming dilution as reported under GAAP	$	(0.02	)	$	0.78		$	1.25		$	1.62		$	1.03		$	0.63		$	2.15		$	0.90
EPS difference ⁽²⁾	1.13			0.29			1.75			1.27			0.27			0.43			0.37			1.21
Non-GAAP EPS assuming dilution	$	1.11		$	1.07		$	3.00		$	2.89		$	1.30		$	1.06		$	2.52		$	2.11


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


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

Acquisition and Divestiture-Related Costs

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

Restructuring Costs

Non-GAAP income and non-GAAP EPS exclude costs related to restructuring actions (see Note 34 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 ~~2017~~2019 is ~~an aggregate charge related to the formation of an oncology collaboration with AstraZeneca (see Note 2 to the condensed consolidated financial statements),~~ a net tax benefit related to the settlement of certain federal income tax ~~issues~~matters (see Note 13 to the condensed consolidated financial statements) and a ~~benefit~~tax charge related to the ~~settlement~~finalization of U.S. treasury regulations related to the Tax Cuts and Jobs Act of 2017. Excluded from non-GAAP income and non-GAAP EPS in 2018 is a charge for the acquisition of Viralytics (see Note 2 to the condensed consolidated financial statements) and a charge related to the formation of a ~~state income tax issue~~collaboration with Eisai (see Note 123 to the condensed consolidated financial statements).

Research and Development Update

Keytruda is an ~~FDA-approved~~ anti-PD-1 therapy inapproved for the treatment of many cancers. These approvals were the result of a broad clinical development program that currently consists of more than 1,000 clinical trials, including more than 600 trials that combine Keytruda with other cancer treatments. These studies encompass more than 30 cancer types including: bladder, cervical, colorectal, cutaneous squamous cell, gastric, HNSCC, hepatocellular, Hodgkin lymphoma, non-Hodgkin lymphoma, melanoma, mesothelioma, nasopharyngeal, NSCLC, ovarian, PMBCL, prostate, renal, small-cell lung and triple-negative breast, many of which are currently in Phase 3 clinical development. Further trials are being planned for ~~expanded~~other cancers.

In July 2019, the CHMP of the EMA adopted a positive opinion recommending approval of Keytruda, in combination with Inlyta (axitinib), a tyrosine kinase inhibitor, for the first-line treatment of patients with advanced renal cell carcinoma based on findings from the pivotal Phase 3 KEYNOTE-426 trial, which demonstrated significant improvements in overall survival (OS), progression-free survival (PFS) and objective response rate (ORR) for Keytruda in combination with axitinib compared to sunitinib. The CHMP’s recommendation will now be reviewed by the EC for marketing authorization in the EU, and a final decision is expected in the third quarter of 2019. Keytruda was approved for this indication by the FDA in April 2019.

Keytruda is also under review in the EU as monotherapy for the first-line treatment of patients with stage III NSCLC who are not candidates for surgical resection or definitive chemoradiation, or metastatic NSCLC, and whose tumors express PD-L1 (TPS ≥1%) with no EGFR or ALK genomic tumor aberrations. Keytruda was approved for this indication by the FDA in April 2019 based on results from the Phase 3 KEYNOTE-042 trial, in which Keytruda monotherapy demonstrated a statistically significant improvement in OS compared with chemotherapy alone in patients whose tumors expressed PD-L1 with a TPS ≥50%, with a TPS ≥20%, and then in the entire study population (TPS ≥1%).

In addition, Keytruda is under review in the EU as monotherapy or in combination with chemotherapy for the first-line treatment of patients with recurrent or metastatic HNSCC. This application is based in part on data from the pivotal Phase 3 KEYNOTE-048 trial where Keytruda demonstrated a significant improvement in OS compared with the standard of care, as monotherapy in patients whose tumors expressed PD-L1 with CPS≥20 and CPS≥1 and in combination with chemotherapy. Keytruda was approved for these indications by the FDA in ~~different cancer types.~~ June 2019.

Additionally, Keytruda is ~~currently~~under review in the EU as monotherapy for the second-line treatment of advanced or metastatic esophageal or esophagogastric junction carcinoma, based on the results of the Phase 3 KEYNOTE-181 trial. In July 2019, the FDA approvedKeytruda as monotherapy for the treatment of ~~certain~~ patients with ~~NSCLC,~~recurrent locally advanced or metastatic squamous cell carcinoma of the esophagus with disease progression after one or more prior lines of systemic therapy and whose tumor express PD-L1 (CPS≥10).

In July 2019, the FDA accepted for review six supplemental Biologics License Applications (sBLAs) to update the dosing frequency for Keytruda to include an every-six-weeks (Q6W) dosing schedule option for certain monotherapy indications. Merck is seeking FDA approval of a 400 mg Q6W dose infused over 30 minutes for Keytruda monotherapy indications in melanoma, cHL, ~~HNSCC, urothelial~~PMBCL, gastric cancer, hepatocellular carcinoma, and Merkel cell carcinoma. If approved by the FDA, the Q6W dose would be available for use in adults in addition to the currently approved dose of Keytruda 200 mg every three weeks (Q3W) infused over 30 minutes. The FDA set a PDUFA date of February 18, 2020. In the EU, 400 mg Q6W dosing for all approved Keytruda monotherapy indications was approved by the EC in March 2019.

In June 2019, Merck announced full results from the pivotal Phase 3 KEYNOTE-062 trial evaluating Keytruda as monotherapy and in combination with chemotherapy for the first-line treatment of advanced gastric or gastroesophageal junction ~~adenocarcinoma,~~adenocarcinoma. In the monotherapy arm of the study, Keytruda met a primary endpoint by demonstrating noninferiority to chemotherapy, the current standard of care, for OS in patients whose tumors expressed PD-L1 (CPS ≥1). In the combination arm of KEYNOTE-062, Keytruda plus chemotherapy was not found to be statistically superior for OS (CPS ≥1 or CPS ≥10) or PFS (CPS ≥1) compared with chemotherapy alone. Results were presented at the 2019 American Society of Clinical Oncology (ASCO) Annual Meeting and ~~MSI-H or mismatch repair deficient cancer, and in combination~~will be discussed with ~~pemetrexed and carboplatin in certain~~regulatory authorities. In September 2017, the FDA approved Keytruda as a third-line treatment for previously treated patients with ~~NSCLC (see “Pharmaceutical Segment” above).~~recurrent locally advanced or metastatic gastric or gastroesophageal junction cancer whose tumors express PD-L1 (CPS ≥1) as determined by an FDA-approved test. KEYNOTE-062 was a potential confirmatory trial for this accelerated, third-line approval. In addition to KEYNOTE-062, additional first-line, Phase 3 studies in Merck’s gastric clinical program include KEYNOTE-811 and KEYNOTE-859, as well as KEYNOTE-585 in the neoadjuvant and adjuvant treatment setting.

In addition, Keytruda has received Breakthrough Therapy designation from the FDA ~~for the treatment of 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;~~ for the treatment of high-risk, early-stage triple-negative breast cancer in combination with neoadjuvant ~~chemotherapy; and for the treatment of Merkel cell carcinoma.~~chemotherapy. The FDA’s Breakthrough Therapy designation is intended to expedite the development and review of a candidate that is planned for use, alone or in combination, to treat a serious or life-threatening disease or condition when preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints.

~~Merck is amending~~ Additionally, the ~~KEYNOTE-189 study to include overall survival as a co-primary endpoint. The updated completion date is February 2019 and there will be opportunities~~FDA recently granted Breakthrough Therapy designation for Keytruda in combination with Lenvima for the ~~Company to conduct interim analyses. KEYNOTE-189 is a Phase 3 study~~potential first-line treatment of ~~platinum-pemetrexed chemotherapy with or without~~ ~~Keytruda~~ in

patients with ~~first-line metastatic nonsquamous NSCLC.~~advanced unresectable hepatocellular carcinoma not amenable to locoregional treatment. Lenvima is being developed as part of a collaboration with Eisai (see Note 3 to the condensed consolidated financial statements).

In July ~~2017,~~2019, Merck announced that the ~~FDA has placed a full clinical hold~~Phase 3 KEYNOTE-522 trial investigating Keytruda in combination with chemotherapy met one of the dual-primary endpoints of pathologic complete response (pCR) following the neoadjuvant part of the neoadjuvant/adjuvant study regimen in patients with triple-negative breast cancer. Based on ~~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~~an interim analysis conducted by the ~~blood cancer multiple myeloma. This decision follows a review of data by the~~independent Data Monitoring Committee ~~in which more deaths were observed in the~~ (DMC), 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~~ ~~Keytruda~~ in combination with ~~pemetrexed and carboplatin~~chemotherapy, demonstrated a statistically significant improvement in pCR rates compared with chemotherapy alone, regardless of PD-L1 status. A pCR is defined as a ~~first-line treatment for metastatic nonsquamous NSCLC. The application was based~~lack of cancer cells in tissue samples analyzed following completion of neoadjuvant therapy and definitive surgery. Based on ~~findings from KEYNOTE-021, Cohort G.~~

~~The~~ ~~Keytruda~~ ~~clinical development program consists of more than 600 clinical trials, including more than 400 trials that combine~~ ~~Keytruda~~ with other cancer treatments. These studies encompass more than 30 cancer types including: bladder, colorectal, esophageal, gastric, head and neck, hepatocellular, Hodgkin lymphoma, non-Hodgkin lymphoma, melanoma, nasopharyngeal, NSCLC, ovarian, 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 Sessionsrecommendation 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~~DMC, the ~~FDA and~~trial will continue without changes to evaluate the ~~EMA. The Prescription Drug User Fee Act (PDUFA) action date from~~other dual-primary endpoint of event-free survival, per 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.~~trial design.

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,May 2019, Merck announced that the ~~pivotal~~ Phase 3 ~~clinical~~KEYNOTE-119 trial evaluating Keytruda as monotherapy for the second- or third-line treatment of patients with metastatic triple-negative breast cancer did not meet its pre-specified primary endpoint of superior OS compared to chemotherapy. Other endpoints were not formally tested per the study protocol because the primary endpoint of 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. LetermovirOS was not met. Results will be ~~marketed under the global trademark~~ ~~Prevymis~~presented at an upcoming medical meeting. The Keytruda breast cancer clinical development program encompasses several internal and external collaborative studies, including three ongoing registration-enabling studies in triple-negative breast cancer: KEYNOTE-355, KEYNOTE-242, and KEYNOTE-522 (discussed above).

~~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)~~PARP inhibitor currently approved for certain types of ovarian ~~cancer. The companies will develop~~ and ~~commercialize Lynparza, both~~breast cancer being co-developed for multiple cancer types 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~~a collaboration with AstraZeneca (see Note 23 to the condensed consolidated financial statements).

In ~~October 2017,~~June 2019, Merck and AstraZeneca announced ~~that~~detailed results from the ~~FDA accepted and granted priority review for a supplemental New Drug Application for the use of~~Phase 3 POLO trial evaluating Lynparza tablets inas a first-line maintenance monotherapy for patients with germline ~~BRCA-mutated, HER2-negative~~BRCA-mutated metastatic ~~breast~~pancreatic cancer whose disease had not progressed following platinum-based chemotherapy. Results from the trial showed a statistically-significant and clinically-meaningful improvement in PFS for Lynparza compared to placebo, reducing the risk of disease progression or death by 47%. The results of the trial were presented at the 2019 ASCO Annual Meeting and published online simultaneously in the New England Journal of Medicine.

Also in June 2019, Merck and AstraZeneca presented full results from the Phase 3 SOLO-3 trial which evaluated Lynparza, compared to chemotherapy, for the treatment of platinum-sensitive relapsed patients with germline BRCA1/2-mutated (gBRCAm) advanced ovarian cancer, who have ~~been previously treated with chemotherapy either in the neoadjuvant, adjuvant~~received two or ~~metastatic settings.~~more prior lines of chemotherapy. The ~~PDUFA action date is in the first quarter of 2018. A New Drug Application was also submitted to Japan’s Pharmaceuticals and Medical Devices Agency.~~

~~Also in July 2017, Merck announced the presentation of~~ results from the ~~DRIVE-AHEAD study,~~trial showed a statistically-significant and clinically-meaningful improvement in ORR in the ~~second~~Lynparza arm compared to the chemotherapy arm. The key secondary endpoint of ~~two~~PFS was also significantly increased in the Lynparza arm compared to the chemotherapy arm. The results were presented at the 2019 ASCO Annual Meeting.

In July 2019, the CHMP of the EMA adopted a positive opinion recommending Zerbaxa for an additional indication for the treatment of hospital-acquired pneumonia (HAP), including ventilator-associated pneumonia (VAP), in adults based on results of the pivotal Phase 3 ~~clinical trials evaluating~~ASPECT-NP trial that evaluated the efficacy and safety of ~~doravirine, the Company’s investigational, non-nucleoside reverse transcriptase inhibitor,~~Zerbaxa for the treatment of ~~HIV-1 infection. At 48 weeks,~~adult patients with HAP, including VAP. The CHMP positive opinion will now be considered by 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 both as a single-entity tablet and as a fixed-dose combination tablet (DOR/3TC/TDF)EC. Zerbaxa is currently approved in the ~~fourth quarter of 2017.~~

~~In October 2017, Merck announced that it will not submit applications~~EU 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 the treatment of chronic HCV infection. This decision was made based on a review of available Phase 2 efficacy data anduse as indicated in ~~consideration of the evolving marketplace and the growing number of treatment options available for~~adult patients with ~~chronic HCV infection, including~~ ~~Zepatier~~, which is currently marketed by the Company for the treatment of chronic HCV infection. As a result of this decision, the Company recorded an IPR&D impairment charge (see Note 6 to the condensed consolidated financial statements).complicated urinary tract infections, acute pyelonephritis, and complicated intra-abdominal infections.

The chart below reflects the Company’s research pipeline as of ~~November 1, 2017.~~July 31, 2019. Candidates shown in Phase 3 include specific products and the date such candidate entered into Phase 3 development. Candidates shown in Phase 2 include the most advanced compound with a specific mechanism or, if listed compounds have the same mechanism, they are each currently intended for commercialization in a given therapeutic area. Small molecules and biologics are given MK-number designations and vaccine candidates are given V-number designations. Except as otherwise noted, candidates in Phase 1, additional indications in the same therapeutic area (other than with respect to ~~oncology)~~cancer and certain other indications) 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~~MK-6482 ~~PMBCL (Primary Mediastinal Large B-Cell Lymphoma)~~Renal Cell ~~Prostate~~MK-7123⁽¹⁾ ~~Cough, including cough with Idiopathic Pulmonary Fibrosis~~Solid Tumors ~~MK-7264~~MK-7339 Lynparza⁽²⁾ ~~Diabetes Mellitus~~Advanced Solid Tumors ~~MK-8521~~MK-7690⁽¹⁾ ~~Pneumoconjugate Vaccine~~Colorectal ~~V114~~MK-7902 Lenvima⁽²⁾ Biliary Tract V937 Cavatak Melanoma Cytomegalovirus V160 HIV-1 Infection MK-8591 (islatravir) Pediatric Neurofibromatosis Type 1 MK-5618 (selumetinib)⁽²⁾⁽³⁾ Respiratory Syncytial Virus MK-1654 Schizophrenia MK-8189	~~Alzheimer’s Disease~~ ~~MK-8931 (verubecestat) (December 2013)~~ ~~Bacterial Infection~~ ~~MK-7655A (relebactam+imipenem/cilastatin)~~ ~~(October 2015)~~ Cancer MK-3475 Keytruda Breast (October 2015) Cervical (October 2018) (EU) Colorectal (November 2015) ~~Esophageal (December 2015)~~Cutaneous Squamous Cell (April 2019) Gastric (May 2015) (EU) ~~Head and Neck (November 2014) (EU)~~ Hepatocellular (May 2016) (EU) Mesothelioma (May 2018) Nasopharyngeal (April 2016) ~~Renal (October 2016)~~Ovarian (December 2018) Prostate (May 2019) Small-Cell Lung (May 2017) (EU) MK-7339 Lynparza⁽¹⁾⁽²⁾ Non-Small-Cell Lung (June 2019) Pancreatic (December 2014) Prostate (April 2017) ~~MK-5618 (selumetinib)~~MK-7902 Lenvima⁽¹⁾⁽²⁾ ~~Thyroid~~Bladder (May 2019) Endometrial (June ~~2013)~~2018) ~~Ebola Vaccine~~Melanoma (March 2019) ~~V920~~Non-Small-Cell Lung (March ~~2015)~~2019) Cough MK-7264 (gefapixant) (March 2018) Heart Failure MK-1242 (vericiguat) (September 2016)⁽¹⁾⁽²⁾ ~~Herpes Zoster~~Pneumoconjugate Vaccine ~~V212 (inactivated VZV vaccine) (December 2010)~~ ~~HIV~~ ~~MK-1439 (doravirine) (December 2014)~~ ~~MK-1439A (doravirine/lamivudine/tenofovir disoproxil fumarate)~~V114 (June ~~2015)~~2018)	New Molecular Entities/Vaccines ~~CMV Prophylaxis in Transplant Patients~~Bacterial Infection ~~MK-8228 (letermovir) (U.S./EU)~~MK-7655A (relebactam+imipenem/cilastatin) (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⁾ ~~Pediatric Hexavalent Combination~~Ebola Vaccine ~~V419~~V920 (U.S.)⁽²⁾⁽⁴⁾(EU) Certain Supplemental Filings Cancer ~~MK-7339 Lynparza~~⁽¹⁾MK-3475 Keytruda • ~~Second-Line~~First-Line Advanced Renal Cell Carcinoma (KEYNOTE-426) (EU) • First-Line Metastatic ~~Breast~~Non-Small-Cell Lung Cancer (KEYNOTE-042) (EU) • First-Line Head and Neck Cancer (KEYNOTE-048) (EU) • Recurrent Locally Advanced or Metastatic Esophageal Cancer (KEYNOTE-180/KEYNOTE-181) (EU) • Alternative Dosing Regimen (Q6W) (U.S.) HAP/VAP⁽⁵⁾ MK-7625A Zerbaxa (EU)
		Footnotes: ⁽¹⁾ Being developed in combination with Keytruda. ⁽²⁾Being developed in a collaboration. ⁽²⁾⁽³⁾ ~~V419~~This 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 the CRL and plan to have further communication with the FDA.~~registrational study. ⁽⁴⁾Rolling submission. ⁽⁵⁾ HAP - Hospital-Acquired Pneumonia / VAP - Ventilator-Associated Pneumonia

~~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			June 30, 2019			December 31, 2018
Cash and investments	$	23,401		$	25,757		$	10,884		$	15,097
Working capital	8,452			13,410			4,213			3,669
Total debt to total liabilities and equity	29.4		%	26.0		%	31.7		%	30.4		%

Cash provided by operating activities was $~~2.4~~4.4 billion in the first ~~nine~~six months of ~~2017~~2019 compared with ~~$6.7~~$4.5 billion in the first ~~nine~~six months of ~~2016. The decline~~2018. Cash provided by operating activities in the first six months of 2019 reflects ~~a $2.8 billion payment~~the receipt of $424 million from AstraZeneca related to the ~~settlement~~conclusion of ~~certain federal income~~the Company’s relationship with AstraZeneca LP, as well as $1.4 billion of tax ~~issues~~payments and a $325 million option payment to Eisai (see Note 12 to the condensed consolidated financial statements), a $1.6 billion upfront payment related to the formation of a collaboration with AstraZeneca (see Note 2 to the condensed consolidated financial statements), and a $625 million payment made by the Company related to the settlement of worldwide ~~Keytruda~~ ~~patent litigation (see Note 7~~3 to the condensed consolidated financial statements). Cash provided by operating activities in the first ~~nine~~six months of ~~2016 includes~~2018 reflects $750 million of upfront payments made by the Company related to the formation of a ~~net payment of approximately $680 million~~collaboration with Eisai (see Note 3 to ~~fund~~ the ~~Vioxx~~ ~~shareholder class action litigation settlement not covered by insurance proceeds.~~condensed consolidated financial statements). Cash provided by operating activities continues to be the Company’s primary source of funds to finance operating needs, capital expenditures, ~~a portion of~~ treasury stock purchases and dividends paid to shareholders.

Cash used in investing activities was $2.1 billion in the first six months of 2019 compared with cash provided by investing activities ~~was~~ of $~~2.7 billion~~476 million in the first ~~nine~~six months of ~~2017 compared with a use of cash of~~ ~~$647 million~~ ~~in the first~~ ~~nine~~ ~~months of 2016.~~2018. The change was driven primarily by ~~lower purchases~~the acquisition of ~~securities and other investments, higher~~Antelliq, lower proceeds from the sales of securities and other investments and higher capital expenditures, partially offset by lower purchases of securities and other investments, as well as a ~~lower use of cash for~~$350 million milestone payment in 2018 related to a collaboration with Bayer (see Note 3 to the ~~acquisitions of businesses.~~condensed consolidated financial statements).

Cash used in financing activities was $~~4.2~~3.7 billion in the first ~~nine~~six months of ~~2017~~2019 compared with $~~7.1~~5.7 billion in the first ~~nine~~six months of ~~2016.~~2018. The ~~decrease in~~lower use of cash ~~used~~ in financing activities was driven primarily by proceeds from the issuance of debt (see below) and lower payments on debt, ~~and an increase in short-term borrowings,~~ partially offset by ~~lower proceeds from~~ the ~~exercise~~repayment 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~~ 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 andborrowings, higher dividends paid to ~~shareholders. The decline in working capital from December 31, 2016 to September 30, 2017 primarily reflects the reclassification~~shareholders and higher purchases 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.treasury stock.

Capital expenditures totaled $~~1.2~~1.4 billion and $~~1.1~~1.0 billion for the first ~~nine~~six months of ~~2017~~2019 and ~~2016,~~2018, respectively.

Dividends paid to stockholders were $~~3.9~~2.9 billion and $2.6 billion for ~~both~~ the first ~~nine~~six months of ~~2017~~2019 and ~~2016.~~2018, respectively. In May ~~2017,~~2019, the Board of Directors declared a quarterly dividend of $0.55 per share on the Company’s common stock for the third quarter ~~of $0.47 per share~~ that was paid in July ~~2017.~~2019. In July ~~2017,~~2019, the Board of Directors declared a quarterly dividend of $0.55 per share on the Company’s common stock for the fourth quarter ~~of $0.47 per share~~ that ~~was~~will be paid in October ~~2017.~~2019.

In March ~~2015,~~2019, the Company issued $5.0 billion principal amount of senior unsecured notes consisting of $750 million of 2.90% notes due 2024, $1.75 billion of 3.40% notes due 2029, $1.0 billion of 3.90% notes due 2039, and $1.5 billion of 4.00% notes due 2049. The Company used the net proceeds from the offering of $5.0 billion for general corporate purposes, including the repayment of outstanding commercial paper borrowings.

In October 2018, Merck’s ~~board~~Board of ~~directors~~Directors authorized purchases of up to $10 billion of Merck’s common stock for its treasury. The treasury stock purchase authorization has no time limit and ~~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~~six months of ~~2017,~~2019, the Company purchased $2.3 billion ~~(36~~(30 million shares) for its ~~treasury.~~treasury under this and a previously authorized share repurchase program. In addition, the Company received 7.7 million shares in settlement of accelerated share repurchase (ASR) agreements as discussed below. As of ~~September~~June 30, ~~2017,~~2019, the Company’s remaining share repurchase authorization was ~~$2.7~~$9.6 billion.

~~In February 2017, $300 million of floating rate notes matured in accordance~~On October 25, 2018, the Company entered into ASR agreements with ~~their terms and were repaid. In January 2016, $850 million of 2.2% notes matured in accordance with their terms and were repaid. In May 2016, $1.0~~two third-party financial institutions (Dealers). Under the ASR agreements, Merck agreed to purchase $5 billion of ~~0.70% notes~~Merck’s common stock, in total, with an initial delivery of 56.7 million shares of Merck’s common stock, based on the then-current market price, made by the Dealers to Merck, and ~~$500 million~~payments of ~~floating rate notes matured in accordance with their terms and were repaid.~~

~~On November 6, 2017,~~$5 billion made by 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~~Dealers on October 29, 2018, which were funded with existing cash and ~~conditions set forth~~investments, as well as short-term borrowings. Upon settlement of the ASR agreements in April 2019, Merck received an additional 7.7 million shares as determined by the ~~Offer~~average daily volume weighted-average price of Merck’s common stock during the term of the ASR program, less a negotiated discount, bringing the total shares received by Merck under this program to ~~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.~~64.4 million.

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

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~~2018 included in Merck’s Form 10‑K filed on February ~~28, 2017.~~27, 2019. Certain of these accounting policies are considered critical as disclosed in the Critical Accounting Policies section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Merck’s Form 10-K because of the potential for a significant impact on the financial statements due to the inherent uncertainty in such estimates. There have been no significant changes in the Company’s critical accounting policies since December 31, ~~2016.~~2018. See Note 1 to the condensed consolidated financial statements for information on the adoption of new accounting standards during 2019.

Recently Issued Accounting Standards

~~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 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 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.~~reporting. Based on ~~this assessment,~~their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that as of ~~September~~June 30, ~~2017~~2019, the Company’s disclosure controls and procedures are effective. For the ~~period covered by this report,~~second quarter of 2019, there ~~have been~~were 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,~~2018, as filed on February ~~28, 2017,~~27, 2019, the Company discusses in more detail various important risk factors that could cause actual results to differ from expected or historic results. The Company notes these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. One should understand that it is not possible to predict or identify all such factors. Consequently, the reader should not consider any such list to be a complete statement of all potential risks or uncertainties.

PART II - Other Information

Item 1. Legal Proceedings

The information called for by this Item is incorporated herein by reference to Note 78 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~~June 30, ~~2017~~2019 were as follows:

ISSUER PURCHASES OF EQUITY SECURITIES

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

Average Price
Paid Per
Share

Approximate Dollar Value of Shares
That May Yet Be Purchased
Under the Plans or Programs⁽¹⁾
July 1 - July 31 —
$0.00 $2,902
August 1 - August 31 720,907
$62.46 $2,857
September 1 - September 30 1,758,726
$64.68 $2,743
Total 2,479,633
$64.04 $2,743



				($ in millions)
Period	Total Number of Shares Purchased ⁽¹⁾		Average Price Paid Per Share	Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs ⁽¹⁾
April 1 - April 30	9,300,182	⁽²⁾	$74.95	$10,741
May 1 - May 31	7,834,108		$78.88	$10,123
June 1 - June 30	6,025,248		82.74	$9,640
Total	23,159,538		$79.98	$9,640


⁽¹⁾	Shares purchased during the period were made as part of ~~a plan~~plans approved by the Board of Directors in ~~March 2015~~November 2017 and October 2018 each to purchase up to $10 billion of Merck’s common stock for its treasury.

⁽²⁾ Includes 7.7 million shares received in April upon settlement of accelerated share repurchase agreements for which no cash was paid during the period.

Item 6. Exhibits



Number		Description

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

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

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

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

32.1	—	Section 1350 Certification of Chief Executive Officer

32.2	—	Section 1350 Certification of Chief Financial Officer

101	—	The following materials from Merck & Co., Inc.’s Quarterly Report on Form 10-Q for the quarter ended ~~September~~June 30, ~~2017,~~2019, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statement of Income, (ii) the Condensed Consolidated Statement of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheet, (iv) the Condensed Consolidated Statement of Cash Flows, and (v) Notes to the Condensed Consolidated Financial Statements.

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~~August 6, 2019		/s/ ~~Michael J. Holston~~Jennifer Zachary
		~~MICHAEL J. HOLSTON~~JENNIFER ZACHARY
		Executive Vice President and General Counsel

Date: ~~November 7, 2017~~August 6, 2019		/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~~June 30, ~~2017,~~2019, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statement of Income, (ii) the Condensed Consolidated Statement of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheet, (iv) the Condensed Consolidated Statement of Cash Flows, and (v) Notes to the Condensed Consolidated Financial Statements.

- 4846 -



	Three Months Ended September 30, 2016								Nine Months Ended September 30, 2016
($ in millions)	Separation Costs		Accelerated Depreciation		Other		Total		Separation Costs		Accelerated Depreciation		Other		Total
Materials and production	$	—	$	18	$	18	$	36	$	—	$	69	$	80	$	149
Marketing and administrative	—		1		—		1		—		8		83		91
Research and development	—		14		—		14		—		133		—		133
Restructuring costs	61		—		100		161		172		—		214		386
	$	61	$	33	$	118	$	212	$	172	$	210	$	377	$	759



	Three Months Ended September 30,
($ in millions)	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	)
Other comprehensive income (loss) before reclassification adjustments, pretax	(88		)		170				2				23			107
Tax	31				(19		)		(13		)		44			43
Other comprehensive income (loss) before reclassification adjustments, net of taxes	(57		)		151				(11		)		67			150
Reclassification adjustments, pretax	(14		)	⁽¹⁾	(24		)	⁽²⁾	31			⁽³⁾	—			(7		)
Tax	5				8				(7		)		—			6
Reclassification adjustments, net of taxes	(9		)		(16		)		24				—			(1		)
Other comprehensive income (loss), net of taxes	(66		)		135				13				67			149
Balance September 30, 2017, net of taxes	$	(103	)		$	210			$	(3,120	)		$	(1,932	)	$	(4,945	)



			($ 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⁾
July 1 - July 31	—	$0.00	$2,902
August 1 - August 31	720,907	$62.46	$2,857
September 1 - September 30	1,758,726	$64.68	$2,743
Total	2,479,633	$64.04	$2,743