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, 2018~~

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, 2018: 2,600,376,500~~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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). 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	☐	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,						Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017			2019			2018			2019			2018
Sales	$	10,794		$	10,325		$	31,296		$	29,689		$	11,760		$	10,465		$	22,575		$	20,502
Costs, Expenses and Other
Materials and production	3,619			3,307			10,220			9,472
Marketing and administrative	2,443			2,459			7,459			7,432
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	2,068			4,413			7,538			8,024			2,189			2,274			4,119			5,470
Restructuring costs	171			153			494			470			59			228			212			323
Other (income) expense, net	(172		)	(207		)	(512		)	(351		)	140			(48		)	327			(340		)
	8,129			10,125			25,199			25,047			8,501			8,379			16,249			17,070
Income Before Taxes	2,665			200			6,097			4,642			3,259			2,086			6,326			3,432
Taxes on Income	707			251			1,682			1,186			615			370			820			975
Net Income (Loss)	1,958			(51		)	4,415			3,456
Less: Net Income Attributable to Noncontrolling Interests	8			5			22			16
Net Income (Loss) Attributable to Merck & Co., Inc.	$	1,950		$	(56	)	$	4,393		$	3,440
Basic Earnings (Loss) per Common Share Attributable to Merck & Co., Inc. Common Shareholders	$	0.73		$	(0.02	)	$	1.64		$	1.26
Earnings (Loss) per Common Share Assuming Dilution Attributable to Merck & Co., Inc. Common Shareholders	$	0.73		$	(0.02	)	$	1.63		$	1.25
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,						Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017			2019			2018			2019			2018
Net Income (Loss) Attributable to Merck & Co., Inc.	$	1,950		$	(56	)	$	4,393		$	3,440
Net Income Attributable to Merck & Co., Inc.													$	2,670		$	1,707		$	5,585		$	2,443
Other Comprehensive (Loss) Income Net of Taxes:
Net unrealized gain (loss) on derivatives, net of reclassifications	27			(66		)	223			(441		)
Net unrealized (loss) gain on derivatives, net of reclassifications													(52		)	266			(100		)	196
Net unrealized gain (loss) on investments, net of reclassifications	40			135			(56		)	213			44			3			126			(96		)
Benefit plan net gain and prior service credit, net of amortization	40			13			106			86			11			30			26			66
Cumulative translation adjustment	(136		)	67			(240		)	423			(19		)	(361		)	131			(104		)
	(29		)	149			33			281			(16		)	(62		)	183			62
Comprehensive Income Attributable to Merck & Co., Inc.	$	1,921		$	93		$	4,426		$	3,721		$	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, 2018			December 31, 2017			June 30, 2019			December 31, 2018
Assets
Current Assets
Cash and cash equivalents	$	7,826		$	6,092		$	6,659		$	7,965
Short-term investments	2,459			2,406			446			899
Accounts receivable (net of allowance for doubtful accounts of $229 in 2018 and $210 in 2017)	7,374			6,873
Inventories (excludes inventories of $1,294 in 2018 and $1,187 in 2017 classified in Other assets - see Note 7)	5,416			5,096
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	3,761			4,299			3,382			4,500
Total current assets	26,836			24,766			24,298			25,875
Investments	7,606			12,125			3,779			6,233
Property, Plant and Equipment, at cost, net of accumulated depreciation of $16,568 in 2018 and $16,602 in 2017	12,755			12,439
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	18,258			18,284			19,490			18,253
Other Intangibles, Net	12,175			14,183			13,381			11,431
Other Assets	7,500			6,075			9,155			7,554
	$	85,130		$	87,872		$	83,965		$	82,637
Liabilities and Equity
Current Liabilities
Loans payable and current portion of long-term debt	$	3,656		$	3,057		$	3,816		$	5,308
Trade accounts payable	3,091			3,102			3,142			3,318
Accrued and other current liabilities	9,776			10,427			11,054			10,151
Income taxes payable	759			708			634			1,971
Dividends payable	1,304			1,320			1,439			1,458
Total current liabilities	18,586			18,614			20,085			22,206
Long-Term Debt	19,936			21,353			22,771			19,806
Deferred Income Taxes	2,065			2,219			2,089			1,702
Other Noncurrent Liabilities	11,887			11,117			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 2018 and 2017	1,788			1,788
Common stock, $0.50 par value Authorized - 6,500,000,000 shares Issued - 3,577,103,522 shares in 2019 and 2018							1,788			1,788
Other paid-in capital	39,762			39,902			39,484			38,808
Retained earnings	42,189			41,350			45,295			42,579
Accumulated other comprehensive loss	(5,151		)	(4,910		)	(5,362		)	(5,545		)
	78,588			78,130			81,205			77,630
Less treasury stock, at cost: 918,364,126 shares in 2018 and 880,491,914 shares in 2017	46,166			43,794
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	32,422			34,336			27,635			26,701
Noncontrolling Interests	234			233			102			181
Total equity	32,656			34,569			27,737			26,882
	$	85,130		$	87,872		$	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,
	2018			2017			2019			2018
Cash Flows from Operating Activities
Net income	$	4,415		$	3,456		$	5,506		$	2,457
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	3,424			3,509			1,871			2,427
Intangible asset impairment charges	—			376			252			—
Charge for future payments related to collaboration license options	650			750			—			650
Charge for collaboration termination	420			—
Deferred income taxes	(391		)	(601		)	(149		)	(258		)
Share-based compensation	261			232			204			170
Other	585			(31		)	114			365
Net changes in assets and liabilities	(2,034		)	(5,259		)	(3,378		)	(1,274		)
Net Cash Provided by Operating Activities	7,330			2,432			4,420			4,537
Cash Flows from Investing Activities
Capital expenditures	(1,686		)	(1,173		)	(1,377		)	(1,033		)
Purchases of securities and other investments	(6,899		)	(8,397		)	(1,810		)	(5,248		)
Proceeds from sales of securities and other investments	11,243			12,533			4,935			7,403
Acquisitions, net of cash acquired	(372		)	(347		)
Acquisition of Antelliq Corporation, net of cash acquired							(3,620		)	—
Other acquisitions, net of cash acquired							(270		)	(372		)
Other	(150		)	121			85			(274		)
Net Cash Provided by Investing Activities	2,136			2,737
Net Cash (Used in) Provided by Investing Activities							(2,057		)	476
Cash Flows from Financing Activities
Net change in short-term borrowings	2,294			1,962			(3,532		)	2,069
Payments on debt	(3,007		)	(301		)	—			(3,008		)
Proceeds from issuance of debt							4,958			—
Purchases of treasury stock	(3,158		)	(2,312		)	(2,325		)	(2,162		)
Dividends paid to stockholders	(3,895		)	(3,884		)	(2,896		)	(2,610		)
Proceeds from exercise of stock options	461			481			304			299
Other	(289		)	(167		)	(207		)	(277		)
Net Cash Used in Financing Activities	(7,594		)	(4,221		)	(3,698		)	(5,689		)
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash	(140		)	438			28			(108		)
Net Increase in Cash, Cash Equivalents and Restricted Cash	1,732			1,386
Cash, Cash Equivalents and Restricted Cash at Beginning of Year (includes restricted cash of $4 million at January 1, 2018 included in Other Assets)	6,096			6,515
Cash, Cash Equivalents and Restricted Cash at End of Period (includes restricted cash of $2 million at September 30, 2018 included in Other Assets)	$	7,828		$	7,901
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 27, ~~2018.~~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.

Recently Adopted Accounting Standards

In May 2014, the Financial Accounting Standards Board (FASB) issued amended accounting guidance on revenue recognition (ASU 2014-09) that applies to all contracts with customers. The objective of the new guidance is to improve comparability of revenue recognition practices across entities and to provide more useful information to users of financial statements through improved disclosure requirements. The new standard permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of adopting the guidance being recognized at the date of initial application (modified retrospective method). The new standard was effective as of January 1, 2018 and was adopted using the modified retrospective method. The Company recorded a cumulative-effect adjustment upon adoption increasing ~~Retained earnings~~ ~~by $5 million. See Note 2 for additional information related to the adoption of this standard.~~

In January 2016, the FASB issued revised guidance for the accounting and reporting of financial instruments (ASU 2016-01) and in 2018 issued related technical corrections (ASU 2018-03). The new guidance requires that equity investments with readily determinable fair values currently classified as available for sale be measured at fair value with changes in fair value recognized in net income. The Company has elected to measure equity investments without readily determinable fair values at cost, less impairment, adjusted for subsequent observable price changes, which will be recognized in net income. The new guidance also changed certain disclosure requirements. ASU 2016-01 was effective as of January 1, 2018 and was adopted using a modified retrospective approach. The Company recorded a cumulative-effect adjustment upon adoption increasing ~~Retained earnings~~ ~~by $8 million. ASU 2018-03 was also adopted as of January 1, 2018 on a prospective basis and did not result in any additional impacts upon adoption.~~

In October 2016, the FASB issued guidance on the accounting for the income tax consequences of intra-entity transfers of assets other than inventory (ASU 2016-16). The new guidance requires the recognition of the income tax consequences of an intra-entity transfer of an asset (with the exception of inventory) when the intra-entity transfer occurs, replacing the prohibition against doing so. The current exception to defer the recognition of any tax impact on the transfer of inventory within the consolidated entity until it is sold to a third party remains unaffected. The new standard was effective as of January 1, 2018 and was adopted using a modified retrospective approach. The Company recorded a cumulative-effect adjustment upon adoption increasing ~~Retained earnings~~ ~~by $54 million with a corresponding decrease to~~ ~~Deferred Income Taxes~~.

In August 2017, the FASB issued new guidance on hedge accounting (ASU 2017-12) that is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. The new guidance makes more financial and nonfinancial hedging strategies eligible for hedge accounting, amends the presentation and disclosure requirements, and changes how companies assess effectiveness. The Company elected to early adopt this guidance as of January 1, 2018 on a modified retrospective basis. The new guidance was applied to all existing hedges as of the adoption date. For fair value hedges of interest rate risk outstanding as of the date of adoption, the Company recorded a cumulative-effect adjustment upon adoption to the basis adjustment on the hedged item resulting from applying the benchmark component of the coupon guidance. This adjustment decreased ~~Retained earnings~~ by $11 million. Also, in accordance with the transition provisions of ASU 2017-12, the Company was required to eliminate the separate measurement of ineffectiveness for its cash flow hedging instruments existing as of the adoption date through a cumulative-effect adjustment to retained earnings; however, all such amounts were ~~de minimis~~.

In February 2018, the FASB issued new guidance to address a narrow-scope financial reporting issue that arose as a consequence of the Tax Cuts and Jobs Act of 2017 (TCJA) (ASU 2018-02). Existing guidance requires that deferred tax liabilities and assets be adjusted for a change in tax laws or rates with the effect included in income from continuing operations in the reporting period that includes the enactment date. That guidance is applicable even in situations in which the related income tax effects of items in accumulated other comprehensive income were originally recognized in other comprehensive income (rather than in net income), such as amounts related to benefit plans and hedging activity. As a result, the tax effects of items within accumulated other comprehensive income do not reflect the appropriate tax rate (the difference is referred to as stranded tax effects). The new guidance allows for a reclassification of these amounts to retained earnings thereby eliminating these stranded tax effects. The Company elected to early adopt the new guidance in the first quarter of 2018 and reclassified the stranded income

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

~~tax effects of the TCJA increasing~~ ~~Accumulated other comprehensive loss~~ ~~in the provisional amount of $266 million with a corresponding increase to~~ ~~Retained earnings~~ ~~(see Note 16). The Company’s policy for releasing disproportionate income tax effects from~~ ~~Accumulated other comprehensive loss~~ ~~is to utilize the item-by-item approach.~~

~~The impact of adopting the above standards is as follows:~~

($ in millions) ASU 2014-09 (Revenue) ASU 2016-01 (Financial Instruments) ASU 2016-16 (Intra-Entity Transfers of Assets Other than Inventory) ASU 2017-12 (Derivatives and Hedging) ASU 2018-02 (Reclassification of Certain Tax Effects) Total
Assets - Increase (Decrease)
Accounts receivable $ 5
$ 5
Liabilities - Increase (Decrease)

Income Taxes Payable (3 ) (3 )
Debt 14
14
Deferred Income Taxes (54 ) (54 )
Equity - Increase (Decrease)
Retained earnings 5
8
54
(11 ) 266
322
Accumulated other comprehensive loss (8 ) (266 ) (274 )

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 Company adopted the new standard as of January 1, 2018 using a retrospective transition method as to the requirement for separate presentation in the income statement of service costs and other components and a prospective transition method as to the requirement to limit the capitalization of benefit costs to the service cost component. The Company utilized a practical expedient that permits it to use the amounts disclosed in its pension and other postretirement benefit plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. Upon adoption, net periodic benefit cost (credit) other than service cost was reclassified to ~~Other (income) expense, net~~ ~~from the previous classification within~~ ~~Materials and production~~ ~~costs,~~ ~~Marketing and administrative~~ ~~expenses and~~ ~~Research and development~~ ~~costs (see Note 13).~~

In August 2016, the FASB issued guidance on the classification of certain cash receipts and payments in the statement of cash flows intended to reduce diversity in practice. The Company adopted the new standard effective as of January 1, 2018 using a retrospective application. There were no changes to the presentation of the Consolidated Statement of Cash Flows in the prior year period as a result of adopting the new standard.

In November 2016, the FASB issued guidance requiring that amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new standard was effective as of January 1, 2018 and was adopted using a retrospective application. The adoption of the new guidance did not have a material effect on the Company’s Consolidated Statement of Cash Flows.

In May 2017, the FASB issued guidance clarifying when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The Company adopted the new standard effective as of January 1, 2018 and will apply the new guidance to future share-based payment award modifications should they occur.

~~Recently Issued Accounting Standards Not Yet Adopted~~

In February 2016, the FASB issued new accounting guidance for the accounting and reporting of leases (ASU 2016-02) and subsequently issued several updates to the new ~~guidance.~~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 ~~will adopt~~adopted the new standard on January 1, 2019 using a modified retrospective approach. Merck ~~will elect~~elected the transition method that allows for application of the standard at the adoption date rather than at the beginning of the earliest comparative period presented in the financial statements. The Company ~~intends to elect~~also elected available practical expedients. ~~The~~Upon adoption, the Company ~~is currently evaluating the impact~~recognized $1.1 billion of ~~adoption~~additional assets and related liabilities on its consolidated ~~financial statements. Merck has~~

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

~~selected a lease accounting tool and made significant progress regarding lease data validation for contracts that are in~~balance sheet (see Note 7). The adoption of the new guidance did not impact the Company’s ~~current lease portfolio. Merck continues to assess the potential impact~~consolidated statements of ~~embedded leases in certain agreements.~~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, the FASB issued guidance that provides for the elimination of Step 2 from the goodwill impairment test. Under the new guidance, impairment charges are recognized to the extent the carrying amount of a reporting unit exceeds its fair value with certain limitations. The new guidance is effective for interim and annual periods in 2020. Early adoption is permitted. The Company does not anticipate that the adoption of the new guidance will have a material effect on its consolidated financial statements.

In April 2018, the FASB issued new guidance on the accounting for costs incurred to implement a cloud computing arrangement that is considered a service arrangement. The new guidance requires the capitalization of such costs, aligning it with the accounting for costs associated with developing or obtaining internal-use software. The new guidance is effective for interim and annual periods 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~~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 ~~may elect~~annual periods beginning in 2020. Early adoption is permitted, including adoption in any interim period. The new guidance is to ~~early adopt~~be applied on a retrospective basis through a cumulative-effect adjustment directly to retained earnings. The Company does not anticipate the adoption of this ~~guidance.~~standard will have a material effect on its consolidated financial statements.


2.	~~Summary of Significant Accounting Policies~~

~~On January 1, 2018, the Company adopted ASU 2014-09,~~ ~~Revenue from Contracts with Customers~~, and subsequent amendments (ASC 606 or new guidance), using the modified retrospective method. Merck applied the new guidance to all contracts with customers within the scope of the standard that were in effect on January 1, 2018 and recognized the cumulative effect of initially applying the new guidance as an adjustment to the opening balance of retained earnings (see Note 1). Comparative information for prior periods has not been restated and continues to be reported under the accounting standards in effect for those periods.

The new guidance provides principles that an entity applies to report useful information about the amount, timing, and uncertainty of revenue and cash flows arising from its contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to in exchange for those goods or services. The new guidance introduces a 5-step model to recognize revenue when or as control is transferred: identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when or as the performance obligations are satisfied. The Company’s significant accounting policies are detailed in Note 2 to the consolidated financial statements included in Merck’s Annual Report on Form 10-K for the year ended December 31, 2017. Changes to the Company’s revenue recognition policy as a result of adopting ASC 606 are described below. See Note 17 for disaggregated revenue disclosures.

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

The vast majority of revenues from sales of products are recognized at a point in time when control of the goods is transferred to the customer, which the Company has determined is when title and risks and rewards of ownership transfer to the customer and the Company is entitled to payment. Certain Merck entities, including U.S. entities, have contract terms under which control of the goods passes to the customer upon shipment; however, either pursuant to the terms of the contract or as a business practice, Merck retains responsibility for goods lost or damaged in transit. Prior to the adoption of the new standard, Merck would recognize revenue for these entities upon delivery of the goods. Under the new guidance, the Company is now recognizing revenue at time of shipment for these entities.

For businesses within the Company’s Healthcare Services segment and certain services in the Animal Health segment, revenue is recognized over time, generally ratably over the contract term as services are provided.

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

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

The nature of the Company’s business gives rise to several types of variable consideration including discounts and returns, which are estimated at the time of sale generally using the expected value method, although the most likely amount method is also used for certain types of variable consideration. In the United States, sales discounts are issued to customers at the point-of-sale, through an intermediary wholesaler (known as chargebacks), or in the form of rebates. Additionally, sales are generally made with a limited right of return under certain conditions. Revenues are recorded net of provisions for sales discounts and returns, which are established at the time of sale. In addition, revenues are recorded net of time value of money discounts if collection of accounts receivable is expected to be in excess of one year.

The provision for aggregate customer discounts covers chargebacks and rebates. Chargebacks are discounts that occur when a contracted customer purchases through an intermediary wholesaler. The contracted customer generally purchases product from the wholesaler at its contracted price plus a mark-up. The wholesaler, in turn, charges the Company back for the difference between the price initially paid by the wholesaler and the contract price paid to the wholesaler by the customer. The provision for chargebacks is based on expected sell-through levels by the Company’s wholesale customers to contracted customers, as well as estimated wholesaler inventory levels. Rebates are amounts owed based upon definitive contractual agreements or legal requirements with private sector and public sector (Medicaid and Medicare Part D) benefit providers, after the final dispensing of the product by a pharmacy to a benefit plan participant. The provision for rebates is based on expected patient usage, as well as inventory levels in the distribution channel to determine the contractual obligation to the benefit providers. The Company uses historical customer segment utilization mix, sales forecasts, changes to product mix and price, inventory levels in the distribution channel, government pricing calculations and prior payment history in order to estimate the expected provision. Amounts accrued for aggregate customer discounts are evaluated on a quarterly basis through comparison of information provided by the wholesalers, health maintenance organizations, pharmacy benefit managers, federal and state agencies, and other customers to the amounts accrued. These discounts, in the aggregate, reduced U.S. sales by $2.6 billion and $2.9 billion in the third quarter of 2018 and 2017, respectively, and by $7.7 billion and $8.2 billion for the first nine months of 2018 and 2017, respectively.

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

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

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

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

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

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

September 30, 2018
($ in millions) As Reported Effects of Adopting ASC 606 Amounts Without Adoption of ASC 606
Assets
Accounts receivable $ 7,374
$ (45 ) $ 7,329
Inventories 5,416
19
5,435
Liabilities

Accrued and other current liabilities 9,776
(6 ) 9,770
Income taxes payable 759
(5 ) 754
Equity

Retained earnings 42,189
(15 ) 42,174


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

The Company continues to pursue 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 July 2019, Merck acquired Peloton Therapeutics, Inc. (Peloton), a clinical-stage biopharmaceutical company focused on the ~~third~~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 novel oral HIF-2α inhibitor in late-stage development for renal cell carcinoma. Merck made an upfront payment of $1.05 billion in cash; additionally, former Peloton shareholders will be eligible to receive up to an additional $1.15 billion contingent upon successful achievement of future regulatory and sales-based milestones. The acquisition will be accounted for as an acquisition of an 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 second quarter of ~~2018,~~2019 include two months of activity for Antelliq. The Company incurred $47 million of transaction costs directly related to the ~~Company recorded~~acquisition of Antelliq, consisting largely of advisory fees, which are reflected in Selling, general and administrative expenses in the second quarter of 2019.

Also in April 2019, Merck acquired Immune Design, a late-stage immunotherapy company employing next-generation in vivo approaches to enable the body’s immune system to fight disease, for $301 million in cash. The transaction was accounted for as an ~~aggregate charge of $420 million within~~ ~~Materials and production~~ ~~costs in conjunction with the termination~~acquisition of a ~~collaboration agreement entered into in 2014 with Samsung Bioepis Co., Ltd. (Samsung)~~business. Merck recognized intangible assets for ~~insulin glargine. The aggregate charge reflects a termination payment~~in-process research and development (IPR&D) of ~~$155~~$156 million, ~~which represents the reimbursement~~cash of ~~all fees previously paid by Samsung to Merck under the agreement, plus interest, as well as the release~~$83 million and other net assets of Merck’s ongoing obligations under the agreement. The aggregate charge also included fixed asset abandonment charges of $137 million, inventory write-offs of $122 million, as well as other related costs of $6$31 million. The ~~termination~~excess of ~~this agreement has no impact on~~ the ~~Company’s other collaboration with Samsung.~~consideration transferred over the fair value of net assets acquired of $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. 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~~, Merck’s anti-PD-1 (programmed death receptor-1) therapy.~~. 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 ~~for~~in the second quarter and first ~~nine~~six months of 2018 related to the transaction. There are no future contingent payments associated with the acquisition.

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

In March 2018, Merck and Eisai Co., Ltd. (Eisai) entered into a strategic collaboration for the worldwide co-development and co-commercialization of Lenvima, an orally available tyrosine kinase inhibitor discovered by Eisai (see Note 4)3).

In March 2017, Merck acquired a controlling interest in Vallée S.A. (Vallée), a leading privately held producer of animal health products in Brazil. Vallée has an extensive portfolio of products spanning parasiticides, anti-infectives and vaccines that include products for livestock, horses, and companion animals. Under the terms of the agreement, Merck acquired 93.5% of the shares of Vallée for $358 million. Of the total purchase price, $176 million was placed into escrow pending resolution of certain contingent items. The transaction was accounted for as an acquisition of a business. Merck recognized intangible assets of $297 million related to currently marketed products, net deferred tax liabilities of $102 million, other net assets of $32 million and noncontrolling interest of $25 million. In addition, the Company recorded liabilities of $37 million for contingencies identified at

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

the acquisition date and corresponding indemnification assets of $37 million, representing the amounts to be reimbursed to Merck if and when the contingent liabilities are paid. The excess of the consideration transferred over the fair value of net assets acquired of $156 million was recorded as goodwill. The goodwill was allocated to the Animal Health segment and is not deductible for tax purposes. The estimated fair values of identifiable intangible assets related to currently marketed products were determined using an income approach. The probability-adjusted future net cash flows of each product were discounted to present value utilizing a discount rate of 15.5%. Actual cash flows are likely to be different than those assumed. The intangible assets related to currently marketed products are being amortized over their estimated useful lives of 15 years. In the fourth quarter of 2017, Merck acquired an additional 4.5% interest in Vallée for $18 million, which reduced the noncontrolling interest related to Vallée.

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

Gross profits from Lynparza and selumetinib product sales generated through monotherapies or combination therapies are shared equally. Merck will fund all development and commercialization costs of Keytruda in combination with Lynparza or selumetinib. AstraZeneca will fund all development and commercialization costs of Imfinzi in combination with Lynparza or selumetinib. AstraZeneca is ~~currently~~ the principal on Lynparza sales transactions. Merck records its share of Lynparza product sales, net of cost of sales and commercialization costs, as alliance revenue within the Pharmaceutical segment and its share of development costs associated with the collaboration as part of Research and development ~~expenses.~~ 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 ~~is making~~will make payments ~~totaling~~of up to $750 million over a multi-year period for certain license options ~~($250~~(of which $250 million ~~of which~~ was paid in ~~2017)~~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 ~~options~~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 ~~and sales-based~~ milestones.

In the second quarter of ~~2018,~~2019, Merck determined it was probable that annual sales of Lynparza in the future would trigger a ~~$200~~$300 million sales-based milestone payment from Merck to AstraZeneca. Accordingly, in the second quarter of ~~2018,~~2019, Merck recorded a ~~$200~~$300 million ~~noncurrent~~ liability and a corresponding increase to the intangible asset related to Lynparza and also recognized ~~$17~~$52 million of cumulative amortization expense within ~~Materials and production~~ ~~costs.~~Cost of sales. Prior to 2019, Merck ~~previously~~ accrued ~~a $150 million~~ sales-based milestone ~~in the first quarter of 2018 (along with $9~~payments aggregating $700 million ~~of cumulative amortization expense) and a $100~~related to Lynparza. Of these amounts, $250 million ~~sales-based milestone in 2017 (which was~~has been paid ~~in 2018). The remaining $3.65 billion of potential~~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 ~~January 2018,~~April 2019, Lynparza received regulatory approval in the ~~United States~~European Union (EU) as a monotherapy for the treatment of certain adult patients with ~~metastatic~~advanced breast cancer, triggering a ~~$70~~$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 ~~$1.93~~$1.7 billion remain under the agreement.

The asset balance related to Lynparza (which includes capitalized sales-based and regulatory milestone payments) was ~~$468 million~~$1.0 billion at ~~September~~June 30, ~~2018~~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
September 30, Nine Months Ended
September 30,
($ in millions) 2018 2017 2018 2017
Alliance revenues $ 49
$ 5
$ 125
$ 5

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

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



	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⁾~~Amounts for the third quarter and first nine months of 2017 include $2.35 billion related to the upfront payment and future license option payments.~~

⁽³⁾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 ~~expenses.~~ costs.

Under the agreement, Merck made an upfront ~~payments~~payment to Eisai of $750 million and will make payments of up to $650 million for certain option rights through 2021 ~~($325~~(of which $325 million was paid in ~~January~~March 2019, ~~or earlier in certain circumstances,~~ $200 million is expected to be paid in ~~January~~March 2020 and $125 million is expected to be paid in ~~January~~March 2021). The Company recorded an aggregate charge of $1.4 billion in Research and development expenses in the first ~~nine months~~quarter of 2018 related to the upfront ~~payments~~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 ~~third~~first quarter of ~~2018,~~2019, Merck determined it was probable that annual sales of Lenvima in the future would trigger ~~a $50~~$282 million of sales-based milestone ~~payment~~payments from Merck to Eisai. Accordingly, in the ~~third~~first quarter of ~~2018,~~2019, Merck recorded a$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 ~~noncurrent liability and a corresponding intangible asset. The remaining $3.92 billion of potential~~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 ~~was approved for the treatment of patients with unresectable hepatocellular carcinoma in Japan in March 2018, in the United States and European Union in August 2018, and in China in September 2018,~~received regulatory approvals triggering capitalized milestone payments of ~~$25~~$250 million ~~$125 million, $50 million, and $25 million, respectively,~~in the aggregate from Merck to Eisai. Potential future regulatory milestone payments of ~~$160~~$135 million remain under the agreement.

The asset balance related to Lenvima (which includes capitalized sales-based and regulatory ~~milestones~~milestone payments) was ~~$266~~$687 million at ~~September~~June 30, ~~2018~~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:

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

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

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



	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 ~~nine~~six months of 2018 includes ~~$1.4 billion related to~~ the upfront payment and future ~~license~~ option payments.

⁽³⁾Includes accrued milestone and ~~license~~ option payments.

Bayer AG

In 2014, the Company entered into a worldwide clinical development collaboration with Bayer AG (Bayer) to 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. ~~In 2016, Merck began promoting and distributing Adempas in Europe. Transition from Bayer in other Merck territories, including Japan, continued in 2017.~~ Revenue from Adempas includes sales in Merck’s marketing territories, as well as Merck’s share of profits from the sale of Adempas in Bayer’s marketing territories.

In the first quarter of 2018, Merck made a $350 million sales-based milestone payment 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, in the second quarter of 2018,~~Bayer; accordingly, Merck recorded a $375 million ~~noncurrent~~ liability and a corresponding increase to the intangible asset related to Adempas and also recognized $106 million of cumulative amortization expense within ~~Materials and production~~ ~~costs. In 2017, annual worldwide~~Cost of sales of Adempas exceeded $500 million triggering a $350 million milestone payment from Merck to Bayer, which was accrued for in 2016 when Merck deemed the payment to be probable. The milestone was paid in the first quarter of 2018.. There is an additional $400 million potential future sales-based milestone payment that has not yet been accrued as it is not deemed by the Company to be probable at this time.

The intangible asset balance related to Adempas (which includes the ~~remaining~~ acquired intangible asset balance, as well as capitalized sales-based ~~milestones~~milestone payments) was ~~$1.1 billion~~$956 million at ~~September~~June 30, ~~2018~~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 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 September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
($ in millions)	2018		2017		2018		2017		2019		2018		2019		2018
Net product sales recorded by Merck	$	47	$	38	$	138	$	105	$	53	$	47	$	100	$	90
Merck’s profit share from sales in Bayer’s marketing territories	47		32		100		116		51		28		94		53
Total sales	94		70		238		221		104		75		194		143

Materials and production⁽¹⁾	29		25		188		73
Marketing and administrative	11		6		26		18
Cost of sales⁽¹⁾									29		132		58		159
Selling, general and administrative									11		10		20		17
Research and development	34		27		90		78		32		28		62		56

($ in millions)					September 30, 2018		December 31, 2017						June 30, 2019		December 31, 2018
Receivables from Bayer					$	36	$	33
Payables to Bayer ⁽²⁾					375		352
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⁾~~Includes~~Represents accrued milestone ~~payments.~~payment.


5.4.	Restructuring

~~In 2010 and 2013, the Company commenced actions under~~Merck recently approved a new global restructuring ~~programs designed to streamline its cost structure. The actions under these programs include~~program (2019 Restructuring Program) as part of a worldwide initiative focused primarily on further optimizing the ~~elimination of positions in sales, administrative~~Company’s manufacturing and ~~headquarters organizations,~~supply network, as well as ~~the sale or closure of certain manufacturing and research and development sites and the consolidation of office facilities. The Company also continues to reduce~~reducing 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~~overall operating model, which could result in the ~~efficiency~~identification of ~~its manufacturing and supply network.~~

additional actions over time. The ~~Company recorded total~~actions contemplated under the 2019 Restructuring Program are expected to be substantially completed by the end of 2023, with the cumulative pretax costs ~~of $169~~to be incurred by the Company to implement the program estimated to be approximately $800 million ~~and $180 million in the third quarter of 2018 and 2017, respectively, and $508 million and $605 million for the first nine months of 2018 and 2017, respectively, related~~ to ~~restructuring program activities. Since inception of the programs through~~ ~~September 30, 2018~~, Merck has recorded total pretax accumulated costs of approximately $14.0 billion and eliminated approximately 45,220 positions comprised of employee separations, as well as the elimination of contractors and vacant positions.$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.~~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. ~~While~~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 ~~has substantially completed the actions under these programs, approximately $50 million of additional~~recorded total pretax costs ~~are expected to be incurred~~of $159 million and $235 million in the ~~fourth~~second quarter of 2019 and 2018, ~~relating~~respectively, and $346 million and $339 million for the first six months of 2019 and 2018, respectively, related to ~~anticipated employee separations and remaining asset-related costs.~~

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, 2018										Nine Months Ended September 30, 2018									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	$	—	$	1		$	1	$	2		$	—	$	1		$	10	$	11
Marketing and administrative	—		—			—		—			—		1			1		2
Cost of sales																				$	—	$	64	$	1	$	65	$	—	$	98	$	1	$	99
Selling, general and administrative																				—		32		—		32		—		32		—		32
Research and development	—		(9		)	5		(4		)	—		(12		)	13		1		—		2		1		3		—		2		1		3
Restructuring costs	137		—			34		171			392		—			102		494		25		—		34		59		153		—		59		212
	$	137	$	(8	)	$	40	$	169		$	392	$	(10	)	$	126	$	508	$	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, 2017 Nine Months Ended September 30, 2017
($ in millions)
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
Research and development —
1
1
2
—
7
4
11
Restructuring costs 100
—
53
153
302
—
168
470
$ 100
$ 6
$ 74
$ 180
$ 302
$ 61
$ 242
$ 605

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

Separation costs are associated with actual headcount reductions, as well as those headcount reductions which were probable and could be reasonably estimated. ~~In the~~ ~~third~~ quarter of 2018 and 2017, approximately 525 positions and 205 positions, respectively, and for the first nine months of 2018 and 2017, 1,870 positions and 1,225 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 ~~2018~~2019 and ~~2017~~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 ~~12)~~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, ~~2018:~~2019:


($ in millions)	Separation Costs			Accelerated Depreciation			Other			Total			Separation Costs			Accelerated Depreciation			Other			Total
Restructuring reserves January 1, 2018	$	619		$	—		$	128		$	747
Restructuring reserves January 1, 2019													$	443		$	—		$	91		$	534
Expense	392			(10		)	126			508			153			132			61			346
(Payments) receipts, net	(535		)	—			(170		)	(705		)	(126		)	—			(77		)	(203		)
Non-cash activity	—			10			13			23			—			(132		)	(2		)	(134		)
Restructuring reserves September 30, 2018 ⁽¹⁾	$	476		$	—		$	97		$	573
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.


6.5.	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 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. For those derivatives which are not designated as cash flow hedges, but serve as economic

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

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

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 also 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. The unrealized gains or losses on these contracts are recorded in foreign currency translation adjustment within OCI, and remain in AOCI until either the sale or complete or substantially complete liquidation of the subsidiary. The Company excludes certain portions of the change in fair value of its derivative instruments from the assessment of hedge effectiveness (excluded component). Changes in fair value of the excluded components are recognized in OCI. ~~In accordance with the new guidance adopted on January 1, 2018 (see Note 1), the~~The Company ~~has elected to recognize~~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.

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

The effects of the Company’s net investment hedges on OCI and the Consolidated Statement of Income are shown below:


	Amount of Pretax (Gain) Loss Recognized in Other Comprehensive Income⁽¹⁾										Amount of Pretax (Gain) Loss Recognized in Other (income) expense, net for Amounts Excluded from Effectiveness Testing										Amount of Pretax (Gain) Loss Recognized in Other Comprehensive Income⁽¹⁾											Amount of Pretax (Gain) Loss Recognized in Other (income) expense, net for Amounts Excluded from Effectiveness Testing
	Three Months Ended September 30,					Nine Months Ended September 30,					Three Months Ended September 30,					Nine Months Ended September 30,					Three Months Ended June 30,					Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
($ in millions)	2018			2017		2018			2017		2018			2017		2018			2017		2019		2018			2019			2018			2019			2018			2019			2018
Net Investment Hedging Relationships
Foreign exchange contracts	$	(10	)	$	—	$	(24	)	$	—	$	(4	)	$	—	$	(7	)	$	—	$	17	$	(12	)	$	7		$	(14	)	$	(8	)	$	(3	)	$	(15	)	$	(3	)
Euro-denominated notes	38			128		(54		)	467		—			—		—			—		28		(271		)	(2		)	(92		)	—			—			—			—

⁽¹⁾ No amounts were reclassified from AOCI into income related to the sale of a subsidiary.

Interest Rate Risk Management

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

In May 2018, four interest rate swaps with notional amounts of $250 million each matured. These swaps effectively converted the Company’s $1.0 billion, 1.30% fixed-rate notes due 2018 to variable rate debt. At ~~September~~June 30, ~~2018,~~2019, the Company was a party to 2219 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)


	September 30, 2018			June 30, 2019
($ in millions)	Par Value of Debt	Number of Interest Rate Swaps Held	Total Swap Notional Amount	Par Value of Debt	Number of Interest Rate Swaps Held	Total Swap Notional Amount
5.00% notes due 2019	1,250	3	550
1.85% notes due 2020	1,250	5	1,250	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 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						Carrying Amount of Hedged Liabilities				Cumulative Amount of Fair Value Hedging Adjustment Increase (Decrease) Included in the Carrying Amount
($ in millions)	September 30, 2018		December 31, 2017		September 30, 2018			December 31, 2017			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	$	553	$	983	$	3		$	(17	)	$	1,244	$	—	$	(6	)	$	—
Long-Term Debt ⁽¹⁾	4,503		5,146		(138		)	(41		)	3,406		4,560		11			(82		)

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

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



		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, 2018 December 31, 2017
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 $ —
$ —
$ —
$ 2
$ —
$ 550
Interest rate swap contracts Accrued and other current liabilities —
2
550
—
3
1,000
Interest rate swap contracts Other noncurrent liabilities —
138
4,650
—
52
4,650
Foreign exchange contracts Other current assets 175
—
6,115
51
—
4,216
Foreign exchange contracts Other assets 85
—
2,682
38
—
1,936
Foreign exchange contracts Accrued and other current liabilities —
5
657
—
71
2,014
Foreign exchange contracts Other noncurrent liabilities —
1
66
—
1
20
$ 260

$ 146

$ 14,720

$ 91

$ 127

$ 14,386
Derivatives Not Designated as Hedging Instruments
Foreign exchange contracts Other current assets $ 127
$ —
$ 6,531
$ 39
$ —
$ 3,778
Foreign exchange contracts Accrued and other current liabilities —
58
5,298
—
90
7,431
$ 127
$ 58
$ 11,829
$ 39
$ 90
$ 11,209
$ 387

$ 204

$ 26,549

$ 130

$ 217

$ 25,595

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



	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, 2018 December 31, 2017
($ in millions) Asset Liability Asset Liability
Gross amounts recognized in the consolidated balance sheet $ 387
$ 204
$ 130
$ 217
Gross amount subject to offset in master netting arrangements not offset in the consolidated
balance sheet
(135 ) (135 ) (94 ) (94 )
Cash collateral received (54 ) —
(3 ) —
Net amounts $ 198
$ 69
$ 33
$ 123

The table below provides information regarding the location and amount of pretax (gains) losses of derivatives designated in fair value or cash flow hedging relationships:


	Sales					Other (income) expense, net ⁽¹⁾					Other comprehensive income (loss)						Sales				Other (income) expense, net⁽¹⁾						Other comprehensive income (loss)					Sales					Other (income) expense, net ⁽¹⁾					Other comprehensive income (loss)						Sales				Other (income) expense, net⁽¹⁾						Other comprehensive income (loss)
	Three Months Ended September 30,					Three Months Ended September 30,					Three Months Ended September 30,						Nine Months Ended September 30,				Nine Months Ended September 30,						Nine Months Ended September 30,					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)	2018			2017		2018			2017		2018			2017			2018		2017		2018			2017			2018		2017			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	$	10,794		$	10,325	$	(172	)	(207	)	$	(29	)	$	149		31,296		$	29,689	$	(512	)	$	(351	)	$	33	$	281		$	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	—			—		(9		)	(9	)	—			—			—		—		(86		)	(5		)	—		—			—		—			55			(15	)	—			—			—	—			88			(77		)	—			—
Derivatives designated as hedging instruments	—			—		15			2		—			—			—		—		100			(25		)	—		—			—		—			(45		)	22		—			—			—	—			(68		)	84			—			—
Impact of cash flow hedging relationships
Foreign exchange contracts
Amount of gain (loss) recognized in OCI on derivatives	—			—		—			—		29			(88		)	—		—		—			—			113		(520		)
(Decrease) increase in Sales as a result of AOCI reclassifications	(6		)	13		—			—		6			(13		)	(172	)	157		—			—			172		(157		)
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⁾ Interest expense is a component of Other (income) expense, net.

The table below provides information regarding the income statement effects of derivatives not designated as hedging instruments:


		Amount of Derivative Pretax (Gain) Loss Recognized in Income											Amount of Derivative Pretax (Gain) Loss Recognized in Income
		Three Months Ended September 30,					Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
($ in millions)	Income Statement Caption	2018			2017		2018			2017		Income Statement Caption	2019			2018			2019		2018
Derivatives Not Designated as Hedging Instruments
Foreign exchange contracts⁽¹⁾	Other (income) expense, net	$	(57	)	$	119	$	(224	)	$	70	Other (income) expense, net	$	2		$	(195	)	$	120	$	(167	)
Foreign exchange contracts ⁽²⁾	Sales	—			—		(5		)	—		Sales	(6		)	(14		)	4		(5		)

⁽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, ~~2018~~2019, the Company estimates $7576 million of pretax net unrealized 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, 2018 December 31, 2017

Fair
Value

Amortized
Cost
Gross Unrealized
Fair
Value

Amortized
Cost
Gross Unrealized
($ in millions) Gains Losses Gains Losses
Corporate notes and bonds $ 6,866
$ 6,952
$ 2
$ (88 ) $ 9,806
$ 9,837
$ 9
$ (40 )
U.S. government and agency securities 1,431
1,448
—
(17 ) 2,042
2,059
—
(17 )
Asset-backed securities 1,288
1,300
1
(13 ) 1,542
1,548
1
(7 )
Foreign government bonds 538
546
—
(8 ) 733
739
—
(6 )
Mortgage-backed securities 23
24
—
(1 ) 626
634
1
(9 )
Commercial paper 30
30
—
—
159
159
—
—
Total debt securities $ 10,176

$ 10,300

$ 3

$ (127 )
$ 14,908

$ 14,976

$ 11

$ (79 )
Publicly traded equity securities ⁽¹⁾
378
275
265
16
(6 )
Total debt and publicly traded equity securities $ 10,554

$ 15,183

$ 15,241

$ 27

$ (85 )

⁽¹⁾~~Pursuant to the adoption of ASU 2016-01 (see Note 1), beginning on January 1, 2018, changes in the fair value of publicly traded equity securities are~~Unrealized net (losses) gains recognized in ~~net income. Unrealized net gains of $10 million and $60 million, respectively, were recognized in~~ Other (income) expense, net ~~during the third quarter and first nine months of 2018~~ on equity securities still held at ~~September~~June 30, ~~2018.~~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 ~~September~~June 30, ~~2018,~~2019, the Company also had ~~$749~~$465 million of equity investments without readily determinable fair values included in Other Assets. During the first ~~nine~~six months of ~~2018,~~2019, the Company recognized unrealized gains of ~~$199~~$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 ~~nine~~six months of ~~2018,~~2019, the Company recognized unrealized losses of ~~$25~~$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 ~~$2.4 billion~~$398 million at ~~September~~June 30, ~~2018.~~2019. Of the remaining debt securities, ~~$7.1~~$3.4 billion mature within five years. At ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~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 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, 2018									December 31, 2017								June 30, 2019								December 31, 2018
Assets
Investments
Corporate notes and bonds	$	—		$	6,765	$	—	$	6,765	$	—	$	9,678	$	—	$	9,678	$	—	$	2,660	$	—	$	2,660	$	—	$	4,835	$	—	$	4,835
Asset-backed securities⁽¹⁾	—			1,271		—		1,271		—		1,476		—		1,476		—		788		—		788		—		1,253		—		1,253
U.S. government and agency securities	—			1,265		—		1,265		68		1,767		—		1,835		—		508		—		508		—		731		—		731
Foreign government bonds	—			538		—		538		—		732		—		732		—		41		—		41		—		166		—		166
Commercial paper	—			30		—		30		—		159		—		159
Mortgage-backed securities	—			—		—		—		—		547		—		547
Publicly traded equity securities	196			—		—		196		104		—		—		104		228		—		—		228		147		—		—		147
	196			9,869		—		10,065		172		14,359		—		14,531		228		3,997		—		4,225		147		6,985		—		7,132
Other assets ⁽²⁾			��
U.S. government and agency securities	54			112		—		166		—		207		—		207		58		19		—		77		55		106		—		161
Corporate notes and bonds	—			101		—		101		—		128		—		128		—		40		—		40		—		85		—		85
Mortgage-backed securities	—			23		—		23		—		79		—		79		—		5		—		5		—		8		—		8
Asset-backed securities⁽¹⁾	—			17		—		17		—		66		—		66		—		4		—		4		—		22		—		22
Foreign government bonds	—			—		—		—		—		1		—		1
Publicly traded equity securities	182			—		—		182		171		—		—		171		528		—		—		528		309		—		—		309
	236			253		—		489		171		481		—		652		586		68		—		654		364		221		—		585
Derivative assets ⁽³⁾
Purchased currency options																		—		158		—		158		—		213		—		213
Forward exchange contracts	—			233		—		233		—		48		—		48		—		129		—		129		—		241		—		241
Purchased currency options	—			154		—		154		—		80		—		80
Interest rate swaps	—			—		—		—		—		2		—		2		—		14		—		14		—		—		—		—
	—			387		—		387		—		130		—		130		—		301		—		301		—		454		—		454
Total assets	$	432		$	10,509	$	—	$	10,941	$	343	$	14,970	$	—	$	15,313	$	814	$	4,366	$	—	$	5,180	$	511	$	7,660	$	—	$	8,171
Liabilities
Other liabilities
Contingent consideration	$	—		$	—	$	852	$	852	$	—	$	—	$	935	$	935	$	—	$	—	$	753	$	753	$	—	$	—	$	788	$	788
Derivative liabilities ⁽³⁾
Forward exchange contracts																		—		73		—		73		—		74		—		74
Interest rate swaps	—			140		—		140		—		55		—		55		—		8		—		8		—		81		—		81
Forward exchange contracts	—			60		—		60		—		162		—		162
Written currency options	—			4		—		4		—		—		—		—		—		3		—		3		—		5		—		5
	—			204		—		204		—		217		—		217		—		84		—		84		—		160		—		160
Total liabilities	$	—		$	204	$	852	$	1,056	$	—	$	217	$	935	$	1,152	$	—	$	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.


⁽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.

There were no transfers between Level 1 and Level 2 during the first ~~nine~~six months of ~~2018.~~2019. As of ~~September~~June 30, ~~2018~~2019, Cash and cash equivalents of $~~7.8~~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)	2018			2017			2019			2018
Fair value January 1	$	935		$	891		$	788		$	935
Changes in estimated fair value⁽¹⁾	144			151			50			122
Additions	8			3			—			8
Payments	(235		)	(100		)	(85		)	(235		)
Fair value September 30 ⁽²⁾	$	852		$	945
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⁾ Balance at ~~September~~June 30, ~~2018~~2019 includes ~~$95~~$114 million recorded as a current liability for amounts expected to be paid within the next 12 months.

The payments of contingent consideration in ~~the first nine months of 2018~~both periods include ~~$175 million~~payments related ~~to the achievement of a clinical milestone in connection with the 2016 acquisition of Afferent Pharmaceuticals. The remaining payments in 2018 relate~~ to liabilities recorded in connection with the 2016 termination of the Sanofi-Pasteur MSD joint venture. The payments of contingent consideration in the first ~~nine~~six months of ~~2017 relate~~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 ~~2016~~ acquisition of ~~IOmet Pharma Ltd.~~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, ~~2018~~2019, was $~~24.0~~28.6 billion compared with a carrying value of $~~23.6~~26.6 billion and at December 31, ~~2017~~2018, was $25.6 billion compared with a carrying value of $~~24.4~~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. At ~~September 30, 2018, the Company’s total net accounts receivable outstanding for more than one year were approximately~~ ~~$40 million~~. The Company does not expect to have write-offs or adjustments to accounts receivable which would have a material adverse effect on its financial position, liquidity or results of operations.

Derivative financial instruments are executed under International Swaps and Derivatives Association master agreements. The master agreements with several of the Company’s financial institution counterparties also include credit support annexes. These annexes contain provisions that require collateral to be exchanged depending on the value of the derivative assets and liabilities, the Company’s credit rating, and the credit rating of the counterparty. ~~As of~~ ~~September 30, 2018~~ ~~and~~ ~~December 31, 2017~~,Cash received by the Company ~~had received cash collateral of $54 million and~~ ~~$3 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, ~~2018~~2019 or December 31, ~~2017~~.2018.

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


7.6.	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, 2018 December 31, 2017
Finished goods $ 1,585
$ 1,334
Raw materials and work in process 4,933
4,703
Supplies 202
201
Total (approximates current cost) 6,720
6,238
(Decrease) increase to LIFO costs (10 ) 45
$ 6,710
$ 6,283
Recognized as:
Inventories $ 5,416
$ 5,096
Other assets 1,294
1,187

Amounts recognized as Other assets are comprised almost entirely of raw materials and work in process inventories. At ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018, these amounts included $1.3 billion and ~~$1.1~~$1.4 billion, respectively, of inventories not expected to be sold within one year. In addition, these amounts included $3$118 million and ~~$80~~$7 million at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018, respectively, of inventories produced in preparation for product launches.


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.	~~Other Intangibles~~

In connection with acquisitions, the Company measures the fair value of research and development pipeline programs and marketed products and capitalizes these amounts. See Note 3 for information on intangible assets acquired as a result of business acquisitions in the first nine months of 2018 and 2017.

~~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~~, which is marketed by the Company for the treatment of adult patients with chronic HCV infection. As a result of this decision, the Company recorded an IPR&D impairment charge of $240 million in the third quarter and first nine months of 2017 to write-off the remaining intangible asset related to uprifosbuvir.

~~Also, 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~~ ~~were being adversely affected by the availability of new therapeutic options. Sales of~~ ~~Intron A~~ ~~in the United States eroded more rapidly than previously anticipated by the Company, which led to changes in the cash flow assumptions for~~ ~~Intron A.~~ ~~These revisions to cash flows indicated that the~~ ~~Intron A~~ intangible asset value was not fully recoverable on an undiscounted cash flows basis. The Company 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.~~


9.	Contingencies

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

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

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

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

available. For product liability claims, a portion of the overall accrual is actuarially determined and considers such factors as past experience, number of claims reported and estimates of claims incurred but not yet reported. Individually significant contingent

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, ~~2018~~2019, approximately ~~3,955~~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 ~~four~~Plaintiffs 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~~ ~~3,950~~ ~~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 2014, Merck settled approximately 95% of the ONJ cases pending in the~~ ~~Fosamax~~ ONJ MDL and in state courts for a payment of $27.3 million. The escrow agent under the agreement has been making settlement payments to qualifying plaintiffs. The ONJ Master Settlement Agreement has no effect on the cases alleging Femur Fractures discussed below. The ~~Fosamax~~ ~~ONJ MDL was closed in June 2018.~~

~~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. 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 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.

In August 2013, the Femur Fracture MDL court entered an order requiring plaintiffs in the Femur Fracture MDL to show cause why those cases asserting claims for a femur fracture injury that took place prior to September 14, 2010, should not be dismissed based on the court’s preemption decision in the Glynn case. Pursuant to the show cause order, in March 2014, the Femur Fracture MDL court dismissed with prejudice approximately 650 cases on preemption grounds. Plaintiffs in approximately 515 of those cases appealed that decision to the U.S. Court of Appeals for the Third Circuit (Third Circuit). In March 2017, the Third Circuit issued a decision reversing the Femur Fracture MDL court’s preemption ruling and remanding the appealed cases back to the Femur Fracture MDL court. Merck filed a petition for a writ of certiorari to the U.S. Supreme Court in August 2017 seeking review of the Third Circuit’s decision. In 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 2018, and ~~final decision on the Femur Fracture MDL court’s preemption ruling is now pending~~an oral argument before the Supreme ~~Court.~~Court was held on January 7, 2019. On May 20, 2019, the Supreme Court issued its opinion and decided that the Third Circuit had incorrectly concluded that the issue of preemption should be resolved by a jury, and accordingly vacated the judgment of the Third Circuit and remanded the proceedings back to the Third Circuit to address the issue in a manner consistent with the 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 appeal.

Accordingly, as of ~~September~~June 30, ~~2018, three~~2019, 11 cases were actively pending in the Femur Fracture MDL, and approximately ~~1,055~~1,060 cases have either been dismissed without prejudice or administratively closed pending final resolution by the Supreme Court of the appeal of the Femur Fracture MDL court’s preemption order.

As of ~~September~~June 30, ~~2018~~2019, approximately ~~2,610~~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 from 2016 to the present.

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

As of ~~September~~June 30, ~~2018~~2019, approximately 275 cases alleging Femur Fractures have been filed and are pending in California state court. All of the Femur Fracture cases filed in California state court have been coordinated before a single judge in Orange County, California. ~~In March 2014, the court directed that a group of 10 discovery pool cases be reviewed through fact discovery and subsequently scheduled the~~ ~~Galper v. Merck~~ ~~case, which plaintiffs selected, as the first trial. The~~ ~~Galper~~ trial began in February 2015 and the jury returned a verdict in Merck’s favor in April 2015, and plaintiff appealed that verdict to the California appellate court. In April 2017, the California appellate court issued a decision affirming the lower court’s judgment in favor of Merck. The next Femur Fracture trial in California that was scheduled to begin in April 2016 was stayed at plaintiffs’ request and a new trial date has not been set.

Additionally, there are 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, ~~2018~~2019, Merck is aware of approximately ~~1,285~~1,350 product users alleging that Januvia and/or Janumet caused the development of pancreatic cancer and other injuries.

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

Most claims have been filed in multidistrict litigation before the U.S. District Court for the Southern District of California (MDL). Outside of the MDL, the majority of claims have been filed in coordinated proceedings before the Superior Court of California, County of Los Angeles (California State Court).

In November 2015, the MDL and California State ~~Court–in~~Court-in separate ~~opinions–granted~~opinions-granted summary judgment to defendants on grounds of federal preemption.

Plaintiffs appealed ~~and~~ in both forums. In November 2017, the U.S. Court of Appeals for the Ninth Circuit ~~reversed~~vacated the judgment and remanded for further discovery, which is ongoing. ~~The appeal~~In November 2018, the California state appellate court reversed and remanded on similar grounds. In March 2019, the parties in the MDL and the California ~~State Court was argued~~coordinated proceeding agreed to coordinate and adopt a schedule for completing discovery on ~~October 4, 2018.~~general causation and preemption 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, ~~2018, eight~~2019, seven product users have claims pending against Merck in state courts other than California, including Illinois. In June 2017, the Illinois trial court denied Merck’s motion for summary judgment based on federal preemption. Merck ~~has~~ appealed, and ~~oral argument is scheduled~~the Illinois appellate court affirmed in December 2018. Merck filed a petition for ~~November 14, 2018.~~leave to appeal to the Illinois Supreme Court in February 2019. In April 2019, the Illinois Supreme Court stayed consideration of the pending petition to appeal until the 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 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~~Governmental Proceedings

~~As previously disclosed,~~In the fall of 2018, the Company received a records subpoena from the U.S. Attorney’s Office for the District of Vermont (VT USAO) pursuant to Section 248 of the Health Insurance Portability and Accountability Act of 1996 (HIPAA) relating to an investigation of potential health care offenses. The subpoena sought information relating to any actual or potential business relationship or arrangement Merck has 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 government is conducting a False Claims Act investigation concerning whether Merck and/or PFI submitted claims to federal healthcare programs that violate the Federal Anti-Kickback Statute. Merck is cooperating with the government’s investigation.

On April 15, 2019, Merck received a ~~defendant in product liability lawsuits~~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 ~~United States involving~~ ~~Propecia~~ ~~and/or~~ ~~Proscar~~.insulin market. The ~~lawsuits were filed in various federal courts~~interrogatories seek information concerning Merck’s development of an insulin glargine product, and ~~in state court in New Jersey. The federal lawsuits were then consolidated for pretrial purposes in a federal multidistrict~~its subsequent termination, as well as Merck’s patent litigation before Judge Brian Cogan of the Eastern District of New York. The matters pending in state court in New Jersey were consolidated before Judge Hyland in Middlesex County (NJ Coordinated Proceedings). There is one matter pending in state court in California and one matter pending in state court in Massachusetts.

~~As previously disclosed, on April 9, 2018, Merck~~against Sanofi S.A. concerning Lantus and the ~~Plaintiffs’ Executive Committee in~~resolution of that litigation. Merck is cooperating with the ~~MDL and the Plaintiffs’ Liaison Counsel in the NJ Coordinated Proceedings entered into an agreement to resolve the above mentioned~~ ~~Propecia/Proscar~~ lawsuits for an aggregate amount of $4.3 million. The settlement was subject to certain contingencies, including 95% plaintiff participation and a per plaintiff clawback if the participation rate was less than 100%. The contingencies were satisfied and the settlement agreement has been finalized. After the settlement, fewer than 40 cases will remain pending in the United States.

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

~~Governmental Proceedings~~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

Zetia Antitrust Litigation

As previously disclosed, Merck, MSD, Schering Corporation and MSP Singapore Company LLC (collectively, the Merck Defendants) are defendants in putative class action and opt-out lawsuits filed in 2018 on behalf of direct and indirect purchasers of Zetia alleging violations of federal and state antitrust laws, as well as other state statutory and common law causes of action. The cases have been consolidated for pretrial purposes in a federal multidistrict litigation before Judge Rebecca Beach Smith in the Eastern District of Virginia. In December 2018, the court denied the Merck Defendants’ motions to dismiss or stay the direct purchaser putative class actions pending bilateral arbitration. On February 6, 2019, the magistrate judge issued a report and recommendation recommending that the district judge grant in part and deny in part defendants’ motions to dismiss on non-arbitration issues. On February 20, 2019, defendants and retailer opt-out plaintiffs filed objections to the report and recommendation. The parties await a decision from the district judge. Trial is currently scheduled to begin on September 30, 2020.

Merck KGaA Litigation

As previously disclosed, in January 2016, to protect its long-established brand rights in the United States, the Company filed a lawsuit against Merck KGaA, Darmstadt, Germany (KGaA), historically operating as the EMD Group in the United States, alleging it improperly uses the name “Merck” in the United States. KGaA has filed suit against the Company in France, the UK, Germany, Switzerland, Mexico, India, Australia, Singapore, Hong Kong, and China alleging, among other things, unfair competition, trademark infringement and/or corporate name infringement. In the UK, Australia, Singapore, Hong Kong, and India, KGaA also alleges breach of the parties’ coexistence agreement. The litigation is ongoing in the United States with no trial date set, and also ongoing in numerous jurisdictions outside of the United States; the Company is defending those suits in each jurisdiction.

Patent Litigation

From time to time, generic manufacturers of pharmaceutical products file 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. Similar lawsuits defending the Company’s patent rights may exist in other countries. The Company intends to vigorously defend its patents, which it believes are valid, against infringement by companies attempting to market products prior to the expiration of such patents. As with any litigation, there can be no assurance of the outcomes, which, if adverse, could result in significantly shortened periods of exclusivity for these products and, with respect to products acquired through acquisitions, potentially significant intangible asset impairment charges.

Inegy —The patents protecting Inegy in Europe ~~have expired but~~expired; supplemental protection certificates (SPCs) ~~have been granted to the Company~~ in many European countries ~~that will expire~~expired in April 2019. ~~There are multiple challenges to the SPCs related to~~ ~~Inegy~~ ~~throughout Europe and generic products have been launched in France, Italy, Ireland, Spain, Portugal, and the Netherlands and may launch in Germany.~~ The Company ~~has~~ filed for preliminary injunctions in many countries that are still pending decision. Preliminary injunctions have been granted in Belgium, the Czech Republic, Germany, Greece, Portugal, Norway and Slovakia. Preliminary injunctions have been denied or revoked in France, Germany, Belgium, Ireland, the Netherlands and Spain. The Company is appealing those decisions. The Company has filed and will continue to file actions for patent infringement seeking damages against those companies that ~~launch~~launched generic products before April 2019.

~~Noxafil~~ Januvia, Janumet, Janumet XR—In ~~August 2015,~~February 2019, Par Pharmaceutical, Inc. (Par Pharmaceutical) filed suit against the Company ~~filed a lawsuit against Actavis Laboratories Fl, Inc. (Actavis)~~ in the ~~United States in respect~~U.S. District Court for the District of ~~that company’s application to the FDA~~New Jersey, seeking ~~pre-patent expiry approval to sell~~ a ~~generic version~~declaratory judgment of ~~Noxafil. In October 2017, the district court held the~~invalidity of a patent valid and infringed. Actavis appealed this decision. While the appeal was pending, the parties reached a settlement, subject to certain terms of the agreement being met, whereby Actavis can launch its generic version prior to expiry of the patent and pediatric exclusivity under certain conditions. In March 2016,owned by the Company ~~filed a lawsuit against Roxane Laboratories, Inc. (Roxane)~~covering certain salt and polymorphic forms of sitagliptin that expires 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~~.2026. In November 2017, the parties reached a settlement whereby Roxane can launch its generic version prior to expiry of the patent under certain conditions. In February 2016, the Company filed a lawsuit against Par Sterile Products LLC, Par Pharmaceutical, Inc., Par Pharmaceutical Companies, Inc. and Par Pharmaceutical Holdings, Inc. (collectively, Par) in the United States in respect of that company’s application to the FDA seeking pre-patent expiry approval to sell a generic version of ~~Noxafil~~ injection. In October 2016, the parties reached a settlement whereby Par can launch its generic version in January 2023, or earlier under certain conditions. In February 2018, the Company filed a lawsuit against Fresenius Kabi USA, LLC., in the United States in respect of that company’s application to the FDA seeking pre-patent expiry approval to sell a generic version of ~~Noxafil.~~ In March 2018, the Company filed a lawsuit against Mylan Laboratories Limited in the United States in respect of that company’s application to the FDA seeking pre-patent expiry approval to sell a generic version of ~~Noxafil~~.

~~Nasonex~~ — ~~Nasonex~~ ~~lost market exclusivity in the United States in 2016. Prior to that, in April 2015,~~response, the Company filed a patent infringement lawsuit against Apotex Inc. and Apotex Corp. (Apotex) in respect of Apotex’s marketed product that the Company believed was infringing. In January 2018, the Company and Apotex settled this matter with Apotex agreeing to pay the Company $115 million plus certain other consideration.

~~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 ~~appealed~~has a pending, unopposed motion before the ~~court’s decision. Gilead also asked~~Judicial Panel of Multidistrict Litigation to transfer the court to overturn the jury’s decision on validity. The court held a hearing on Gilead’s motion in August 2016, and the court subsequently rejected Gilead’s request, which Gilead appealed. In April 2018, the appeals court affirmed the decisions that both patents were unenforceableCompany’s lawsuit against ~~Gilead. In September 2018, Merck filed a petition for a writ of certiorari~~Mylan to the U.S. ~~Supreme~~District Court ~~seeking review of the appellate decision.~~

The Company, through its Idenix Pharmaceuticals, Inc. subsidiary, has pending litigation against Gilead in the United States, Germany and France based on different patent estates that would also be infringed by Gilead’s sales of these two products. Gilead opposed the European patent at the European Patent Office (EPO). Trial in the United States was held in December 2016 and the jury returned a verdict for the ~~Company, awarding damages~~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 on~~U.S. District Court for the ~~issues~~District of ~~enhanced damages and future royalties. Gilead submitted post-trial motions for judgment as a matter of law. A hearing on~~Delaware has scheduled the ~~motions was held in September 2017. Also, in September 2017, the court denied the Company’s motion on~~

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

enhanced damages, granted its motion on prejudgment interest and deferred its motion on future royalties. In February 2018, the court granted Gilead’s motion for judgment as a matter of law and found the patent was invalidlawsuits for a ~~lack of enablement.~~single 3-day trial on invalidity issues beginning October 4, 2021. The Company appealed this decision. The EPO opposition division revoked the European patent, and the Company appealed this decision. The cases in France and Germany have been stayed pending the final decision of the EPO.Court will schedule separate 1-day trials on 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, ~~2018~~2019 and December 31, ~~2017~~2018 of approximately $~~150~~260 million and $~~160~~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.


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.	~~Equity~~

Three Months Ended September 30,

Common Stock
Other
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss

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

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

Nine Months Ended September 30,

Common Stock
Other
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss

Treasury Stock
Non-
Controlling
Interests
Total
($ and shares in millions) Shares Par Value Shares Cost
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 ($1.41 per share) —
—
—
(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
Balance at January 1, 2018 3,577
$ 1,788
$ 39,902
$ 41,350
$ (4,910 ) 880
$ (43,794 ) $ 233
$ 34,569
Adoption of new accounting standards (see Note 1) —
—
—
322
(274 ) —
—
—
48
Net income attributable to Merck & Co., Inc. —
—
—
4,393
—
—
—
—
4,393
Other comprehensive income, net of taxes —
—
—
—
33
—
—
—
33
Cash dividends declared on common stock ($1.44 per share) —
—
—
(3,876 ) —
—
—
—
(3,876 )
Treasury stock shares purchased —
—
—
—
—
53
(3,158 ) —
(3,158 )
Share-based compensation plans and other —
—
(140 ) —
—
(15 ) 786
—
646
Net income attributable to noncontrolling interests —
—
—
—
—
—
—
22
22
Distributions attributable to noncontrolling interests —
—
—
—
—
—
—
(21 ) (21 )
Balance at September 30, 2018 3,577
$ 1,788
$ 39,762
$ 42,189
$ (5,151 ) 918
$ (46,166 ) $ 234
$ 32,656


~~11.~~	Share-Based Compensation Plans

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

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



	Three Months Ended 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) 2018 2017 2018 2017
Pretax share-based compensation expense $ 91
$ 76
$ 261
$ 232
Income tax benefit (14 ) (23 ) (42 ) (70 )
Total share-based compensation expense, net of taxes $ 77
$ 53
$ 219
$ 162

During the first ~~nine~~six months of ~~2018 and 2017,~~2019, the Company granted 76 million RSUs with a weighted-average grant date fair value of $~~58.19~~76.31 per RSU and 5during the first sixmonths of 2018 granted 7 million RSUs with a weighted-average grant date fair value of $~~63.96~~58.15 per ~~RSU, respectively.~~RSU. During the first ~~nine~~six months of ~~2018~~2019, the Company granted 609 thousand PSUs with a weighted-average

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

grant date fair value of $90.50 per PSU and ~~2017,~~during the ~~Company~~first sixmonths of 2018 granted 855 thousand PSUs with a weighted-average grant date fair value of $56.70 per ~~PSU and 1 million PSUs with a weighted-average grant date fair value of $63.62 per PSU, respectively.~~PSU.

During the first ~~nine~~six months of ~~2018 and 2017,~~2019, the Company granted 3 ~~million~~ ~~stock options with a weighted-average exercise price of~~ ~~$57.72~~ ~~per option and 4~~ million stock options with a weighted-average exercise price of ~~$63.96~~$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 2019 and 2018 was $10.63 and ~~2017 was~~ ~~$8.19~~ ~~and $7.04~~$8.19 per option, respectively, and was determined using the following assumptions:

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



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

At ~~September~~June 30, ~~2018~~2019, there was $~~654~~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.


~~12.~~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 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,
	2018						2017						2018						2017						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	$	77		$	56		$	80		$	66		$	245		$	181		$	234		$	189		$	74		$	60		$	85		$	58		$	144		$	120		$	168		$	125
Interest cost	109			43			114			44			324			134			341			127			113			44			107			45			228			89			215			91
Expected return on plan assets	(209		)	(106		)	(210		)	(101		)	(634		)	(326		)	(646		)	(292		)	(205		)	(107		)	(211		)	(108		)	(411		)	(214		)	(425		)	(221		)
Amortization of unrecognized prior service credit	(12		)	(3		)	(13		)	(3		)	(37		)	(10		)	(40		)	(8		)	(12		)	(3		)	(13		)	(3		)	(25		)	(6		)	(25		)	(7		)
Net loss amortization	63			21			46			25			174			64			135			72			35			16			56			21			70			31			112			43
Termination benefits	1			—			3			1			18			—			11			2			3			1			7			—			5			1			17			—
Curtailments	3			—			4			(1		)	7			(1		)	8			(1		)	—			—			5			(1		)	1			—			3			(1		)
Settlements	—			—			—			—			1			3			—			—			—			—			—			4			—			—			1			4
	$	32		$	11		$	24		$	31		$	98		$	45		$	43		$	89		$	8		$	11		$	36		$	16		$	12		$	21		$	66		$	34

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

The Company provides medical benefits, principally to its eligible U.S. retirees and similar benefits to their dependents, through its other postretirement benefit plans. The net 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) 2018 2017 2018 2017
Service cost $ 15
$ 15
$ 43
$ 43
Interest cost 17
20
52
61
Expected return on plan assets (21 ) (20 ) (63 ) (59 )
Amortization of unrecognized prior service credit (21 ) (24 ) (63 ) (74 )
Net loss amortization —
—
1
1
Termination benefits —
—
2
1
Curtailments (1 ) (1 ) (7 ) (6 )
$ (11 ) $ (10 ) $ (35 ) $ (33 )

In connection with restructuring actions (see Note 5)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 ~~13)~~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.


~~13.~~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) 2018 2017 2018 2017
Interest income $ (92 ) $ (90 ) $ (257 ) $ (284 )
Interest expense 190
189
569
564
Exchange losses (gains) 42
(6 ) 119
5
Equity income from affiliates (81 ) (18 ) (93 ) (11 )
Net periodic defined benefit plan (credit) cost other than service cost (119 ) (121 ) (384 ) (381 )
Other, net (112 ) (161 ) (466 ) (244 )
$ (172 ) $ (207 ) $ (512 ) $ (351 )


⁽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 ~~increases in equity income from affiliates~~higher exchange losses in the ~~third quarter and~~ first ~~nine~~six months of ~~2018 compared with~~2019 reflect losses on forward exchange contracts related to the ~~same periods~~acquisition of ~~2017 were driven primarily by higher equity income from certain research investment funds.~~Antelliq.

Other, net (as reflected in the table above) ~~includes net gains on securities of $80 million and $202 million~~ in the ~~third~~second quarter and first ~~nine~~six months of ~~2018, respectively, compared with $25~~2019 includes $78 million and ~~$74~~$162 million ~~for~~of goodwill impairment charges related to certain businesses in the third quarter and first nine months of 2017, respectively. The increase in net gains on securities is attributable to the recognition of unrealized gains on equity securities pursuant to the prospective adoption of ASU 2016-01 on January 1, 2018 (see Note 1).Healthcare Services segment. Other, net in the first ~~nine~~six months of 2018 ~~also~~ includes a $115 million gain on the settlement of certain patent ~~litigation (see Note 9). These gains were partially offset by lower income related to AstraZeneca’s option exercise in 2014.~~litigation.

Interest paid for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018 was ~~$535~~$356 million and $~~505~~341 million, respectively.


~~14.~~13.	Taxes on Income

The effective income tax rates of ~~26.5%~~18.9% and ~~125.5%~~17.8% for the ~~third~~second quarter of ~~2018~~2019 and ~~2017,~~2018, respectively, and ~~27.6%~~13.0% and ~~25.5%~~28.4% for the first ~~nine~~six months of ~~2018~~2019 and ~~2017,~~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 for the third quarter and first nine months of 2018 reflect the unfavorable impact of a $420 million aggregate pretax charge related to the termination of a collaboration agreement with Samsung for which no tax benefit was recognized. The effective income tax rate for the first ~~nine~~six months of ~~2018 also~~2019 reflects the unfavorable impact of a $1.4 billion aggregate pretax charge recorded in connection with the formation of an oncology collaboration with Eisai for which no tax benefit was recognized. In addition, the effective income tax rates for the third quarter and first nine months of 2017 reflect the unfavorable impact of a $2.35 billion aggregate pretax charge recorded in connection with the formation of an oncology collaboration with AstraZeneca for which no tax benefit was recognized, partially offset by the favorable impact of a $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~~2018 reflects ~~a benefit of $88 million related to~~ 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.~~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 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.

On December 22, 2017, new U.S. tax legislation known as the Tax Cuts and Jobs Act of 2017 (TCJA) was enacted. Among other provisions, the TCJA reduced the U.S. federal corporate statutory tax rate from 35% to 21% effective January 1, 2018, requires companies to pay a one-time transition tax on undistributed earnings of certain foreign subsidiaries, and creates new taxes on certain foreign sourced earnings. The Company reflected the impact of the TCJA in its 2017 financial statements as described below. However, application of certain provisions of the TCJA was and remains subject to further interpretation and in

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

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

The one-time transition tax is based on the Company’s post-1986 undistributed earnings and profits (E&P). For a substantial portion of these undistributed E&P, the Company had not previously provided deferred taxes as these earnings were deemed by Merck to be retained indefinitely by subsidiary companies for reinvestment. The Company recorded a provisional amount for its one-time transition tax liability of $5.3 billion in 2017. Merck has not yet finalized its calculation of the total post-1986 undistributed E&P for these foreign subsidiaries. The transition tax is based in part on the amount of undistributed E&P held in cash and other specified assets; therefore, this amount may change when the Company finalizes its calculation of post-1986 undistributed foreign E&P and finalizes the amounts held in cash or other specified assets. This provisional amount was reduced by the reversal of $2.0 billion of deferred taxes that were previously recorded in connection with the merger of Schering-Plough Corporation in 2009 for certain undistributed foreign E&P. The Company anticipates that it will be able to utilize certain foreign tax credits to partially reduce the transition tax payment, resulting in a net transition tax payment of $5.1 billion.

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

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


~~15.~~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)	2018		2017			2018		2017		2019		2018		2019		2018
Net income (loss) attributable to Merck & Co., Inc.	$	1,950	$	(56	)	$	4,393	$	3,440
Net income attributable to Merck & Co., Inc.										$	2,670	$	1,707	$	5,585	$	2,443
Average common shares outstanding	2,662		2,727			2,680		2,735		2,574		2,683		2,579		2,689
Common shares issuable ⁽¹⁾	16		—			14		19		14		13		17		13
Average common shares outstanding assuming dilution	2,678		2,727			2,694		2,754		2,588		2,696		2,596		2,702
Basic earnings (loss) per common share attributable to Merck & Co., Inc. common shareholders	$	0.73	$	(0.02	)	$	1.64	$	1.26
Earnings (loss) per common share assuming dilution attributable to Merck & Co., Inc. common shareholders	$	0.73	$	(0.02	)	$	1.63	$	1.25
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.

For the ~~three months ended September 30,~~second quarter of 2019 and 2018, 23 million and 13 million, respectively, and for the first ~~nine~~six months of 2019 and 2018, ~~and 2017, 7~~4 million and 415 million, respectively, of common shares issuable under share-based compensation plans were excluded from the computation of earnings per common share assuming dilution because the effect would have been antidilutive. The Company recorded a net loss for the three months ended September 30, 2017; therefore, no potential dilutive common shares were used in the computation of loss per common share assuming dilution because the effect would have been antidilutive.


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)


~~16.~~	~~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, 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 )
Balance July 1, 2018, net of taxes $ 65
$ (164 ) $ (3,065 ) $ (1,958 ) $ (5,122 )
Other comprehensive income (loss) before reclassification adjustments, pretax 29
8
—
(147 ) (110 )
Tax (6 ) —
—
11
5
Other comprehensive income (loss) before reclassification adjustments, net of taxes 23
8
—
(136 ) (105 )
Reclassification adjustments, pretax 5
⁽¹⁾
32
⁽²⁾
47
⁽³⁾
—
84
Tax (1 ) —
(7 ) —
(8 )
Reclassification adjustments, net of taxes 4

32

40

—
76
Other comprehensive income (loss), net of taxes 27
40
40
(136 ) (29 )
Balance September 30, 2018, net of taxes $ 92

$ (124 )
$ (3,025 )
$ (2,094 )
$ (5,151 )

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

Nine Months Ended September 30,
($ in millions) Derivatives Investments
Employee
Benefit
Plans

Cumulative
Translation
Adjustment

Accumulated Other
Comprehensive
Income (Loss)
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 )
Balance January 1, 2018, net of taxes $ (108 ) $ (61 ) $ (2,787 ) $ (1,954 ) $ (4,910 )
Other comprehensive income (loss) before reclassification adjustments, pretax 113
(125 ) (2 ) (129 ) (143 )
Tax (24 ) 1
4
(111 ) (130 )
Other comprehensive income (loss) before reclassification adjustments, net of taxes 89
(124 ) 2
(240 ) (273 )
Reclassification adjustments, pretax 169
⁽¹⁾
68
⁽²⁾
128
⁽³⁾
—
365
Tax (35 ) —
(24 ) —
(59 )
Reclassification adjustments, net of taxes 134
68
104
—
306
Other comprehensive income (loss), net of taxes 223
(56 ) 106
(240 ) 33

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

Balance September 30, 2018, net of taxes $ 92

$ (124 )
$ (3,025 )
$ (2,094 )
$ (5,151 )


⁽¹⁾	Relates to foreign currency cash flow hedges that were reclassified from AOCI to ~~Sales.~~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. ~~In 2017, these amounts included both debt and equity investments; however, upon adoption of ASU 2016-01 in 2018 (see Note 1), these amounts relate only to available-for-sale debt investments.~~


⁽³⁾	Includes net amortization of prior service cost and actuarial gains and losses included in net periodic benefit cost (see Note ~~12)~~11).


~~17.~~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 segments. The Pharmaceutical and Animal Health segments are the only reportable segments. ~~The Animal Health segment met the criteria for separate reporting and became a reportable segment in the first quarter of 2018.~~

The Pharmaceutical segment includes human health pharmaceutical and vaccine products. Human health pharmaceutical products consist of therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. The Company sells these human health pharmaceutical products primarily to drug wholesalers and retailers, hospitals, government agencies and managed health care providers such as health maintenance organizations, pharmacy benefit managers and other institutions. ~~Vaccine~~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. During 2019, as a result of changes to the Company’s 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 a comparable basis.

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

5,010

9,658

4,197

4,959

9,156

12,206

15,653

27,859

11,887

14,214

26,101
Animal Health:
Livestock 153
508
660
137
518
655
383
1,563
1,946
359
1,457
1,816
Companion Animals 153
207
361
153
192
345
541
689
1,230
483
595
1,078
Total Animal Health segment sales 306

715

1,021

290

710

1,000

924

2,252

3,176

842

2,052

2,894
Other segment sales ⁽²⁾
55
—
55
100
—
100
194
1
195
294
—
294
Total segment sales 5,010

5,725

10,734

4,587

5,669

10,256

13,324

17,906

31,230

13,023

16,266

29,289
Other ⁽³⁾
20
39
60
7
63
69
101
(35 ) 66
73
327
400
$ 5,030
$ 5,764
$ 10,794
$ 4,594
$ 5,732
$ 10,325
$ 13,425
$ 17,871
$ 31,296
$ 13,096
$ 16,593
$ 29,689



	Three Months Ended June 30,															Six Months Ended June 30,
	2019							2018								2019							2018
($ in millions)	U.S.			Int’l		Total		U.S.			Int’l			Total		U.S.			Int’l		Total		U.S.			Int’l			Total
Pharmaceutical:
Oncology
Keytruda	$	1,498		$	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	6			150		156		8			218			226		6			290		296		25			505			531
Vytorin	3			73		76		3			152			155		6			167		174		11			311			322
Atozet	—			92		92		—			101			101		—			186		186		—			174			174
Adempas	—			104		104		—			75			75		—			194		194		—			143			143
Diabetes
Januvia	471			437		908		503			446			949		855			877		1,732		968			862			1,829
Janumet	166			366		533		209			377			585		333			730		1,063		401			729			1,129
Women’s Health
NuvaRing	206			34		240		187			49			236		391			68		459		357			95			452
Implanon/Nexplanon	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	24			39		63		27			43			70		53			67		121		56			81			138
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	4,758			5,702		10,460		3,841			5,442			9,282		8,933			11,190		20,123		7,557			10,644			18,201
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	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 ⁽³⁾	4			125		128		54			(18		)	37		12			206		216		80			(74		)	6
	$	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.~~rounding.


⁽¹⁾	Other pharmaceutical primarily reflects sales of other human health pharmaceutical products, including products within the franchises not listed separately.


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


⁽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 2018 and 2017 also includes $81 million and $60 million, respectively, related to the sale of the marketing rights to certain products.~~

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

Consolidated ~~revenues~~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

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

$ 10,325

$ 31,296

$ 29,689

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



	Three Months Ended 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) 2018 2017 2018 2017
Segment profits:
Pharmaceutical segment $ 6,479
$ 5,906
$ 18,109
$ 16,657
Animal Health segment 409
389
1,273
1,202
Other segments 5
93
94
234
Total segment profits 6,893
6,388
19,476
18,093
Other profits (losses) 55
(78 ) (35 ) 107
Unallocated:
Interest income 92
90
257
284
Interest expense (190 ) (189 ) (569 ) (564 )
Equity income from affiliates 85
23
101
16
Depreciation and amortization (324 ) (334 ) (1,006 ) (1,036 )
Research and development (1,855 ) (4,208 ) (6,878 ) (7,399 )
Amortization of purchase accounting adjustments (679 ) (765 ) (2,144 ) (2,322 )
Restructuring costs (171 ) (153 ) (494 ) (470 )
Aggregate charge related to termination of collaboration agreement with Samsung (420 ) —
(420 ) —
Other unallocated, net (821 ) (574 ) (2,191 ) (2,067 )
$ 2,665
$ 200
$ 6,097
$ 4,642

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

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

In the first quarter of 2018, the Company adopted a new accounting standard related to the classification of certain defined benefit plan costs (see Note 1), which resulted in a change to the measurement of segment profits. Net periodic benefit cost (credit) other than service cost is no longer included as a component of segment profits. Prior period amounts have been recast to conform to the new presentation.

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

Recent Developments

~~Dividend Increase and Share Repurchase Program~~

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

Business Developments

In ~~June 2018,~~April 2019, Merck acquired ~~Viralytics Limited (Viralytics)~~Antelliq Corporation (Antelliq), ~~an Australian publicly traded~~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).

In July 2019, Merck acquired Peloton Therapeutics, Inc. (Peloton), a clinical-stage biopharmaceutical company focused on ~~oncolytic immunotherapy treatments for a range~~the development of ~~cancers, for AUD 502 million ($378 million). The transaction provided Merck with full rights to~~ ~~Cavatak~~ ~~(V937, formerly CVA21), Viralytics’s investigational oncolytic immunotherapy.~~ ~~Cavatak~~ ~~is based on Viralytics’s proprietary formulation of an oncolytic virus (Coxsackievirus Type A21) that has been shown to preferentially infect and kill cancer cells.~~ ~~Cavatak~~ ~~is currently being evaluated in multiple Phase 1 and Phase 2 clinical trials, both as an intratumoral and intravenous agent, including in combination with~~ ~~Keytruda~~ ~~(pembrolizumab), Merck’s anti-PD-1 (programmed death receptor-1) therapy. Under a previous agreement between Merck and Viralytics, a study is investigating the use of the~~ ~~Keytruda~~ ~~and~~ ~~Cavatak~~ ~~combination in melanoma, prostate, lung and bladder cancers.~~

In March 2018, Merck and Eisai Co., Ltd. (Eisai) announced a strategic collaboration for the worldwide co-development and co-commercialization of Lenvima (lenvatinib mesylate), 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 ~~Keytruda~~. Eisai records Lenvima product sales globally 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. Under the agreement, Merck made upfront payments to Eisai of $750 million and will make payments of up to $650 million for certain option rights through 2021 ($325 million in January 2019 or earlier in certain circumstances, $200 million in January 2020 and $125 million in January 2021). The Company recorded an aggregate charge of $1.4 billion in ~~Research and development~~ expenses in the first nine months of 2018 related to the upfront payments and future option payments. In addition, the agreement provides for Eisai to receive up to $385 million associated with the achievement of certain clinical and regulatory milestones and up to $3.97 billion for the achievement of milestones associated with sales of Lenvima. Lenvima has since been approvednovel small molecule therapeutic candidates targeting hypoxia-inducible factor-2α (HIF-2α) for the treatment of patients with ~~unresectable hepatocellular carcinoma~~cancer and other non-oncology diseases. Peloton’s lead candidate, MK-6482 (formerly PT2977), is a novel oral HIF-2α inhibitor in late-stage development for renal cell carcinoma. Merck made an upfront payment of $1.05 billion in cash; additionally, former Peloton shareholders will be eligible to receive up to an additional $1.15 billion contingent upon successful achievement of future regulatory and sales-based milestones.

Restructuring Program

Merck recently approved a new global restructuring program (2019 Restructuring Program) as part of a worldwide initiative focused primarily on further optimizing the Company’s manufacturing and supply network, as well as reducing 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 overall operating model, which could result in the ~~United States, Europe, China and Japan.~~identification of 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.

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. Changes to the U.S. health care system as part of health care reform, as well as increased purchasing power of entities that negotiate on behalf of Medicare, Medicaid, and private sector beneficiaries, ~~could result in further~~have contributed to pricing ~~pressures. In July 2018, the Company announced its commitment not to increase the average net price in the United States across its human health portfolio of products by more than inflation annually.~~

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 ~~2018.~~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 ~~2018.~~

~~Cyber-attack~~

On June 27, 2017, the Company experienced a network cyber-attack that led to a disruption of its worldwide operations, including manufacturing, research and sales operations. Due to a residual backlog of orders for certain products as a result of the cyber-attack, the Company was unable to fulfill orders for certain products in certain markets, which had an unfavorable effect on sales for the first nine months of 2018 of approximately $150 million, including an immaterial impact to sales in the third quarter of 2018. The Company expects an immaterial impact to sales for the remainder of 2018. Sales in the third quarter and first nine months of 2017 were unfavorably affected by $135 million due to the cyber-attack. In addition, the Company recorded manufacturing-related expenses, primarily unfavorable manufacturing variances, in ~~Materials and production~~ ~~costs, as well as expenses related to remediation efforts in~~ ~~Marketing and administrative~~ ~~expenses and~~ ~~Research and development~~ ~~expenses, which aggregated approximately $175 million for the third quarter and first nine months of 2017. Costs in the first nine months of 2018 were immaterial.~~

The Company has insurance coverage insuring against costs resulting from cyber-attacks and has received insurance proceeds. However, there may be disputes with the insurers about the availability of the insurance coverage for claims related to this incident.2019.

Operating Results

Sales

Worldwide sales were $~~10.8~~11.8 billion for the ~~third~~second quarter of 2019, an increase of 12% compared with the second quarter of 2018 ~~an increase of 5% compared with the~~ ~~third~~ ~~quarter of 2017~~ including a 1%3% unfavorable effect from foreign exchange. Global sales were ~~$31.3~~$22.6 billion for the first ~~nine~~six months of ~~2018,~~2019, an increase of 5%10% compared with the same period of ~~2017.~~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 ~~related to~~from Lynparza (olaparib) and ~~Lenvima. Also contributing to revenue growth were higher~~Lenvima (lenvatinib). Higher sales ~~in the hospital acute care franchise, largely attributable to~~ ~~Bridion~~ ~~(sugammadex) Injection and~~ ~~Noxafil~~ ~~(posaconazole). The sales increases in the third quarter and first nine months~~ of ~~2018 also reflect higher sales of~~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), ~~which were attributable in part to a reduction of~~ ~~Gardasil~~ ~~9 sales due to a borrowing the Company made from the U.S. Centers for Disease Control~~ and ~~Prevention (CDC) Pediatric~~pediatric vaccines ProQuad (Measles, Mumps, Rubella and Varicella Virus Vaccine ~~Stockpile in the third quarter of 2017 as discussed below. Higher sales of animal health products~~Live), M‑M‑R II (Measles, Mumps and Rubella Virus Vaccine Live) and Varivax (Varicella Virus Vaccine Live) also drove ~~revenue~~sales growth in the ~~third~~second quarter and first ~~nine~~six months of ~~2018. Additionally, a lower impact from the June 2017 cyber-attack as discussed above also contributed to the sales increase in the third quarter and first months of 2018.~~2019.

~~Revenue~~Sales growth in ~~the third quarter and first nine months of 2018~~both periods was partially offset by ~~declines in~~ the ~~virology franchise driven primarily by lower sales of hepatitis C virus (HCV) treatment~~ ~~Zepatier~~ ~~(elbasvir and grazoprevir), as well as lower sales of shingles (herpes zoster) vaccine~~ ~~Zostavax~~ ~~(Zoster Vaccine Live). The~~ ongoing effects of generic competition for cardiovascular products Zetia (ezetimibe) and Vytorin (ezetimibe and simvastatin), hospital acute care product Invanz (ertapenem sodium), and biosimilar competition for ~~cardiovascular products~~ ~~Zetia~~ ~~(ezetimibe),~~ ~~Vytorin~~ ~~(ezetimibe and simvastatin), and~~ immunology product Remicade (infliximab)~~, as well as lower~~. 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.

~~Sales~~International sales represented 56% and 57% of ~~the Company’s products were as follows:~~

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

5,010

9,658

4,197

4,959

9,156

12,206

15,653

27,859

11,887

14,214

26,101
Animal Health:
Livestock 153
508
660
137
518
655
383
1,563
1,946
359
1,457
1,816
Companion Animals 153
207
361
153
192
345
541
689
1,230
483
595
1,078
Total Animal Health segment sales 306

715

1,021

290

710

1,000

924

2,252

3,176

842

2,052

2,894
Other segment sales ⁽²⁾
55
—
55
100
—
100
194
1
195
294
—
294
Total segment sales 5,010

5,725

10,734

4,587

5,669

10,256

13,324

17,906

31,230

13,023

16,266

29,289
Other ⁽³⁾
20
39
60
7
63
69
101
(35 ) 66
73
327
400
$ 5,030

$ 5,764

$ 10,794

$ 4,594

$ 5,732

$ 10,325

$ 13,425

$ 17,871

$ 31,296

$ 13,096

$ 16,593

$ 29,689

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


⁽¹⁾	~~Other pharmaceutical primarily reflects~~ sales ~~of other human health pharmaceutical products, including products within the franchises not listed separately.~~


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


⁽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 2018 and 2017 also includes $81 million and $60 million, respectively, related to the sale of the marketing rights to certain products.

Product sales are recorded net of the provision for discounts, including chargebacks, which are customer discounts that occur when a contracted customer purchases 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.~~second quarter and first six months of 2019, respectively. Performance in international markets was led by China, which had total sales ~~by $2.6~~of $763 million and $1.5 billion in the second quarter and ~~$2.9 billion for the three~~first six months ~~ended~~ ~~September 30, 2018~~of 2019, respectively, representing growth rates of 37% and ~~2017~~44%, respectively, compared with the same prior year periods. Foreign exchange unfavorably affected sales performance in China by 9% and ~~by $7.7 billion~~10% in the second quarter and ~~$8.2 billion for the nine~~first six months ~~ended September 30, 2018 and 2017,~~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

Oncology

Keytruda, is an anti-PD-1 therapy isthat has been approved ~~in the United States and in the European Union (EU) as monotherapy~~ for the treatment of ~~certain patients with~~multiple malignancies including non-small-cell lung cancer (NSCLC), melanoma, classical Hodgkin lymphoma (cHL), head and neck squamous cell carcinoma (HNSCC) ~~and~~, urothelial carcinoma, ~~a type of bladder~~cervical cancer, ~~and in combination with pemetrexed and carboplatin for certain patients with nonsquamous NSCLC.~~ ~~Keytruda~~ ~~is also approved in the United States as monotherapy for the treatment of certain patients with~~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. ~~In addition, the U.S. Food and Drug Administration (FDA)~~Keytruda was also recently approved ~~Keytruda~~in the United States for the treatment of certain patients with ~~cervical~~esophageal cancer, ~~primary mediastinal large B-cell lymphoma (PMBCL), a type of non-Hodgkin lymphoma,~~renal cell carcinoma and ~~in combination with carboplatin and either paclitaxel or nab-paclitaxel for patients with squamous NSCLC~~small-cell lung cancer (SCLC) (see below). ~~Keytruda~~ ~~is approved in Japan for the treatment of certain patients with melanoma, NSCLC, cHL, and urothelial carcinoma. Additionally, in July 2018,~~ ~~Keytruda~~ ~~was approved in China for the treatment of adult patients with unresectable or metastatic melanoma following failure of one prior line of therapy.~~ ~~Keytruda~~ ~~is also approved in many other international markets.~~ The Keytruda clinical development program includes studies across a broad range of cancer types (see “Research and Development” below).

In ~~August 2018,~~July 2019, the U.S. Food and Drug Administration (FDA) approved Keytruda as 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 ~~an expanded label for~~ Keytruda as monotherapy or 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,~~unresectable, recurrent HNSCC based on results from the pivotal Phase 3 KEYNOTE-048 trial. Keytruda was initially approved for the treatment of ~~the KEYNOTE-189 trial.~~ ~~Keytruda~~ ~~in combination~~certain patients with ~~pemetrexed and carboplatin was first approved in 2017~~recurrent or metastatic HNSCC under the FDA’s accelerated approval process ~~for the first-line treatment of patients with metastatic nonsquamous NSCLC,~~ based on ~~tumor response rates and PFS~~ data from athe Phase ~~2 study (KEYNOTE-021, Cohort G1).~~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-189~~KEYNOTE-048 and has resulted in the FDA converting the accelerated approval to a full (regular) approval.

Also in ~~September 2018,~~June 2019, the EUFDA 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), 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, ~~in adults whose tumors have~~with no EGFR or ALK ~~positive mutations. This is the first approval in Europe for an anti-PD-1 therapy in combination with chemotherapy.~~

~~In June 2018, the FDA approved~~ ~~Keytruda~~ for the treatment of patients with recurrent or metastatic cervical cancer with disease progression on or after chemotherapy whose tumors express PD-L1 as determined by an FDA-approved test. Also in June 2018, the FDA approved ~~Keytruda~~ ~~for the treatment of adult and pediatric patients with refractory PMBCL, or who have relapsed after two or more prior lines of therapy. With this indication,~~ ~~Keytruda~~ ~~becomes the first anti-PD-1 therapy to be approved for the treatment of PMBCL. Both of these indications were approved under the FDA’s accelerated approval regulations based on~~ genomic tumor ~~response rate and durability of response.~~

~~Additionally, in September 2018, the EC approved~~ ~~Keytruda~~ as monotherapy for the treatment of recurrent or metastatic HNSCC in adults whose tumors express PD-L1 with a tumor proportion score (TPS) of ≥50%, and who progressed on or after platinum-containing chemotherapy,aberrations, based on data from the pivotal Phase 3 ~~KEYNOTE-040~~KEYNOTE-189 trial.

In ~~October 2018,~~March 2019, the ~~FDA~~European Commission (EC) approved Keytruda, in combination with carboplatin and either paclitaxel or nab-paclitaxel for the first-line treatment of ~~patients~~adults with metastatic squamous NSCLC based on ~~results~~data from the Phase 3 KEYNOTE-407 trial. ~~This approval marks the first time an anti-PD-1 regimen has been~~Keytruda was approved for ~~the first-line treatment of squamous NSCLC regardless of tumor PD-L1 expression status.~~ ~~Keytruda~~ ~~is the first anti-PD-1 approved~~this indication in the ~~first-line setting~~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 ~~both combination and~~an intravenous infusion over 30 minutes for all approved monotherapy indications in ~~certain patients with metastatic NSCLC.~~the 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 ~~$1.9~~$2.6 billion in the ~~third~~second quarter of ~~2018 compared with $1.0 billion in the third quarter of 2017~~2019 and ~~were $5.0~~$4.9 billion in the first ~~nine~~six months of ~~2018~~2019, representing growth of 58% and 57%, respectively, compared with ~~$2.5 billion for~~ the same ~~period~~periods of ~~2017.~~2018. Foreign exchange unfavorably affected global sales performance by 5% in both the second quarter and first six months of 2019. Sales growth in both periods was driven by volume growth ~~in all markets~~ as the Company continues to launch Keytruda with multiple new indications globally. Sales in the United States continue to build across the multiple approved indications, in particular for the treatment of NSCLC ~~reflecting~~ both ~~the continued adoption of~~ ~~Keytruda~~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 ~~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~~recently launched

renal cell carcinoma 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 HNSCC, bladder, and microsatellite instability-high cancer, also contributed to adjuvant melanoma indications. Keytrudasales growth in ~~the third quarter and first nine months of 2018. Sales growth~~international markets was driven primarily by use in ~~international~~

~~markets reflects continued uptake for~~ the treatment of NSCLC as monotherapy, as well as in combination with chemotherapy as that indication continues launching in multiple markets, including in Europe. The launch of multiple new indications in Japan and China also drove growth in the ~~Company has secured reimbursement~~second quarter and first six months of 2019.

Global sales of Emend (aprepitant), for the prevention of chemotherapy-induced and post-operative nausea and vomiting, were $121 million in the second quarter of 2019 and $237 million for the first six months of 2019, declines of 18% and 13%, respectively, compared with the same periods of 2018. Foreign exchange unfavorably affected global sales performance by 3% in both the second quarter and first six months of 2019. The sales declines primarily reflect lower demand in the United States due to 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 ~~along with growth~~expired in May 2019. The patent that provides U.S. market exclusivity for Emend for Injection expires in September 2019 and the ~~melanoma, HNSCC, and bladder cancer indications.~~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 43 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 ~~$49 million and $125~~$111 million in the ~~third~~second quarter of 2019 compared with $44 million in the second quarter of 2018 and $190 million for the first ~~nine~~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 ~~respectively, related to Lynparza.~~based on the Phase 3 SOLO-1 trial. In ~~January 2018,~~April 2019, the ~~FDA~~EC approved Lynparza as a monotherapy for ~~use in~~the treatment of certain adult patients with germline BRCA~~-mutated,~~1/2-mutations, and who have human epidermal growth factor receptor 2 (HER2)-negative locally advanced or metastatic breast cancer, ~~who have been previously treated with chemotherapy,~~ triggering a ~~$70~~$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 ~~was also approved in Japan in July 2018~~as monotherapy for ~~use in~~the maintenance treatment of certain adult patients with ~~unresectable~~BRCA-mutated advanced ovarian, fallopian tube or ~~recurrent~~ ~~BRCA-mutated, HER2-negative breast~~primary peritoneal cancer ~~who have received prior chemotherapy. Lynparza was approved for use as~~based on data from the SOLO-1 trial, triggering a ~~maintenance therapy in patients with platinum-sensitive relapsed ovarian cancer, regardless of~~ ~~BRCA~~ ~~mutation status in the EU in May 2018 and in Japan in January 2018.~~$30 million milestone payment from Merck to AstraZeneca.

Lenvima, an ~~orally available~~oral receptor tyrosine kinase inhibitor being developed as part of a collaboration with Eisai entered into in March 2018 (see Note 43 to the condensed consolidated financial statements), is ~~currently~~ approved for certain types of thyroid cancer, hepatocellular carcinoma, and in combination for certain patients with renal cell ~~cancer.~~carcinoma. Merck recorded alliance revenue of ~~$43~~$97 million and ~~$78~~$35 million in the ~~third~~second quarter of 2019 and ~~first nine months of~~ 2018, respectively, related to Lenvima. Alliance revenue for Lenvima was ~~approved~~$171 million for the ~~treatment~~first six months of ~~certain patients with unresectable~~2019. Lenvima sales in 2019 reflect strong performance in hepatocellular carcinoma in Japan in March 2018, in the United States and EU in August 2018, and in China in September 2018, triggering capitalized milestone payments of $25 million, $125 million, $50 million, and $25 million, respectively, to Eisai.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 ~~$1.0 billion~~$886 million in the ~~third~~second quarter of 2019, an increase of 46% compared with the second quarter of 2018 ~~an increase of 55% compared with the third quarter of 2017~~ including a 1%4% unfavorable effect from foreign exchange. ~~The increase~~Growth was driven primarily by public sector buying patterns, higher ~~sales~~demand and pricing in the United States ~~attributable to a borrowing from the CDC Pediatric Vaccine Stockpile in the third quarter of 2017 as discussed below. The increase in sales of~~ ~~Gardasil/Gardasil~~ ~~9 during the third quarter of 2018 was also driven by higher demand in most international markets, particularly in China due to~~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 ~~Europe.~~the quarter. Global sales of Gardasil/Gardasil 9 were ~~$2.3~~$1.7 billion infor the first ~~nine~~six months of ~~2018,~~2019, an increase of ~~38%~~36% compared with the same period of ~~2017~~2018 including a ~~2% favorable~~4% unfavorable effect from foreign exchange. ~~The increase was driven in part by the 2017 CDC stockpile borrowing, as well as by higher demand~~Sales growth in the ~~Asia Pacific region, particularly~~first six months of 2019 primarily reflects higher volumes in China, the United States and in Europe. ~~In April 2018, China’s Food and Drug Administration approved~~ ~~Gardasil~~ 9 for use in girls and women ages 16 to 26. In October 2018, the FDA approved an expanded age indication for use in women and men ages 27 to 45 for the prevention of certain cancers and diseases caused by the nine HPV types covered by the vaccine.

~~During the third quarter of 2017, the Company made a request to borrow doses of~~ ~~Gardasil~~ 9 from the CDC Pediatric Vaccine Stockpile, which the CDC granted. The Company’s decision to borrow the doses from the CDC was driven in part by the temporary shutdown resulting from the cyber-attack that occurred in June 2017, as well as by overall higher demand than expected. As a result of the borrowing, the Company reversed the sales related to the borrowed doses, which reduced revenues by approximately $240 million in the third quarter of 2017, and recognized a corresponding liability. The Company subsequently replenished a portion of the borrowed doses in the fourth quarter of 2017. The net effect of the borrowing and subsequent partial replenishment was a reduction in sales of $125 million for the full year of 2017. The Company anticipates it will replenish the remaining borrowed doses in the fourth quarter of 2018.

Global sales of ProQuad~~(Measles, Mumps, Rubella and Varicella Virus Vaccine Live)~~, a pediatric combination vaccine to help protect against measles, mumps, rubella and varicella, were ~~$186~~$204 million in the ~~third~~second quarter of ~~2018,~~2019, an increase of ~~10%~~40% compared with ~~$169~~$146 million in the ~~third~~second quarter of ~~2017.~~2018. Worldwide sales of ProQuad were ~~$455~~$356 million in the first ~~nine~~six months of ~~2018,~~2019, an increase of ~~13%~~33% compared with ~~$402~~$269 million in the first ~~nine~~six months of ~~2017.~~2018. Foreign exchange unfavorably affected global sales performance by 2% and 1% in the ~~third~~second quarter and first six months of ~~2018.~~2019, respectively. Sales growth in both periods was driven primarily by higher volumes and pricing in the United States and volume growth in certain European markets.

Worldwide sales of M‑M‑R II, ~~(Measles, Mumps and Rubella Virus Vaccine Live),~~ a vaccine to help protect against measles, mumps and rubella, were ~~$121~~$199 million for the ~~third~~second quarter of 2019 compared with $95 million for the second quarter of 2018 ~~a decline of 2% compared with $124 million for the third quarter of 2017. Global sales of~~ ~~M‑M‑R~~ IIand were ~~$310~~$322 million in the first ~~nine~~six months of ~~2018, an increase of 2%~~2019 compared with ~~$303~~$188 million in the first ~~nine~~six months of ~~2017. Foreign exchange favorably affected global~~2018. Growth in both periods was driven primarily by higher sales ~~performance by 1%~~ in the ~~third quarter of 2018.~~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.

Global sales of Varivax~~(Varicella Virus Vaccine Live)~~, a vaccine to help prevent chickenpox (varicella), were ~~$217~~$271 million for the ~~third~~second quarter of ~~2018, a decline~~2019, an increase of 4%46% compared with ~~$226~~$186 million for the ~~third~~second quarter of ~~2017. The sales decrease primarily reflects volume declines in Turkey due to the loss of a government tender, partially offset by volume growth in Latin America.~~2018. Worldwide sales of Varivax were ~~$578~~$492 million in the first ~~nine~~six months of ~~2018,~~2019, an increase of 2%36% compared with ~~$568~~$361 million in the first ~~nine~~six months of ~~2017. Foreign exchange favorably affected global sales performance by 1% in the first nine~~

~~months of~~ 2018. Sales growth in the year-to-date period was largely attributable to volume growth in most international markets, along with higher pricing in the United States, partially offset by volume declines in Turkey due to the loss of a government tender.

~~Global sales of~~ ~~Pneumovax~~ 23 (pneumococcal vaccine polyvalent), a vaccine to help prevent pneumococcal disease, were $214 million in the third quarter of 2018, a decline of 7% compared with the third quarter of 2017, driven primarily by lower sales in the United States reflecting lower demand, partially offset by higher pricing. Worldwide sales of ~~Pneumovax~~ 23 were $586 million in the first nine months of 2018, an increase of 5% compared with the same period of 2017, driven primarily by volume growth in Europe. Sales in the United States were relatively flat in the first nine months of 2018 as higher pricing offset lower volumes. Foreign exchange unfavorably affected global sales performance by 1%4% and 5% in the ~~third~~second quarter and first six months of ~~2018~~2019,

respectively. Sales growth in both periods was driven primarily by government tenders in Brazil, as well as volume growth and ~~favorably affected global sales performance by 1%~~pricing in the ~~first nine months of 2018.~~United States.

Worldwide sales of RotaTeq (Rotavirus Vaccine, Live Oral, Pentavalent), a vaccine to help protect against rotavirus gastroenteritis in infants and children, were ~~$191~~$172 million in the ~~third~~second quarter of ~~2018, an increase of 7% compared with the third quarter of 2017 including a 1% unfavorable effect from foreign exchange. Sales growth was driven primarily by the launch in China~~2019 and ~~higher volumes and pricing in the United States. Global sales of~~ ~~RotaTeq~~were ~~$540~~$383 million infor the first ~~nine~~six months of ~~2018, up 3% compared with the same period~~2019, increases of ~~2017 including a 1% favorable effect from foreign exchange. Sales growth was driven primarily by the launch in China and higher pricing in the United States.~~

~~Worldwide sales of~~ ~~Zostavax~~, a vaccine to help prevent shingles (herpes zoster) in adults 50 years of age and older, were $54 million in the third quarter of 2018 and $163 million in the first nine months of 2018, declines of 77% and 70%, respectively,10% compared with the same periods of ~~2017.~~2018. Foreign exchange ~~favorably~~unfavorably affected global sales performance by 1%3% and 2% in the second quarter and first ~~nine~~six months of ~~2018. The sales declines were~~2019, respectively. Sales growth in both periods was driven primarily by ~~lower volumes in most markets, particularly in the United States. Lower demand in the United States reflects the approval of a competitor’s vaccine that received a preferential recommendation~~continued uptake from the ~~CDC’s Advisory Committee on Immunization Practices~~launch in ~~October 2017 for the prevention of shingles over~~ ~~Zostavax. The Company anticipates competition will continue to have a material adverse effect on sales of~~ ~~Zostavax~~ ~~in future periods.~~China.

Hospital Acute Care

Worldwide sales of Bridion, (sugammadex) Injection, for the reversal of two types of neuromuscular blocking agents used during surgery, were ~~$217~~$278 million in the ~~third~~second quarter of ~~2018, an increase of 17% compared with the third quarter of 2017 including a 3% unfavorable effect from foreign exchange. Global sales of~~ ~~Bridion~~ ~~were~~ ~~$661~~2019 and $533 million in for the first ~~nine~~six months of ~~2018, an increase~~2019, increases of ~~33%~~16% and 20%, respectively, compared with the same ~~period~~periods of ~~2017 including a 2% favorable 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 and certain European markets.~~States.

Worldwide sales of Noxafil (posaconazole), for the prevention of invasive fungal infections, were ~~$188~~$193 million in the ~~third~~second quarter of ~~2018, an increase of 16% compared with the third quarter of 2017 including a 2% unfavorable effect from foreign exchange. Global sales of~~ ~~Noxafil~~ ~~were $551~~2019 and $383 million infor the first ~~nine~~six months of ~~2018, an increase~~2019, increases of ~~21%~~3% and 5%, respectively, compared with the same ~~period~~periods of ~~2017 including a 3% favorable effect from foreign exchange. Sales growth in both periods primarily reflects higher demand~~2018. Foreign exchange unfavorably affected global sales performance by 4% and 5% in the ~~United States, as well as volume growth~~second quarter and first six months of 2019, respectively. The patent that provided U.S. market exclusivity for Noxafil expired in ~~certain~~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 ~~and~~ in ~~China.~~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 ~~$137~~$78 million in the ~~third~~second quarter of ~~2018, a decline of 14% compared with the third quarter of 2017 including a 2% unfavorable effect from foreign exchange. Worldwide sales of~~ ~~Invanz~~ ~~were $437~~2019 and $150 million for the first ~~nine~~six months of ~~2018, a decrease~~2019, declines of 2%48% and 50%, respectively, compared with the same ~~period~~periods of ~~2017.~~2018. Foreign exchange unfavorably affected global sales performance by 4% in both the second quarter and first six months of 2019. The sales ~~declines were~~decline in both periods was driven ~~primarily~~ by ~~lower volumes~~generic competition in the United States. The patent that provided U.S. market exclusivity for Invanz expired in November ~~2017 and the Company is experiencing a decline in U.S.~~ ~~Invanz~~ ~~sales as a result of generic competition and expects the decline to continue.~~

~~Global sales of~~ ~~Cancidas~~ (caspofungin acetate), an anti-fungal product sold primarily outside of the United States, were $79 million in the third quarter of 2018 and $257 million in the first nine months of 2018, declines of 16% and 22%, respectively, compared with the same periods of 2017. Foreign exchange unfavorably affected global sales performance by 2% in the third quarter of 2018 and favorably affected global sales performance by 3% in the first nine months of 2018. The sales declines were driven by generic competition in certain European markets. The EU compound patent for ~~Cancidas~~ ~~expired in April~~ 2017. Accordingly, the Company is experiencing a significant decline in ~~Cancidas~~U.S. Invanz sales ~~in these European markets~~ and expects the decline to continue.

In ~~September 2018, Merck announced that~~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 ~~clinical study evaluating~~ASPECT-NP trial. In July 2019, the ~~Company’s antibiotic~~ Committee for Medicinal Products for Human Use (CHMP) of the European Medicines Agency (EMA) adopted a positive opinion recommending Zerbaxa ~~(ceftolozane and tazobactam) at an investigational dose~~ for the treatment of ~~adult patients with either ventilated~~ hospital-acquired ~~bacterial~~ pneumonia, orincluding ventilator-associated ~~bacterial~~ pneumonia ~~met~~in adults based on the ~~pre-specified primary endpoints, demonstrating non-inferiority to meropenem,~~results of the active comparator, in day 28 all-cause mortality and in clinical cure rate at the test-of-cure visit. Based on these results, Merck plans to submit supplemental new drug applications to the FDA and European Medicines Agency (EMA) seeking regulatory approval of ASPECT-NP trial. Zerbaxa ~~for these potential new indications.~~ ~~Zerbaxa~~ ~~is currently~~ was previously approved in the United States and EU for the treatment of certain adult patients with complicated urinary tract infections, ~~caused by certain Gram-negative microorganisms~~including pyelonephritis, and complicated intra-abdominal infections.

In July 2019, the FDA approved Recarbrio (imipenem, cilastatin, and inrelebactam) for injection, a new combination ~~with metronidazole~~antibacterial for the treatment of complicated ~~intra-abdominal~~urinary tract infections, including pyelonephritis, caused by certain Gram-negative microorganisms in patients 18 years of age and ~~Gram-positive microorganisms.~~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 ~~$210~~$214 million in the ~~third~~second quarter of 2018, a decline of 4% compared with the third quarter of 2017 including a 1% unfavorable effect from foreign exchange. The sales decline reflects lower pricing, partially offset by higher volumes in Europe. Sales of ~~Simponi~~ ~~were $673~~2019 and $422 million infor the first ~~nine~~six months of ~~2018, growth~~2019, declines of ~~12%~~8% and 9%, respectively, compared with the same ~~period~~periods of ~~2017 including~~2018. Foreign exchange unfavorably affected sales performance by 7% in both the second quarter and first six months of 2019. The Company anticipates sales of Simponi will be unfavorably affected in future periods by the recent launch of biosimilars for a ~~7% favorable effect from foreign exchange. Sales growth was driven by volume growth in Europe.~~competing product.

Sales of Remicade, a treatment for inflammatory diseases (marketed by the Company in Europe, Russia and Turkey), were ~~$135~~$98 million in the ~~third~~second quarter of ~~2018~~2019 and ~~$459~~$221 million infor the first ~~nine~~six months of ~~2018,~~2019, declines of 37% and ~~29%~~32%, respectively, compared with the same periods of ~~2017.~~2018. Foreign exchange unfavorably affected ~~global~~ sales performance by 2%5% and 6% in the ~~third~~second quarter ~~of 2018~~ and ~~favorably affected global sales performance by 4% in the~~ first ~~nine~~six months of ~~2018.~~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.

Virology

Global combined sales of Isentress/Isentress HD ~~(raltegravir)~~, an HIV integrase inhibitor for use in combination with other antiretroviral agents for the treatment of HIV-1 infection, were ~~$275~~$247 million in the ~~third~~second quarter of ~~2018, a decline of 11% compared with the third quarter of 2017 including a 2% unfavorable effect from foreign exchange. Worldwide sales of~~ ~~Isentress/Isentress HD~~ ~~were $860~~2019 and $502 million in for

the first ~~nine~~six months of ~~2018, a decline~~2019, declines of 4%19% and 14%, respectively, compared with the same ~~period~~periods of ~~2017 including a 1% favorable effect from foreign exchange.~~2018. Foreign exchange 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 ~~and~~due to competitive ~~pricing pressure and lower volumes in Europe.~~

~~In August 2018, the FDA approved two new HIV-1 medicines:~~ ~~Delstrigo, a once-daily fixed-dose combination tablet of doravirine, lamivudine and tenofovir disoproxil fumarate; and~~ ~~Pifeltro~~ ~~(doravirine), a new non-nucleoside reverse transcriptase inhibitor to be administered in combination with other antiretroviral medicines. Both~~ ~~Delstrigo~~ ~~and~~ ~~Pifeltro~~ are indicated for the treatment of HIV-1 infection in adult patients with no prior antiretroviral treatment experience. In September 2018, the Committee for Medicinal Products for Human Use (CHMP) of the EMA adopted a positive opinion recommending granting of marketing authorization for ~~Delstrigo~~ ~~and~~ ~~Pifeltro. These two recommendations will now be reviewed by the European Commission (EC) for marketing authorization in the EU.~~

~~Global sales of~~ ~~Zepatier~~, a treatment for adult patients with certain types of chronic HCV infection, were $104 million in the third quarter of 2018 and $347 million in the first nine months of 2018, declines of 78% and 75%, respectively, compared with the same periods of 2017. Foreign exchange unfavorably affected global sales performance by 1% in the third quarter of 2018 and favorably affected global sales performance by 1% in the first nine months of 2018. The sales declines were driven primarily by the unfavorable effects of increasing competition and declining patient volumes, particularly in the United States, Europe and Japan. The Company anticipates that sales of ~~Zepatier~~ ~~in the future will continue to be materially adversely affected by competition and lower patient volumes.~~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 ~~$353~~$376 million in the ~~third~~second quarter of ~~2018, a decline~~2019 and $721 million for the first six months of ~~34%~~2019, declines of 25% and 32%, respectively, compared with the ~~third~~same periods of 2018. Foreign exchange unfavorably affected global sales performance by 4% in both the second quarter and first six months of ~~2017 including a 1% unfavorable effect from foreign exchange.~~2019. The sales ~~decline in the third quarter was~~declines were driven primarily by lower sales in ~~Europe, as well as in the United States.~~Europe. The ~~Company lost market exclusivity in major European markets~~EU patents for Ezetrol and Inegy expired in April 2018 and ~~has also lost market exclusivity in certain European markets for~~ ~~Inegy~~ ~~(see Note 9 to the condensed consolidated financial statements).~~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. ~~In addition,~~ ~~Zetia~~ ~~and~~ ~~Vytorin~~Merck lost market exclusivity in the United States for Zetiain ~~December~~ 2016 and ~~April~~Vytorin in 2017 ~~respectively. Accordingly, the Company experienced a rapid and substantial decline in U.S.~~ ~~Zetia~~ ~~and~~ ~~Vytorin~~ ~~sales as a result of generic competition~~ and has lost nearly all U.S. sales of these products. Combined global sales of the ezetimibe family were $1.4 billion in the first nine months of 2018, a decline of 21% compared with the same period of 2017 including a 4% favorable effect from foreign exchange. The sales decline primarily reflects lower volumes and pricing of ~~Zetia~~ ~~and~~ ~~Vytorin~~ ~~in the United States, as well as in certain European markets~~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 ~~higher sales in Japan due in part to~~ the launch of ~~Atozet~~.Rosuzet in Japan.

~~Pursuant to a collaboration with Bayer AG (Bayer) (see Note 4 to the condensed consolidated financial statements), Merck has lead commercial rights for~~ Adempas (riociguat), a cardiovascular drug for the treatment of pulmonary arterial hypertension, ~~in countries outside~~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 Americas while Bayer has lead rights in the Americas, including the United States. The companies share profits equally under the collaboration. In 2016, Merck began promoting and distributing Adempas in Europe. Transition from Bayer in other Merck territories, including Japan, continued in 2017.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 ~~sales~~revenue related to Adempas of ~~$94~~$104 million in the ~~third~~second quarter of ~~2018, an increase~~2019 and $194 million for the first six months of ~~35%~~2019, increases of 39% and 36%, respectively, compared with the ~~third~~same periods of 2018. Foreign exchange unfavorably affected global sales performance by 4% in both the second quarter and first six months of ~~2017.~~2019. Sales growth in ~~the third quarter reflects higher sales in Merck’s marketing territories and~~both periods was driven by higher profit sharing from Bayer. Merck recorded sales related to Adempas of $238 million in the first nine months of 2018, growth of 7% compared with the same period of 2017 including a 3% favorable effect from foreign exchange. Sales growth in the first nine months of 2018 reflects higher sales in Merck’s marketing territories, partially offset by lower profit sharing from Bayer, due in part to lower pricing in the United States.

Diabetes

Worldwide combined sales of Januvia ~~(sitagliptin)~~ and Janumet~~(sitagliptin/metformin HCl)~~, medicines that help lower blood sugar levels in adults with type 2 diabetes, were ~~$1.5~~$1.4 billion in the ~~third~~second quarter of ~~2018, a decline of 2% compared with the third quarter of 2017 including a 1% unfavorable effect from foreign exchange. Global combined sales of~~ ~~Januvia~~2019 and ~~Janumet~~ ~~were $4.4~~$2.8 billion infor the first ~~nine~~six months of ~~2018, essentially flat~~2019, declines of 6% compared with the same ~~period~~periods of ~~2017 excluding a 2% favorable effect from foreign exchange. Sales~~2018. Foreign exchange unfavorably affected global sales performance by 3% and 4% in the second quarter and first six months of 2019, respectively. The sales decline in both periods reflects continued pricing pressure ~~particularly~~ in the United States, partially offset by higher demand globally. The Company expects U.S. pricing pressure to continue.

Women’s Health

Worldwide sales of NuvaRing (etonogestrel/ethinyl estradiol vaginal ring), a vaginal contraceptive product, were ~~$234~~$240 million in the ~~third~~second quarter of ~~2018~~2019 and ~~$686~~$459 million infor the first ~~nine~~six months of ~~2018,~~2019, increases of ~~9% and 20%, respectively,~~2% compared with the same periods of ~~2017. Foreign~~2018 including a 1% unfavorable effect from foreign exchange ~~unfavorably affected global sales performance by 1% in the third quarter of 2018 and favorably affected global sales performance by 1% in first nine months of 2018. Sales growth~~ in both ~~periods was driven primarily by higher pricing in the United States.~~periods. The patent that provided U.S. market exclusivity for NuvaRing expired in April 2018 and the Company anticipates a significant decline in U.S. NuvaRing sales in future periods as a result of generic competition.

Animal Health Segment

Animal Health includes pharmaceutical and vaccine products for the prevention, treatment and control of disease in all major farm and companion animal species. The Animal Health segment met the criteria for separate reporting and became a reportable segment in the first quarter of 2018. Animal Health sales are affected by competition and the frequent introduction of generic products. Global sales of Animal Health products totaled ~~$1.0~~$1.1 billion for the ~~third~~second quarter of 2019, growth of 3% compared with the second quarter of 2018 ~~an increase of 2% compared with the~~ ~~third~~ ~~quarter of 2017~~ including a 4%6% unfavorable effect from foreign exchange. Growth in the second quarter was primarily driven by higher sales of livestock products, predominantly due to products obtained in the Antelliq acquisition. Companion animal sales performance in the second quarter reflects volume growth in vaccine and insulin products, partially offset by the timing of customer purchases in the prior year for the Bravecto (fluralaner) line of products for parasitic control. Worldwide sales of Animal Health products totaled ~~$3.2~~$2.1 billion for the first ~~nine~~six months of 2019, essentially flat compared with the first six months of 2018 ~~an increase of 10% compared with the same period of 2017~~ including a ~~2% favorable~~6% unfavorable effect from foreign exchange. Sales ~~growth~~performance in ~~both periods~~the year-to-date period was driven by livestock products, due to the Antelliq acquisition and higher ~~sales of~~demand for poultry products, as well as higher demand for companion animal products, primarily the Bravecto ~~(fluralaner)~~ 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, due in part~~monitoring solutions (see Note 2 to the ~~timing of customer purchases and a delayed flea and tick season, as well as higher sales of livestock products, including ruminant and poultry products.~~condensed consolidated financial statements).

Costs, Expenses and Other

~~Materials and Production~~Cost of Sales

~~Materials and production costs~~Cost of sales were $~~3.6~~3.4 billion for the ~~third~~second quarter of 2019, essentially flat compared with the second quarter of 2018, ~~an increase of 9% compared with the third quarter of 2017~~ and were ~~$10.2~~$6.5 billion for the first ~~nine~~six months of ~~2018, an increase~~2019, a decline of 8%2% compared with the same period of ~~2017.~~2018. Costs in the ~~third~~second quarter of 2019 and ~~first nine months of~~ 2018 include a $420 million aggregate charge related to the termination of a collaboration agreement with Samsung Bioepis Co., Ltd. (Samsung) (see Note 3 to the condensed consolidated financial statements). Additionally, costs in the ~~third~~ ~~quarter of 2018 and 2017 include $679~~$371 million and ~~$765~~$732 million, respectively, and for the first ~~nine~~six months of 2019 and 2018 include $768 million and ~~2017 include $2.1 billion and $2.3~~$1.5 billion, respectively, of expenses for the amortization of intangible assets recorded in connection

with business acquisitions. ~~Also, in~~Cost of sales also include expenses for the ~~first nine months~~amortization of ~~2018, the Company recorded $135 million of cumulative amortization expense for~~ amounts capitalized in connection with collaborations of $124 million and $157 million in the ~~recognition~~second quarter of ~~liabilities~~2019 and 2018, respectively, and $222 million and $195 million for ~~potential future milestone payments related~~the first six months of 2019 and 2018, respectively. These amounts include catch-up amortization from the accrual of sales-based milestones that were deemed by the Company to ~~collaborations~~be probable in each period (see Note 43 to the condensed consolidated financial statements). In addition, ~~costs~~cost of sales in the second quarter and first ~~nine~~six months of ~~2017~~2019 include ~~$123~~$69 million and $81 million, respectively, of intangible asset impairment charges ~~including $47 million~~ related to a marketed ~~product (see Note 8 to the condensed consolidated financial statements)~~products and ~~$76 million related to a licensing agreement.~~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. Also included in ~~materials and production costs~~cost of sales are expenses associated with restructuring activities which amounted to $265 million and

~~$25~~ $3 million in the ~~third~~second quarter of ~~2018~~2019 and ~~2017,~~2018, respectively, and ~~$11~~$99 million and ~~$121~~$9 million for the first ~~nine~~six months of ~~2018~~2019 and ~~2017,~~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 ~~66.5%~~71.1% in the ~~third~~second quarter of 2019 compared with 67.3% in the second quarter of 2018 and was 71.4% in the first six months of 2019 compared with ~~68.0% in the~~ ~~third~~ ~~quarter of 2017 and was 67.3%~~67.8% for the first ~~nine~~six months of 2018 compared with 68.1% in the first nine months of 2017. The declines in gross margin primarily reflect an aggregate charge recorded in conjunction with the termination of a collaboration agreement with Samsung as noted above.2018. The gross margin decline in the year-to-date period also reflects cumulative amortization expense for potential future milestone payments related to collaborations also as noted above. The gross margin declines were partially offset by the favorable effects of foreign exchange and the amortization of unfavorable manufacturing variances recorded in the third quarter of 2017, resulting in part from the June 2017 cyber-attack. The gross margin declinesimprovement in both periods ~~were also partially offset by~~largely reflects a lower ~~net impacts~~aggregate impact from the amortization of intangible assets related to business acquisitions ~~intangible asset impairment charges~~ and restructuring costs as noted above, which unfavorably affected gross margin by ~~6.3~~4.3 percentage points in the ~~third~~second quarter of ~~2018~~2019 compared with ~~7.7~~7.1 percentage points in the ~~third~~second quarter of ~~2017~~2018 and by ~~6.9~~4.3 percentage points in the first ~~nine~~six months of ~~2018~~2019 compared with ~~8.7~~7.2 percentage points in the first ~~nine~~six months of ~~2017.~~

~~Marketing and Administrative~~

~~Marketing and administrative (M&A) expenses were~~ ~~$2.4 billion~~2018. The gross margin improvement in ~~the~~ ~~third~~ ~~quarter of 2018, a decline of 1% compared with the third quarter of 2017, reflecting lower selling and promotional costs and~~both periods also reflects the favorable effects of ~~foreign exchange,~~product mix and lower amortization of capitalized milestone payments related to collaborations as noted above.

Selling, General and Administrative

Selling, general and administrative (SG&A) expenses were $2.7 billion in the second quarter of 2019, an increase of 8% compared with the second quarter of 2018, reflecting higher administrative costs, acquisition and divestiture-related costs (primarily related to the acquisition of Antelliq), restructuring costs, and promotional costs, partially offset by ~~higher administrative costs. M~~the favorable effect of foreign exchange. SG&A expenses were ~~$7.5~~$5.1 billion for the first ~~nine~~six months of ~~2018, up slightly~~2019, an increase of 2% compared with the same period of ~~2017. The increase primarily reflects~~2018, driven by higher administrative costs, restructuring costs, and acquisition and divestiture-related costs, partially offset by the ~~unfavorable effects~~favorable effect of foreign exchange ~~offset by~~and lower selling and promotional costs. SG&A expenses in the second quarter and ~~selling expenses.~~first six months of 2019 include restructuring costs of $32 million related primarily to accelerated depreciation for facilities to be closed or divested.

Research and Development

Research and development (R&D) expenses ~~were~~ declined 4% in the second quarter of 2019 to $~~2.1~~2.2 billion driven primarily by lower expenses for business development transactions, reflecting a $344 million charge in the ~~third~~second quarter of 2018 ~~a decline of 53% compared with the third quarter of 2017. The decline primarily reflects an aggregate charge recorded in third quarter of 2017~~ related to the ~~formation~~acquisition of ~~an oncology collaboration with AstraZeneca and lower in-process research and development (IPR&D) impairment charges,~~Viralytics Limited (Viralytics). The decline was partially offset by ~~increased~~higher expenses related to clinical development ~~spending, in particular for oncology, higher licensing costs~~ and increased investment in discovery research and early drug development. R&D expenses were ~~$7.5~~$4.1 billion ~~for~~in the first ~~nine~~six months of ~~2018,~~2019, a decline of 6%25% compared with the same period of ~~2017.~~2018. The decline was driven primarily ~~reflects an aggregate~~by a $1.4 billion charge recorded in the first nine months of 2017 related to the formation of an oncology collaboration with AstraZeneca and lower IPR&D impairment charges, partially offset by an aggregate charge in the first nine months of 2018 related to the formation of an oncology collaboration with 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 ~~charge~~reduction in expenses related to a decrease in the estimated fair value measurement of liabilities for contingent consideration. Partially offsetting the ~~acquisition of Viralytics, as well as~~decline were higher expenses related to clinical development ~~spending~~ and increased investment in discovery research and early drug development.

R&D expenses are comprised of the costs directly incurred by Merck Research Laboratories (MRL), the Company’s research and development division that focuses on human health-related activities, which were ~~$1.3~~$1.5 billion and ~~$1.1~~$1.4 billion in the ~~third~~second quarter of ~~2018~~2019 and ~~2017,~~2018, respectively, and were ~~$3.7~~$2.9 billion and ~~$3.4~~$2.7 billion ~~for~~in the first ~~nine~~six months of ~~2018~~2019 and ~~2017,~~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 ~~$775~~$715 million and ~~$670~~$525 million for the ~~third~~second quarter of ~~2018~~2019 and ~~2017,~~2018, respectively, and were ~~$2.1~~$1.3 billion and ~~$2.0~~$1.0 billion ~~for the first nine months of 2018 and 2017, respectively. Additionally, R&D expenses~~ in the first ~~nine~~six months of 2019 and 2018, respectively. In addition, R&D expenses include ~~a $1.4 billion aggregate charge~~expense or income related to the formation of an oncology collaboration with Eisai (see Note 4 to the condensed consolidated financial statements), as well as a $344 million charge for the acquisition of Viralytics (see Note 3 to the condensed consolidated financial statements). R&D expenseschanges 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 4 to the condensed consolidated financial statements). R&D expenses also include IPR&D impairment charges of $245 million and $253 million for the third quarter and first nine months of 2017, respectively (see Note 8 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.~~acquisitions. During the first six months of 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 discontinuation or delay of certain programs.

Restructuring Costs

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

programs. The Company will continue to evaluate its global footprint and overall operating model, which could result in the identification of 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 $~~171~~59 million and $~~153~~228 million for the ~~third~~second quarter of ~~2018~~2019 and ~~2017,~~2018, respectively, and ~~were $494~~$212 million and ~~$470~~$323 million for the first ~~nine~~six months of ~~2018~~2019 and ~~2017,~~2018, respectively. Separation costs incurred were 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 525 positions and 205 positions in the~~ ~~third~~ ~~quarter of 2018 and 2017, respectively, and 1,870 positions and 1,225 positions in the first nine months of 2018 and 2017, respectively, related to these restructuring activities.~~ Also included in restructuring costs are asset abandonment, shut-down and other related costs, as well as employee-related costs such as curtailment, settlement and termination charges associated with pension and other postretirement benefit plans and share-based compensation plan costs. For segment reporting, restructuring costs are unallocated expenses.

Additional costs associated with the Company’s restructuring activities are included in ~~Materials~~Cost of sales, Selling, general and ~~production~~, ~~Marketing~~administrative expenses and ~~administrative~~ ~~and~~ Research and development. costs. The Company recorded aggregate pretax costs of ~~$169~~$159 million and ~~$180~~$235 million in the ~~third~~second quarter of ~~2018~~2019 and ~~2017,~~2018, respectively, and ~~$508~~$346 million and ~~$605~~$339 million for the first ~~nine~~six months of ~~2018~~2019 and ~~2017,~~2018, respectively, related to restructuring program activities (see Note 54 to the condensed consolidated financial statements). While the Company has substantially completed the actions under the programs, approximately $50 million of additional pretax costs are expected to be incurred in the fourth quarter of 2018 relating to anticipated employee separations and remaining asset-related costs.

Other (Income) Expense, Net

Other (income) expense, net was $~~172~~140 million of expense in the second quarter of 2019 compared with $48 million of income in the ~~third~~second quarter of 2018 and was $327 million of expense in the first six months of 2019 compared with ~~$207 million~~ ~~of income in the~~ ~~third~~ ~~quarter of 2017 and was $512~~$340 million of income for the first ~~nine~~six months of ~~2018 compared with $351 million of income for the first nine months of 2017.~~2018. For details on the components of Other (income) expense, net, see Note 1312 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)	2018			2017			2018			2017			2019			2018			2019			2018
Pharmaceutical segment profits	$	6,479		$	5,906		$	18,109		$	16,657		$	7,115		$	5,975		$	13,690		$	11,914
Animal Health segment profits	409			389			1,273			1,202			405			450			820			864
Other non-reportable segment profits	5			93			94			234			(2		)	26			—			88
Other	(4,228		)	(6,188		)	(13,379		)	(13,451		)	(4,259		)	(4,365		)	(8,184		)	(9,434		)
Income before taxes	$	2,665		$	200		$	6,097		$	4,642		$	3,259		$	2,086		$	6,326		$	3,432

Pharmaceutical segment profits are comprised of segment sales less standard costs, as well as ~~marketing~~selling, general and administrative expenses ~~and research and development costs~~ directly incurred by the segment. Animal Health segment profits are comprised of segment sales, less all ~~materials and production costs,~~cost of sales, as well as ~~marketing~~selling, general and administrative expenses and research and development costs directly incurred by the segment. For internal management reporting presented to the chief operating decision maker, Merck does not allocate the remaining ~~materials and production costs~~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,~~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 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 are reflected in “Other” in the above table. Also included in “Other” are miscellaneous corporate profits (losses), as well as operating profits (losses) related to third-party manufacturing sales. In the first quarter of 2018, the Company adopted a new accounting standard related to the classification of certain defined benefit plan costs, which resulted in a change to the measurement of segment profits (see Note 17 to the condensed consolidated financial statements). Prior period amounts have been recast to conform to the new presentation.

Pharmaceutical segment profits grew ~~10%~~19% in the ~~third~~second quarter of ~~2018~~2019 and 9%15% in the first ~~nine~~six months of ~~2018~~2019 compared with the ~~corresponding prior year~~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 ~~grew~~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 ~~third quarter~~first six months of 2019 compared with the corresponding period of 2018 largely reflecting the unfavorable effect of foreign exchange and ~~6% in the first nine months of 2018 compared to the corresponding prior year periods driven primarily by~~ higher ~~sales, partially offset by increased~~ selling ~~and promotional~~ costs.

Taxes on Income

Net (Loss) Income Attributable to Noncontrolling Interests

Net (loss) income attributable to noncontrolling interests was $(26) million for ~~as well as adjustments~~the second quarter of 2019 compared with $9 million for the second quarter of 2018 and 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 ~~reserves for unrecognized tax benefits relating to years which remain open to examination~~certain businesses in the Healthcare Services segment that are ~~affected by this settlement.~~attributable to noncontrolling interests.

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

Net income ~~(loss)~~ attributable to Merck & Co., Inc. was ~~$2.0~~$2.7 billion for the ~~third~~second quarter of 2019 compared with $1.7 billion for the second quarter of 2018 ~~compared with~~ ~~$(56) million~~ ~~for the~~ ~~third~~ ~~quarter of 2017~~ and was ~~$4.4~~$5.6 billion for the first ~~nine~~six months of ~~2018~~2019 compared with ~~$3.4~~$2.4 billion for the first ~~nine~~six months of ~~2017.~~2018. Earnings ~~(loss)~~ per common share assuming dilution attributable to Merck & Co., Inc. common shareholders (EPS) for the ~~third~~second quarter of 2019 were $1.03 compared with $0.63 in the second quarter of 2018 ~~were~~ ~~$0.73~~ ~~compared with~~ ~~$(0.02)~~ ~~in the~~ ~~third~~ ~~quarter of 2017~~ and were ~~$1.63~~$2.15 for the first ~~nine~~six months of ~~2018~~2019 compared with ~~$1.25~~$0.90 for the first ~~nine~~six months of ~~2017.~~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)	2018		2017			2018			2017			2019			2018			2019			2018
Income before taxes as reported under GAAP	$	2,665	$	200		$	6,097		$	4,642		$	3,259		$	2,086		$	6,326		$	3,432
Increase (decrease) for excluded items:
Acquisition and divestiture-related costs	677		1,032			2,265			2,797			660			855			1,208			1,588
Restructuring costs	169		180			508			605			159			235			346			339
Other items:
Aggregate charge related to the termination of a collaboration with Samsung	420		—			420			—
Aggregate charge related to the formation of a collaboration with Eisai	—		—			1,400			—
Charge for the acquisition of Viralytics	—		—			344			—			—			344			—			344
Aggregate charge related to the formation of a collaboration with AstraZeneca	—		2,350			—			2,350
Charge related to the formation of a collaboration with Eisai												—			—			—			1,400
Other	—		—			(54		)	(9		)	48			(32		)	48			(54		)
Non-GAAP income before taxes	3,931		3,762			10,980			10,385			4,126			3,488			7,928			7,049
Taxes on income as reported under GAAP	707		251			1,682			1,186			615			370			820			975
Estimated tax benefit on excluded items ⁽¹⁾	38		218			400			593			145			255			274			362
Net tax benefit related to the settlement of certain federal income tax issues	—		234			—			234
Tax benefit related to the settlement of state income tax issue	—		—			—			88
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	745		703			2,082			2,101			760			625			1,387			1,337
Non-GAAP net income	3,186		3,059			8,898			8,284			3,366			2,863			6,541			5,712
Less: Net income attributable to noncontrolling interests	8		5			22			16
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.	$	3,178	$	3,054		$	8,876		$	8,268		$	3,356		$	2,854		$	6,531		$	5,698
EPS assuming dilution as reported under GAAP	$	0.73	$	(0.02	)	$	1.63		$	1.25		$	1.03		$	0.63		$	2.15		$	0.90
EPS difference ⁽²⁾	0.46		1.13			1.66			1.75			0.27			0.43			0.37			1.21
Non-GAAP EPS assuming dilution	$	1.19	$	1.11		$	3.29		$	3.00		$	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 54 to the condensed consolidated financial statements). These amounts include employee separation costs and accelerated depreciation associated with facilities to be closed or divested. Accelerated depreciation costs represent the difference between the depreciation expense to be recognized over the revised useful life of the asset, based upon the anticipated date the site will be closed or divested or the equipment disposed of, and depreciation expense as determined utilizing the useful life prior to the restructuring actions. Restructuring costs also include asset abandonment, shut-down and other related costs, as well as employee-related costs such as curtailment, settlement and termination charges associated with pension and other postretirement benefit plans and share-based compensation costs.

Certain Other Items

Non-GAAP income and non-GAAP EPS exclude certain other items. These items are adjusted for after evaluating them on an individual basis, considering their quantitative and qualitative aspects, and typically consist of items that are unusual in nature, significant to the results of a particular period or not indicative of future operating results. Excluded from non-GAAP income and non-GAAP EPS in ~~2018~~2019 is an aggregate charge related to the termination of a collaboration agreement with Samsung for insulin glargine (see Note 3 to the condensed consolidated financial statements), a charge for the acquisition of Viralytics (see Note 3 to the condensed consolidated financial statements) and an aggregate charge related to the formation of a collaboration with Eisai (see Note 4 to the condensed consolidated financial statements). Excluded from non-GAAP income and non-GAAP EPS in 2017 is an aggregate charge related to the formation of a collaboration with AstraZeneca (see Note 4 to the condensed

~~consolidated financial statements), as well as~~ 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 tax ~~benefit~~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 143 to the condensed consolidated financial statements).

Research and Development Update

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

~~In October 2018, the FDA~~ approved~~Keytruda~~ in combination with carboplatin-paclitaxel or nab-paclitaxel as a first-line treatment for metastatic squamous NSCLC, regardless of PD-L1 expression. This approval was based on data from the Phase 3 KEYNOTE-407 trial, which were presented at the American Society of Clinical Oncology (ASCO) 2018 Annual Meeting. ~~Keytruda~~ ~~is under review for this indication in the EU.~~

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

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

~~Also, in September 2018, the FDA accepted and granted Priority Review for an sBLA seeking accelerated approval for~~ ~~Keytruda~~ for the treatment of ~~adult~~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 ~~pediatric patients with recurrent locally advanced or metastatic Merkel cell carcinoma, a rare form~~triple-negative breast, many of skin cancer. This sBLA is based on data from the Phase 2 KEYNOTE-017 trial including overall response rate and duration of response; these data were presented at the ASCO 2018 Annual Meeting. The FDA set a PDUFA date of December 28, 2018.

~~In June 2018, the FDA accepted for standard review an sBLA for~~ ~~Keytruda~~ ~~as adjuvant therapy~~which are currently in the treatment of patients with resected, high-risk stage III melanoma and granted a PDUFA date of February 16, 2019. This sBLA is based on a significant benefit in recurrence-free survival demonstrated by ~~Keytruda~~ ~~in the pivotal~~ Phase 3 ~~EORTC1325/KEYNOTE-054 trial, which was conducted in collaboration with the European Organisation~~clinical development. Further trials are being planned for ~~Research and Treatment of Cancer (EORTC). These data were presented at the American Association of Cancer Research 2018 Annual Meeting and published in~~ ~~The New England Journal of Medicine~~. other cancers.

In ~~October 2018,~~July 2019, the CHMP of the EMA adopted a positive opinion recommending approval of Keytruda ~~as adjuvant therapy~~, in combination with Inlyta (axitinib), a tyrosine kinase inhibitor, for the first-line treatment of patients with ~~melanoma with lymph node involvement who have undergone complete surgical resection~~advanced renal cell carcinoma based on ~~data~~findings from the ~~EORTC1325/KEYNOTE-054 trial.~~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 ~~EU. A~~the EU, and a final decision is expected in the ~~fourth~~third quarter of ~~2018.~~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 June 2019.

Additionally, Keytruda is 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 approved Keytruda as monotherapy for the treatment of patients with 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, 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. 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 will be discussed with regulatory authorities. In September 2017, the FDA approved Keytruda as a third-line treatment for previously treated patients with 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 ~~in combination with axitnib as a first-line treatment for patients with advanced or metastatic renal cell carcinoma; and~~ for the treatment of high-risk, early-stage triple-negative breast cancer in combination with neoadjuvant chemotherapy. ~~Also, the FDA granted Breakthrough Therapy designation for~~ ~~Keytruda~~ in combination with Lenvima for the potential treatment of patients with advanced and/or metastatic renal cell carcinoma and for the potential treatment of certain patients with advanced and/or metastatic non-microsatellite instability high/proficient mismatch repair endometrial carcinoma. The Lenvima and ~~Keytruda~~ ~~combination therapy is being jointly developed by Merck and Eisai.~~ The FDA’s Breakthrough Therapy designation is intended to expedite the development and review of a candidate that is planned for use, alone or in combination, to treat a serious or life-threatening disease or condition when preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints. Additionally, the FDA recently granted Breakthrough Therapy designation for Keytruda in combination with Lenvima for the potential first-line treatment of

patients with 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 ~~October 2018,~~July 2019, Merck announced that the ~~first presentation of interim data from the pivotal~~ Phase 3 ~~KEYNOTE-048~~KEYNOTE-522 trial investigating Keytruda~~, as both monotherapy and~~ in combination with chemotherapy ~~for the first-line treatment of recurrent or metastatic HNSCC. These interim results were presented at the ESMO 2018 Congress. Interim data from KEYNOTE-048 showed~~ ~~Keytruda~~ ~~monotherapy improved overall survival (OS), a primary endpoint~~met one of the dual-primary endpoints of pathologic complete response (pCR) following the neoadjuvant part of the neoadjuvant/adjuvant study ~~by 39% in patients whose tumors expressed PD-L1 with Combined Positive Score (CPS) ≥20, and by 22%~~regimen in patients with ~~CPS≥1, compared to the EXTREME regimen (cetuximab with carboplatin or cisplatin plus 5-fluorouracil (5-FU), the current standard of care. In addition, Keytruda~~ ~~in combination with chemotherapy (carboplatin or cisplatin plus 5-FU) (Keytruda~~ ~~combination) demonstrated improved OS compared to the EXTREME regimen by 23%, regardless of PD-L1 expression. At the final analysis, superiority for OS will be evaluated for~~ ~~Keytruda~~ ~~monotherapy in the total population and~~ ~~Keytruda~~ ~~combination in patients whose tumors express PD-L1 at CPS≥20 and CPS≥1; at this interim analysis, based upon the prespecified testing algorithm, non-inferiority for~~ ~~Keytruda~~ ~~monotherapy in the total population was demonstrated and statistical significance was not achieved for the~~ ~~Keytruda~~ ~~combination in the subset of patients whose tumors expressed PD-L1 at CPS ≥20 or ≥1. Additionally, at this time point there was no difference in progression-~~

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

~~In October 2018, Merck announced that the pivotal Phase 3 KEYNOTE-426 trial investigating~~ ~~Keytruda~~ in combination with Inlyta (axitinib), Pfizer’s tyrosine kinase inhibitor, met both primary endpoints of OS and PFS in the first-line treatment of advanced or metastatic renal cell carcinoma (RCC), the most common type of kidneytriple-negative breast cancer. Based on ~~the first~~an interim analysis conducted by the independent Data Monitoring Committee ~~the~~ (DMC), Keytruda, ~~plus Inlyta~~ in combination ~~resulted in~~with chemotherapy, demonstrated a statistically significant improvement in pCR rates compared with chemotherapy alone, regardless of PD-L1 status. A pCR is defined as a lack of cancer cells in tissue samples analyzed following completion of neoadjuvant therapy and ~~clinically meaningful improvements in~~definitive surgery. Based on the recommendation of the DMC, the trial will continue without changes to evaluate the other dual-primary endpoint of event-free survival, per the trial design.

In May 2019, Merck announced that the Phase 3 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 ~~and PFS,~~ compared to ~~sunitinib monotherapy. These results~~chemotherapy. Other endpoints were not formally tested per the study protocol because the primary endpoint of OS was not met. Results will be presented at an upcoming medical ~~meeting and submitted to regulatory authorities worldwide.~~

~~In October 2018, Merck announced the first presentation of results from an interim analysis of KEYNOTE-057, a Phase 2 trial evaluating~~ ~~Keytruda~~ for previously treated patients with high-risk non-muscle invasive bladder cancer. An interim analysis of the study’s primary endpoint showed a complete response rate of nearly 40% at three months with ~~Keytruda~~ in patients whose disease was unresponsive to Bacillus Calmette-Guérin therapy, the current standard of care for this disease, and who were ineligible for or who refused to undergo radical cystectomy. These results, as well as other study findings, were presented at the ESMO 2018 Congress.

meeting. The Keytruda breast cancer clinical development program ~~consists~~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).

Lynparza is an oral PARP inhibitor currently approved for certain types of ~~more than 850 clinical trials, including more than 500 trials that combine~~ ~~Keytruda~~ ~~with other~~ovarian and breast cancer ~~treatments. These studies encompass more than 30~~being co-developed for multiple cancer types including: bladder, colorectal, esophageal, gastric, HNSCC, hepatocellular, Hodgkin lymphoma, non-Hodgkin lymphoma, melanoma, mesothelioma, nasopharyngeal, NSCLC, ovarian, PMBCL, prostate, renal, small-cell lung cancer and triple-negative breast, manyas part of ~~which are currently in Phase~~a collaboration with AstraZeneca (see Note 3 ~~clinical development. Further trials are being planned for other cancers.~~to the condensed consolidated financial statements).

In ~~April 2018,~~June 2019, Merck and AstraZeneca announced ~~that the EMA validated for review the Marketing Authorization Application for Lynparza for use in patients with deleterious or suspected deleterious~~ ~~BRCA~~-mutated, HER2-negative metastatic breast cancer who have been previously treated with chemotherapy in the neoadjuvant, adjuvant or metastatic setting. This is the first regulatory submission for a PARP inhibitor in breast cancer in Europe.

~~In October 2018, Merck and AstraZeneca announced~~detailed results from the Phase 3 ~~SOLO-1~~POLO trial ~~testing~~evaluating Lynparza tablets as a first-line maintenance ~~treatment~~monotherapy for patients with ~~newly-diagnosed advanced~~ germline BRCA-mutated ~~ovarian~~metastatic pancreatic cancer ~~who were in complete or partial response~~whose disease had not progressed following ~~first-line standard~~ platinum-based chemotherapy. Results offrom the trial ~~confirm the~~showed a statistically-significant and clinically-meaningful improvement in PFS for Lynparza as compared to placebo, reducing the risk of disease progression or death by ~~70%~~47%. The ~~data~~results of the trial were presented at the ~~ESMO 2018 Congress~~2019 ASCO Annual Meeting and published online simultaneously ~~online~~ in ~~The~~ the New England Journal of Medicine.

~~As noted above,~~Also in ~~March 2018,~~June 2019, Merck and ~~Eisai announced a strategic collaboration~~AstraZeneca presented full results from the Phase 3 SOLO-3 trial which evaluated Lynparza, compared to chemotherapy, for the ~~worldwide co-development~~treatment of platinum-sensitive relapsed patients with germline BRCA1/2-mutated (gBRCAm) advanced ovarian cancer, who have received two or more prior lines of chemotherapy. The results from the trial showed a statistically-significant and ~~co-commercialization of Lenvima (see Note 4~~clinically-meaningful improvement in ORR in the Lynparza arm compared to the ~~condensed consolidated financial statements). Under~~chemotherapy arm. The key secondary endpoint of PFS was also significantly increased in the ~~agreement, Merck and Eisai will develop and commercialize Lenvima jointly, both as monotherapy and in combination with~~ ~~Keytruda. Per~~Lynparza arm compared to the ~~agreement,~~chemotherapy arm. The results were presented at the ~~companies will jointly initiate clinical studies evaluating the Lenvima/Keytruda~~ combination to support 11 potential indications in six types of cancer (endometrial cancer, NSCLC, hepatocellular carcinoma, head and neck cancer, bladder cancer and melanoma), as well as a basket trial targeting multiple cancer types.2019 ASCO Annual Meeting.

In ~~September 2018,~~July 2019, the CHMP of the EMA adopted a positive opinion recommending ~~granting~~Zerbaxa for an additional indication for the treatment of ~~marketing authorization~~hospital-acquired pneumonia (HAP), including ventilator-associated pneumonia (VAP), in adults based on results of the pivotal Phase 3 ASPECT-NP trial that evaluated the efficacy and safety of Zerbaxa for ~~MK-1439A,~~ ~~Delstrigo, a once-daily fixed-dose combination tablet~~the treatment of ~~doravirine, lamivudine and tenofovir disoproxil fumarate; and MK-1439,~~ ~~Pifeltro~~ ~~(doravirine), a new non-nucleoside reverse transcriptase inhibitor to be administered in combination~~adult patients with ~~other antiretroviral medicines. These two recommendations~~HAP, including VAP. The CHMP positive opinion will now be ~~reviewed~~considered by the ~~EC for marketing authorization~~EC. Zerbaxa is currently approved in the ~~EU.~~ ~~Delstrigo~~EU for use as indicated in adult patients with complicated urinary tract infections, acute pyelonephritis, and ~~Pifeltro~~ ~~were approved by the FDA in August 2018.~~

In April 2018, Merck announced that a pivotal Phase 3 study of relebactam, the Company’s investigational beta-lactamase inhibitor, in combination with imipenem/cilastatin (MK-7655A), demonstrated a favorable overall response in the treatment of certain imipenem-non-susceptible bacterial infections, the primary endpoint, with lower treatment-emergent nephrotoxicity (kidney toxicity), a secondary endpoint, compared to a Colistin (colistimethate sodium) plus imipenem regimen. Based on these results, the Company plans to submit a New Drug Application to the FDA seeking regulatory approval of a fixed-dose combination of imipenem/cilastatin and relebactam.

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

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

V920 is an investigational rVSV-ZEBOV (Ebola) vaccine candidate being studied in large scale Phase 2/3 clinical trials. In November 2014, Merck and NewLink Genetics announced an exclusive licensing and collaboration agreement for the investigational Ebola vaccine. In December 2015, Merck announced that the application for Emergency Use Assessment and Listing (EUAL) for V920 was accepted for review by the World Health Organization (WHO). According to the WHO, the EUAL process is designed to expedite the availability of vaccines needed for public health emergencies such as another outbreak of Ebola. The WHO decision to grant V920 EUAL status will be based on data regarding quality, safety, and efficacy/effectiveness; as well as a risk/benefit analysis for emergency use. While EUAL designation allows for emergency use, the vaccine remains investigational and has not yet been licensed for commercial distribution. In July 2016, Merck announced that the FDA granted V920 Breakthrough Therapy designation, and that the EMA granted the vaccine candidate PRIME (PRIority MEdicines) status. The Company intends to file the V920 Ebola vaccine with the FDA and EMA in 2019.complicated intra-abdominal infections.

The chart below reflects the Company’s research pipeline as of ~~November 1, 2018.~~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
Cancer MK-3475 Keytruda Advanced Solid Tumors ~~Cutaneous Squamous~~MK-6482 Renal Cell ~~Carcinoma~~ ~~Ovarian~~MK-7123⁽¹⁾ ~~Prostate~~Solid Tumors MK-7339 Lynparza⁽²⁾ Advanced Solid Tumors MK-7690⁽¹⁾ Colorectal MK-7902 Lenvima⁽¹⁾⁽²⁾ Biliary Tract ~~Non-Small-Cell Lung~~ V937 Cavatak Melanoma ~~MK-7690~~⁽²⁾ ~~Colorectal~~ Cytomegalovirus V160 ~~Diabetes Mellitus~~ ~~MK-8521~~⁽³⁾ HIV-1 Infection MK-8591 (islatravir) Pediatric Neurofibromatosis Type 1 MK-5618 (selumetinib)^(1)(4)(2)(3) ~~Schizophrenia~~ ~~MK-8189~~ Respiratory Syncytial Virus MK-1654 Schizophrenia MK-8189	~~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) 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-7902 Lenvima⁽¹⁾⁽²⁾ Bladder (May 2019) Endometrial (June 2018)⁽²⁾ Melanoma (March 2019) Non-Small-Cell Lung (March 2019) Cough MK-7264 (gefapixant) (March 2018) ~~Ebola Vaccine~~ ~~V920 (March 2015)~~ Heart Failure MK-1242 (vericiguat) (September 2016)⁽¹⁾⁽²⁾ ~~Herpes Zoster~~ ~~V212 (inactivated VZV vaccine)~~ ~~(December 2010)~~⁽³⁾ Pneumoconjugate Vaccine V114 (June 2018)	New Molecular Entities/Vaccines ~~HIV-1~~Bacterial Infection ~~MK-1439 (doravirine)~~MK-7655A (relebactam+imipenem/cilastatin) (EU) ~~MK-1439A (doravirine/lamivudine/tenofovir disoproxil fumarate) (EU)~~ ~~Pediatric Hexavalent Combination~~Ebola Vaccine ~~V419~~V920 (U.S.)^(1)(5)(4)(EU) Certain Supplemental Filings Cancer MK-3475 Keytruda • First-Line ~~Metastatic Squamous Non-Small-Cell Lung~~ ~~Cancer KEYNOTE-407~~Advanced Renal Cell Carcinoma (KEYNOTE-426) (EU) • First-Line Metastatic ~~Nonsquamous or Squamous Non-~~ ~~Small-Cell~~Non-Small-Cell Lung Cancer ~~KEYNOTE-042 (U.S.)~~(KEYNOTE-042) (EU) ~~• Second-Line Hepatocellular Carcinoma~~ ~~KEYNOTE-224 (U.S.)~~ • First-Line ~~Merkel Cell Carcinoma KEYNOTE-017~~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.) ~~• Adjuvant Therapy in Advanced Melanoma~~HAP/VAP⁽⁵⁾ ~~KEYNOTE-054 (U.S.)~~MK-7625A Zerbaxa (EU) ~~MK-7339 Lynparza~~⁽¹⁾ ~~• Second-Line Metastatic Breast Cancer (EU)~~
		Footnotes: ⁽¹⁾~~Being developed in a collaboration.~~ ⁽²⁾ Being developed in combination with Keytruda. ⁽²⁾Being developed in a collaboration. ⁽³⁾~~Development is currently on hold.~~ ⁽⁴⁾This is a registrational study. ⁽⁴⁾Rolling submission. ⁽⁵⁾ V419 is an investigational pediatric hexavalent combination vaccine, DTaP5-IPV-Hib-HepB, that is being developed and, if approved, will be commercialized through a partnership of Merck and Sanofi. In November 2015, the FDA issued a CRL with respect to V419. Merck and Sanofi provided a response to the CRL, which was deemed complete and acceptable for review. HAP - Hospital-Acquired Pneumonia / VAP - Ventilator-Associated Pneumonia

Liquidity and Capital Resources


($ in millions)	September 30, 2018			December 31, 2017			June 30, 2019			December 31, 2018
Cash and investments	$	17,891		$	20,623		$	10,884		$	15,097
Working capital	8,250			6,152			4,213			3,669
Total debt to total liabilities and equity	27.7		%	27.8		%	31.7		%	30.4		%

Cash provided by operating activities was $~~7.3~~4.4 billion in the first ~~nine~~six months of ~~2018~~2019 compared with ~~$2.4~~$4.5 billion in the first ~~nine~~six months of ~~2017.~~2018. Cash provided by operating activities in the first ~~nine~~six months of 2019 reflects the receipt of $424 million from AstraZeneca related to the conclusion of the Company’s relationship with AstraZeneca LP, as well as $1.4 billion of tax payments and a $325 million option payment to Eisai (see Note 3 to the condensed consolidated financial statements). Cash provided by operating activities in the first six months of 2018 reflects $750 million of upfront payments made by the Company related to the formation of a collaboration with Eisai (see Note 43 to the condensed consolidated financial statements). Cash provided by operating activities in the first nine months of 2017 reflects a $2.8 billion payment related to the settlement of certain federal income tax issues (see Note 14 to the condensed consolidated financial statements), a $1.6 billion upfront payment made by the Company related to the formation of a collaboration with AstraZeneca (see Note 4 to the condensed consolidated financial statements), and a $625 million payment made by the Company related to the previously disclosed settlement of worldwide ~~Keytruda~~ ~~patent litigation.~~ Cash provided by operating activities continues to be the Company’s primary source of funds to finance operating needs, capital expenditures, treasury stock purchases and dividends paid to shareholders.

Cash ~~provided by~~used in investing activities was $2.1 billion in the first ~~nine~~six months of ~~2018~~2019 compared with~~$2.7 billion~~ ~~in the first~~ ~~nine~~ ~~months of 2017. The decline in~~ cash provided by investing activities of $476 million in the first six months of 2018. The change was driven primarily by the acquisition of 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 $350 million milestone payment in 2018 related to a collaboration with Bayer (see Note 43 to the condensed consolidated financial statements)~~, partially offset by lower purchases of securities and other investments.~~.

Cash used in financing activities was $~~7.6~~3.7 billion in the first ~~nine~~six months of ~~2018~~2019 compared with $~~4.2~~5.7 billion in the first ~~nine~~six months of ~~2017.~~2018. The ~~higher~~lower use of cash in financing activities was driven primarily by ~~higher~~proceeds from the issuance of debt (see below) and lower payments on debt, partially offset by the repayment of short-term borrowings, higher dividends paid to shareholders and higher purchases of treasury ~~stock and payment of contingent consideration related to a prior year business acquisition, partially offset by higher short-term borrowings.~~stock.

Capital expenditures totaled $~~1.7~~1.4 billion and $~~1.2~~1.0 billion for the first ~~nine~~six months of 2019 and 2018, ~~and 2017,~~ respectively. In October 2018, the Company announced it now plans to invest approximately $16 billion on new capital projects, up $4 billion from its prior five-year plan of $12 billion announced in February 2018. The focus of this investment will be to increase manufacturing capacity across Merck’s key businesses.

Dividends paid to stockholders were $~~3.9~~2.9 billion and $2.6 billion for ~~both~~ the first ~~nine~~six months of 2019 and 2018, ~~and 2017.~~respectively. In May ~~2018,~~2019, the Board of Directors declared a quarterly dividend of ~~$0.48~~$0.55 per share on the Company’s common stock for the third quarter that was paid in July ~~2018.~~2019. In July ~~2018,~~2019, the Board of Directors declared a quarterly dividend of ~~$0.48~~$0.55 per share on the Company’s common stock for the fourth quarter that ~~was~~will be paid in October ~~2018.~~ 2019.

In October 2018, Merck announced that its Board of Directors approved a 15% increase to the Company’s quarterly dividend, raising it to $0.55 per share from $0.48 per share on the Company’s outstanding common stock. Payment will be made in January 2019.

~~In November 2017,~~ Merck’s Board of Directors authorized purchases of up to $10 billion of Merck’s common stock for its treasury. The treasury stock purchase authorization has no time limit and will be made over time in open-market transactions, block transactions on or off an exchange, or in privately negotiated transactions. During the first ~~nine~~six months of ~~2018,~~2019, the Company purchased ~~$3.2~~$2.3 billion ~~(53~~(30 million shares) for its 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, ~~2018,~~2019, the Company’s remaining share repurchase authorization was ~~$7.9~~$9.6 billion. In October 2018, Merck’s Board of Directors authorized an additional $10 billion of treasury stock purchases with no time limit for completion. The Company entered into a $5 billion accelerated share repurchase (ASR) program under its expanded authorization as discussed below.

On October 25, 2018, the Company entered into an ASR ~~agreement~~agreements with ~~Goldman Sachs & Co. and JP Morgan Chase~~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 ~~current~~the then-current market price, made by the Dealers to Merck, and ~~payment~~payments of $5 billion made by Merck to the Dealers on October 29, 2018, which ~~was~~were funded with existing cash and investments, as well as short-term borrowings. ~~The payment to the Dealers will be recorded as a reduction to shareholders’ equity, consisting of a $4 billion increase in treasury stock, which reflects the value~~Upon settlement of the ~~initial 56.7~~ASR agreements in April 2019, Merck received an additional 7.7 million shares ~~received upon execution, and a $1 billion decrease in other-paid-in capital, which reflects the value of the stock held back~~as determined by ~~the Dealers pending final settlement. The final number of shares of Merck’s common stock that Merck may receive, or may be required to remit, upon settlement under the ASR will be based upon~~ the average daily volume weighted-average price of Merck’s common stock during the term of the ASR ~~program. Final settlement of~~program, less a negotiated discount, bringing the ~~transaction~~total shares received by Merck under ~~the ASR agreement is expected~~this program to occur in the first half of 2019, and may occur earlier at the option of the Dealers, or later under certain circumstances. The terms of the transaction under the ASR agreement are subject to adjustment if Merck were to enter into or announce certain types of transactions. If Merck is obligated to make an

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

In January 2018, $1.0 billion of 1.10% notes matured in accordance with their terms and were repaid. In May 2018, $1.0 billion of 1.30% notes and $1.0 billion of floating-rate notes matured in accordance with their terms and were repaid.64.4 million.

The Company has a $6.0 billion credit facility that matures in June ~~2023.~~2024. The facility provides backup liquidity for the Company’s commercial paper borrowing facility and is to be used for general corporate purposes. The Company has not drawn funding from this facility.

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

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

Critical Accounting Policies

The Company’s significant accounting policies, which include management’s best estimates and judgments, are included in Note 2 to the consolidated financial statements for the year ended December 31, ~~2017~~2018 included in Merck’s Form 10‑K filed on February 27, ~~2018.~~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, ~~2017.~~2018. See Note 1 to the condensed consolidated financial statements for information on the adoption of new accounting standards during ~~2018.~~2019.

Recently Issued Accounting Standards

For a discussion of recently issued accounting standards, see Note 1 to the condensed 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, ~~2018~~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, 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, ~~2017,~~2018, as filed on February 27, ~~2018,~~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 98 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, ~~2018~~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 11,274,234
$62.31 $8,176
August 1 - August 31 2,386,135
$67.30 $8,016
September 1 - September 30 1,901,599
$69.79 $7,883
Total 15,561,968
$63.99 $7,883



				($ 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. In October 2018, the Board of Directors authorized an additional $10 billion of treasury stock purchases with no time limit for completion. The Company entered into a $5 billion accelerated share repurchase program under its expanded authorization.

⁽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, ~~2018,~~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~~August 6, ~~2018~~2019		/s/ Jennifer Zachary
		JENNIFER ZACHARY
		Executive Vice President and General Counsel

Date: ~~November~~August 6, ~~2018~~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, ~~2018,~~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.

- 5346 -



($ in millions)	ASU 2014-09 (Revenue)		ASU 2016-01 (Financial Instruments)		ASU 2016-16 (Intra-Entity Transfers of Assets Other than Inventory)		ASU 2017-12 (Derivatives and Hedging)		ASU 2018-02 (Reclassification of Certain Tax Effects)		Total
Assets - Increase (Decrease)
Accounts receivable	$	5									$	5
Liabilities - Increase (Decrease)
Income Taxes Payable							(3	)			(3		)
Debt							14				14
Deferred Income Taxes					(54	)					(54		)
Equity - Increase (Decrease)
Retained earnings	5		8		54		(11	)	266		322
Accumulated other comprehensive loss			(8	)					(266	)	(274		)



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



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

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

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



	Three Months Ended September 30, 2017								Nine Months Ended September 30, 2017
($ in millions)	Separation Costs		Accelerated Depreciation		Other		Total		Separation Costs		Accelerated Depreciation		Other		Total
Materials and production	$	—	$	5	$	20	$	25	$	—	$	52	$	69	$	121
Marketing and administrative	—		—		—		—		—		2		1		3
Research and development	—		1		1		2		—		7		4		11
Restructuring costs	100		—		53		153		302		—		168		470
	$	100	$	6	$	74	$	180	$	302	$	61	$	242	$	605



			($ 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	11,274,234	$62.31	$8,176
August 1 - August 31	2,386,135	$67.30	$8,016
September 1 - September 30	1,901,599	$69.79	$7,883
Total	15,561,968	$63.99	$7,883