Merck and : & CO., INC. Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-K)

The following section of this Form 10-K generally discusses 2019 and 2018
results and year-to-year comparisons between 2019 and 2018. Discussion of 2017
results and year-to-year comparisons between 2018 and 2017 that are not included
in this Form 10-K can be found in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Part II, Item 7 of the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2018
filed on February 27, 2019.
Description of Merck's Business
Merck & Co., Inc. (Merck or the Company) is a global health care company that
delivers innovative health solutions through its prescription medicines,
vaccines, biologic therapies and animal health products. The Company's
operations are principally managed on a products basis and include four
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 Pharmaceutical segment includes human health pharmaceutical and vaccine
products. Human health pharmaceutical products consist of therapeutic and
preventive agents, generally sold by prescription, for the treatment of human
disorders. The Company sells these human health pharmaceutical products
primarily to drug wholesalers and retailers, hospitals, government agencies and
managed health care providers such as health maintenance organizations, pharmacy
benefit managers and other institutions. Human health vaccine products consist
of preventive pediatric, adolescent and adult vaccines, primarily administered
at physician offices. The Company sells these human health vaccines primarily to
physicians, wholesalers, physician distributors and government entities.
The Animal Health segment discovers, develops, manufactures and markets a wide
range of veterinary pharmaceutical and vaccine products, as well as health
management solutions and services, for the prevention, treatment and control of
disease in all major livestock and companion animal species. The Company also
offers an extensive suite of digitally connected identification, traceability
and monitoring products. The Company sells its products to veterinarians,
distributors and animal producers.
The 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 Company has recently sold certain businesses in the
Healthcare Services segment and is in the process of divesting the remaining
businesses. While the Company continues to look for investment opportunities in
this area of health care, the approach to these investments has shifted toward
venture capital investments in third parties as opposed to wholly-owned
businesses.
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.
Planned Spin-Off of Women's Health, Legacy Brands and Biosimilars into New
Company
In February 2020, Merck announced its intention to spin-off products from its
women's health, trusted legacy brands and biosimilars businesses into a new,
yet-to-be-named, independent, publicly traded company (NewCo) through a
distribution of NewCo's publicly traded stock to Company shareholders. The
distribution is expected to qualify as tax-free to the Company and its
shareholders for U.S. federal income tax purposes. The legacy brands included in
the transaction consist of dermatology, pain, respiratory, and select
cardiovascular products including Zetia and Vytorin, as well as the rest of
Merck's diversified brands franchise. Merck's existing research pipeline
programs will continue to be owned and developed within Merck as planned. NewCo
will have development capabilities initially focused on late-stage development
and life-cycle management, and is expected over time to develop research
capabilities in selected therapeutic areas. The spin-off is expected to be
completed in the first half of 2021, subject to market and certain other
conditions.
Overview
Merck's performance during 2019 demonstrates execution in both commercial and
research operations driven by a focus on key growth drivers and innovative
pipeline investment reinforcing the Company's science-led strategy. In 2019,
Merck enhanced its portfolio and pipeline with external innovation, increased
investment in new capital projects focused primarily on expanding manufacturing
capacity across Merck's key businesses, and returned capital to shareholders.

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Worldwide sales were $46.8 billion in 2019, an increase of 11% compared with
2018, including a 2% unfavorable effect from foreign exchange. The sales
increase was driven primarily by Merck's growth pillars of oncology, human
health vaccines, certain hospital acute care products, and animal health. Growth
in these areas was partially offset by the ongoing effects of generic
competition, particularly in the diversified brands and cardiovascular
franchises, as well as by competitive pressure, particularly in the diabetes and
virology franchises.
Merck continued to prioritize business development aimed at enhancing its
portfolio and strengthening its pipeline by executing several business
development transactions in 2019. To expand its oncology presence, Merck
completed the acquisitions of Peloton Therapeutics, Inc. (Peloton), a
clinical-stage biopharmaceutical company focused on the development of novel
small molecule therapeutic candidates for the treatment of cancer and other
diseases, and Immune Design, a late-stage immunotherapy company employing
next-generation in vivo approaches to enable the body's immune system to fight
disease. Merck also announced an agreement to acquire ArQule, Inc. (ArQule), a
biopharmaceutical company focused on kinase inhibitor discovery and development
for the treatment of cancer and other diseases; the acquisition closed in
January 2020. To augment Merck's animal health business, the Company acquired
Antelliq Group (Antelliq), a leader in digital animal identification,
traceability and monitoring solutions.
During 2019, the Company received numerous regulatory approvals and progressed
many important pipeline candidates through clinical development. Within
oncology, Keytruda received multiple additional approvals in the United States,
European Union (EU), China and Japan as monotherapy in the therapeutic areas of
non-small-cell lung cancer (NSCLC), small-cell lung cancer (SCLC), esophageal
cancer and in combination with axitinib for the treatment of renal cell
carcinoma (RCC), in combination with chemotherapy for head and neck squamous
cell carcinoma (HNSCC), and in combination with Lenvima for endometrial
carcinoma. Lynparza, which is being developed in collaboration with AstraZeneca
PLC (AstraZeneca), received U.S. Food and Drug Administration (FDA) approval for
the treatment of appropriate patients with germline BRCA-mutated (gBRCAm)
pancreatic cancer and European Commission (EC) approval for use in certain
patients with advanced ovarian cancer and advanced or metastatic breast cancer.
In addition to oncology, the Company received regulatory approvals in the
hospital acute care and vaccines therapeutic areas. The FDA approved Recarbrio
(imipenem, cilastatin, and relebactam) for injection, a new combination
antibacterial for the treatment of certain patients with complicated urinary
tract infections caused by certain Gram-negative microorganisms. Recarbrio was
approved by the EC in February 2020. The FDA and EC also approved expanded
indications for Zerbaxa for the treatment of patients with hospital-acquired
bacterial pneumonia and ventilator-associated bacterial pneumonia (HABP/VABP)
caused by certain susceptible Gram-negative microorganisms. Additionally, Ervebo
(Ebola Zaire Vaccine, Live), a vaccine for the prevention of disease caused by
Zaire ebolavirus in adults, was approved in the United States and received
conditional approval in the EU.
In addition to the recent regulatory approvals discussed above, the Company
advanced its late-stage pipeline, particularly in oncology, with several
regulatory submissions for Keytruda, Lynparza and Lenvima in the United States
and internationally. The Company's Phase 3 oncology programs include Keytruda in
the therapeutic areas of biliary tract, breast, cervical, colorectal, cutaneous
squamous cell, endometrial, esophageal, gastric, hepatocellular, mesothelioma,
nasopharyngeal, ovarian, prostate and small-cell lung cancers; Lynparza in
combination with Keytruda for non-small cell lung cancer; and Lenvima in
combination with Keytruda for bladder, endometrial, head and neck, melanoma and
non-small-cell lung cancers. Additionally, the Company has candidates in Phase 3
clinical development in several other therapeutic areas, including V114, an
investigational polyvalent conjugate vaccine for the prevention of pneumococcal
disease that received Breakthrough Therapy designation from the FDA for the
prevention of invasive pneumococcal disease caused by the vaccine serotypes in
pediatric patients (6 weeks to 18 years of age) and in adults; MK-7264,
gefapixant, a selective, non-narcotic, orally-administered P2X3-receptor
antagonist being developed for the treatment of refractory, chronic cough;
MK-8591A, islatravir, an investigational nucleoside reverse transcriptase
translocation inhibitor (NRTTI) in combination with doravirine for the treatment
of HIV-1 infection; and MK-1242, vericiguat, an investigational treatment for
heart failure being developed in a collaboration (see "Research and Development"
below).
The Company is allocating resources to effectively support its commercial
opportunities in the near term while making the necessary investments to support
long-term growth. Research and development expenses in 2019 reflect higher
clinical development spending and increased investment in discovery research and
early drug development.

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In November 2019, Merck's Board of Directors approved an increase to the
Company's quarterly dividend, raising it to $0.61 per share from $0.55 per share
on the Company's outstanding common stock. During 2019, the Company returned
$10.5 billion to shareholders through dividends and share repurchases.
Earnings per common share assuming dilution attributable to common shareholders
(EPS) for 2019 were $3.81 compared with $2.32 in 2018. EPS in both years
reflects the impact of acquisition and divestiture-related costs, as well as
restructuring costs and certain other items. Certain other items in 2019 include
a charge related to the acquisition of Peloton and in 2018 include a charge
related to the formation of a collaboration with Eisai Co., Ltd. (Eisai).
Non-GAAP EPS, which excludes these items, was $5.19 in 2019 and $4.34 in 2018
(see "Non-GAAP Income and Non-GAAP EPS" below).
Pricing
Global efforts toward health care cost containment continue to exert pressure on
product pricing and market access worldwide. Changes to the U.S. health care
system as part of health care reform, as well as increased purchasing power of
entities that negotiate on behalf of Medicare, Medicaid, and private sector
beneficiaries, have contributed to pricing pressure. In several international
markets, government-mandated pricing actions have reduced prices of generic and
patented drugs. In addition, the Company's revenue performance in 2019 was
negatively affected by other cost-reduction measures taken by governments and
other third-parties to lower health care costs. The Company anticipates all of
these actions and additional actions in the future will continue to negatively
affect revenue performance.
Operating Results
Sales
                                          % Change                             % Change
                                         Excluding                             Excluding
($ in millions)   2019       % Change     Exchange      2018      % Change     Exchange       2017
United States   $ 20,325        12 %         12 %     $ 18,212       5 %          5 %       $ 17,424
International     26,515        10 %         13 %       24,083       6 %          6 %         22,698
Total           $ 46,840        11 %         13 %     $ 42,294       5 %          5 %       $ 40,122


U.S. plus international may not equal total due to rounding.
Worldwide sales grew 11% in 2019 driven primarily by higher sales in the
oncology franchise reflecting strong growth of Keytruda, as well as increased
alliance revenue related to Lynparza and Lenvima. Also contributing to revenue
growth were higher sales of vaccines, including Gardasil/Gardasil 9, Varivax,
ProQuad and M­M­R II, as well as increased sales of certain hospital acute care
products, including Bridion. Higher sales of animal health products also drove
revenue growth in 2019.
Sales growth in 2019 was partially offset by the effects of generic competition
for cardiovascular products Zetia and Vytorin, hospital acute care products
Invanz, Cubicin and Noxafil, oncology product Emend, and products within the
diversified brands franchise, as well as biosimilar competition for immunology
product Remicade. The diversified brands franchise includes certain products
that are approaching the expiration of their marketing exclusivity or that are
no longer protected by patents in developed markets. Lower sales of diabetes
products Januvia and Janumet and HIV products Isentress/Isentress HD also
partially offset revenue growth in 2019.
Sales in the United States grew 12% in 2019 driven primarily by higher sales of
Keytruda, combined sales of ProQuad, M-M-R II and Varivax, and Bridion, as well
as higher alliance revenue from Lenvima and Lynparza. Revenue growth was
partially offset by lower sales of Januvia, Janumet, Invanz, Emend,
Isentress/Isentress HD, Cubicin and Noxafil.
International sales grew 10% in 2019. Performance in international markets was
led by China, which had total sales of $3.2 billion in 2019, representing growth
of 47% compared with 2018, including a 7% unfavorable effect from foreign
exchange. The increase in international sales primarily reflects growth in
Keytruda, Gardasil/Gardasil 9, combined sales of ProQuad, M-M-R II and Varivax,
as well as higher alliance revenue from Lynparza and Lenvima. Sales growth was
partially offset by lower sales of Zetia, Vytorin, Zepatier, Remicade, and
products within the diversified brands franchise. International sales
represented 57% of total sales in both 2019 and 2018.
See Note 18 to the consolidated financial statements for details on sales of the
Company's products. A discussion of performance for select products in the
franchises follows.

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Pharmaceutical Segment
Oncology
                                                     % Change                                % Change
                                                     Excluding                               Excluding
($ in millions)             2019       % Change      Exchange       2018       % Change      Exchange       2017
Keytruda                 $ 11,084         55  %         58  %     $ 7,171         88  %         88  %     $ 3,809
Alliance Revenue -
Lynparza (1)                  444        137  %        141  %         187          *             *             20
Alliance Revenue -
Lenvima (1)                   404        171  %        173  %         149        N/A           N/A              -
Emend                         388        (26 )%        (24 )%         522         (6 )%         (7 )%         556


* Calculation not meaningful.
(1) Alliance revenue represents Merck's share of profits, which are product
sales net of cost of sales and commercialization costs (see Note 4 to the
consolidated financial statements).
Keytruda is an anti-PD-1 therapy that has been approved for the treatment of
multiple malignancies including cervical cancer, classical Hodgkin lymphoma
(cHL), esophageal cancer, gastric or gastroesophageal junction adenocarcinoma,
HNSCC, hepatocellular carcinoma (HCC), NSCLC, SCLC, melanoma, Merkel cell
carcinoma, microsatellite instability-high (MSI-H) or mismatch repair deficient
cancer, primary mediastinal large B-cell lymphoma (PMBCL), RCC and urothelial
carcinoma. The Keytruda clinical development program includes studies across a
broad range of cancer types (see "Research and Development" below).
In January 2020, the FDA approved Keytruda as monotherapy for the treatment of
certain patients with Bacillus Calmette-Guerin (BCG)-unresponsive, high-risk,
non-muscle invasive bladder cancer (NMIBC) based on the results of the
KEYNOTE-057 trial.
In July 2019, the FDA approved Keytruda as monotherapy for the treatment of
certain 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, based on the results of the
KEYNOTE-181 and KEYNOTE-180 trials.
In June 2019, the FDA approved Keytruda as monotherapy or in combination with
chemotherapy for the first-line treatment of patients with metastatic or
unresectable, recurrent HNSCC based on results from the pivotal Phase 3
KEYNOTE-048 trial. Keytruda was initially approved for HNSCC under the FDA's
accelerated approval process based on data from the Phase 1b KEYNOTE-012 trial.
In accordance with the accelerated approval process, continued approval was
contingent upon verification and description of clinical benefit, which has now
been demonstrated in KEYNOTE-048 and has resulted in the FDA converting the
accelerated approval to a full (regular) approval. Keytruda was approved for
these indications by the EC in November 2019 and by Japan's Ministry of Health,
Labour and Welfare (MHLW) in December 2019.
Also in June 2019, the FDA approved Keytruda as monotherapy for the treatment of
certain patients with metastatic SCLC 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 RCC, the most common type of kidney cancer, based on findings from the
pivotal Phase 3 KEYNOTE-426 trial. Keytruda was approved for this indication by
the EC in September 2019 and by Japan's MHLW in December 2019.
Also in April 2019, the FDA approved an expanded label for Keytruda as
monotherapy for the first-line treatment of patients with NSCLC expressing PD-L1
(Tumor Proportion Score [TPS] ?1%) as determined by an FDA-approved test, with
no EGFR or ALK genomic tumor aberrations, in stage III disease where patients
are not candidates for surgical resection or definitive chemoradiation, and in
metastatic disease. The approval was based on results from the Phase 3
KEYNOTE-042 trial.
In September 2019, the FDA approved the combination of Keytruda plus Lenvima for
the treatment of certain patients with advanced endometrial carcinoma that is
not MSI-H or mismatch repair deficient.

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In March 2019, the EC approved Keytruda in combination with carboplatin and
either paclitaxel or nab-paclitaxel for the first-line treatment of adults with
metastatic squamous NSCLC based on data from the Phase 3 KEYNOTE-407 trial.
Keytruda was approved for this indication by the FDA in October 2018.
In April 2019, the EC approved a new extended dosing schedule of 400 mg every
six weeks (Q6W) delivered as an intravenous infusion over 30 minutes for all
approved monotherapy indications in the 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.
Additionally, in 2019, Keytruda received the following approvals from China's
National Medical Products Administration (NMPA): in combination with pemetrexed
and platinum chemotherapy for the first-line treatment of patients with
metastatic nonsquamous NSCLC, with no EGFR or ALK genomic tumor aberrations,
based on data from the pivotal Phase 3 KEYNOTE-189 trial; as monotherapy for the
first-line treatment of patients with locally advanced or metastatic NSCLC whose
tumors express PD-L1 as determined by a NMPA-approved test, with no EGFR or ALK
genomic tumor aberrations, based on the results from the Phase 3 KEYNOTE-042
trial; and in combination with carboplatin and paclitaxel for the first-line
treatment of patients with metastatic squamous NSCLC based on findings from the
pivotal Phase 3 KEYNOTE-407 trial.
Global sales of Keytruda grew 55% in 2019 driven by higher demand 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 as monotherapy and in combination with
chemotherapy for both nonsquamous and squamous metastatic NSCLC, along with
uptake in the recently launched RCC and adjuvant melanoma indications. Other
indications contributing to U.S. sales growth include HNSCC, urothelial
carcinoma, melanoma, and MSI-H cancer. Keytruda sales growth in international
markets was driven primarily by performance in Europe, Japan and China
reflecting increased use in the treatment of NSCLC, as well as for the more
recently approved indications as described above.
The Company is a party to certain third-party license agreements pursuant to
which the Company pays royalties on sales of Keytruda. Under the terms of the
more significant of these agreements, Merck pays a royalty of 6.5% on worldwide
sales of Keytruda through 2023 to one third party; this royalty will decline to
2.5% for 2024 through 2026 and will terminate thereafter. The Company pays an
additional 2% royalty on worldwide sales of Keytruda to another third party, the
termination date of which varies by country; this royalty will expire in the
United States in 2024 and in major European markets in 2025. The royalties are
included in Cost of sales.
Pursuant to a re-pricing rule, the Japanese government reduced the price of
Keytruda by 17.5% effective February 2020. Additionally, Keytruda will be
subject to another significant price reduction in April 2020 under a provision
of the Japanese pricing rules.
Lynparza, an oral poly (ADP-ribose) polymerase (PARP) inhibitor being developed
as part of a collaboration with AstraZeneca entered into in July 2017 (see Note
4 to the consolidated financial statements), is approved for the treatment of
certain types of advanced ovarian, breast and pancreatic cancers. The increase
in alliance revenue related to Lynparza in 2019 was driven primarily by expanded
use in the United States, the EU, Japan and China reflecting in part the ongoing
launch of new indications. Lynparza received approval for the treatment of
certain types of advanced ovarian cancer in the United States in December 2018,
in the EU and in Japan in June 2019, and in China in December 2019 based on the
results of the Phase 3 SOLO-1 trial. Also, in April 2019, the EC approved
Lynparza for the treatment of certain adult patients with advanced breast cancer
based on the results of the Phase 3 OlympiAD trial. Additionally, in December
2019, the FDA approved Lynparza for the maintenance treatment of certain adult
patients with advanced pancreatic cancer based on the results of the Phase 3
POLO trial.
Lenvima, an oral receptor tyrosine kinase inhibitor being developed as part of a
collaboration with Eisai entered into in March 2018 (see Note 4 to the
consolidated financial statements), is approved for the treatment of certain
types of thyroid cancer, HCC, and in combination with evorolimus for certain
patients with RCC. Additionally, in September 2019, the FDA approved the
combination of Keytruda plus Lenvima for the treatment of certain patients with
advanced endometrial carcinoma that is not MSI-H or mismatch repair deficient.
This marks the first U.S. approval for the combination of Keytruda plus Lenvima.
The increase in alliance revenue related to Lenvima in 2019 reflects strong
performance in the treatment of HCC following recent worldwide launches, as well
as a full year of collaboration activity in 2019.

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Global sales of Emend, for the prevention of chemotherapy-induced and
post-operative nausea and vomiting, declined 26% in 2019 driven primarily by
lower demand and pricing in the United States due to competition, including
recent generic competition for Emend for Injection following U.S. patent expiry
in September 2019. The patent that provided U.S. market exclusivity for Emend
expired in 2015 and the patent that provided market exclusivity in most major
European markets expired in May 2019. Additionally, Emend for Injection will
lose market exclusivity in major European markets in August 2020. The Company
anticipates that sales of Emend for Injection in these markets will decline
significantly thereafter.
Vaccines
                                             % Change                             % Change
                                            Excluding                            Excluding
($ in millions)       2019      % Change     Exchange      2018      % Change     Exchange      2017
Gardasil/Gardasil 9 $ 3,737        19 %         21 %     $ 3,151        37 %         36 %     $ 2,308
ProQuad                 756        27 %         29 %         593        12 %         12 %         528
M-M-R II                549        28 %         29 %         430        13 %         12 %         382
Varivax                 970        25 %         28 %         774         1 %          1 %         767
RotaTeq                 791         9 %         10 %         728         6 %          6 %         686


Worldwide sales of Gardasil/Gardasil 9, vaccines to help prevent certain cancers
and other diseases caused by certain types of HPV, grew 19% in 2019 driven
primarily by higher demand in the Asia Pacific region, particularly in China,
and higher demand in certain European markets reflecting increased vaccination
rates for both boys and girls. Growth was partially offset by lower sales in the
United States. The U.S. sales decline was driven by the borrowing of Gardasil 9
doses from the U.S. Centers for Disease and Control Prevention (CDC) Pediatric
Vaccine Stockpile, offset in part by higher demand and pricing.
In 2019, the Company borrowed doses of Gardasil 9 from the CDC Pediatric Vaccine
Stockpile. The borrowing reduced sales in 2019 by approximately $120 million and
the Company recognized a corresponding liability. During 2018, the Company
replenished doses borrowed from the CDC Pediatric Vaccine Stockpile in 2017
resulting in the recognition of sales of $125 million in 2018 and a reversal of
the liability related to that borrowing.
The decision of Japan's MHLW to suspend the active recommendation for HPV
vaccination is still under review.
The Company is a party to certain third-party license agreements pursuant to
which the Company pays royalties on sales of Gardasil/Gardasil 9. Under the
terms of the more significant of these agreements, Merck pays a 7% royalty on
worldwide sales of Gardasil/Gardasil 9 to one third party (this agreement
expires in December 2023) and an additional 7% royalty on sales of
Gardasil/Gardasil 9 in the United States to another third party (this agreement
expires in December 2028). The royalties are included in Cost of sales.
Global sales of ProQuad, a pediatric combination vaccine to help protect against
measles, mumps, rubella and varicella, grew 27% in 2019 driven primarily by
higher volumes and pricing in the United States, as well as volume growth in the
EU largely reflecting a competitor supply issue.
Worldwide sales of M-M-R II, a vaccine to help protect against measles, mumps
and rubella, grew 28% in 2019 driven primarily by higher sales in the United
Sates reflecting increased demand due to measles outbreaks, as well as higher
pricing. The Company anticipates that U.S. sales of M-M-R II will decline in
2020 driven by lower expected demand related to fewer measles outbreaks.
Global sales of Varivax, a vaccine to help prevent chickenpox (varicella), grew
25% in 2019 driven primarily by government tenders in Latin America, as well as
higher pricing and volume growth in the United States. Varivax sales are
expected to decline in 2020 due in part to the timing of government tenders and
competition in select Latin American markets.
Global sales of RotaTeq, a vaccine to help protect against rotavirus
gastroenteritis in infants and children, grew 9% in 2019 driven primarily by
continued uptake from the launch in China and higher volumes in the United
States, partially offset by lower volumes in Latin America.

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In December 2019, the FDA approved Ervebo for the prevention of disease caused
by Zaire ebolavirus in individuals 18 years of age and older. As previously
announced, Merck is working to initiate manufacturing of licensed doses and
expects these doses to start becoming available in approximately the third
quarter of 2020. Merck is working closely with the U.S. government, the World
Health Organization (WHO), UNICEF, and Gavi (the Vaccine Alliance) to plan for
how eventual, licensed doses will support future public health preparedness and
response efforts against Zaire ebolavirus disease. Merck is not seeking to
profit from sales of this vaccine; rather, to ensure the vaccine is sustainable
by recovering manufacturing and operational costs associated with the
program. Ervebo was also granted a conditional marking authorization by the EC.
Additionally, Merck has made submissions to African country national regulatory
authorities in collaboration with the African Vaccine Regulatory Forum that will
allow the vaccine to be registered in African countries considered to be at-risk
for Ebola outbreaks by the WHO. In February 2020, Merck confirmed that four
African countries have approved Ervebo. Approvals in additional countries in
Africa are anticipated in the near future.
Hospital Acute Care
                                         % Change                            % Change
                                         Excluding                           Excluding
($ in millions)   2019      % Change     Exchange      2018     % Change     Exchange      2017
Bridion         $ 1,131       23  %         26  %     $ 917       30  %         30  %     $ 704
Noxafil             662      (11 )%         (7 )%       742       17  %         15  %       636
Invanz              263      (47 )%        (44 )%       496      (18 )%        (17 )%       602
Cubicin             257      (30 )%        (28 )%       367       (4 )%         (5 )%       382


Global sales of Bridion, for the reversal of two types of neuromuscular blocking
agents used during surgery, grew 23% in 2019 driven by higher demand globally,
particularly in the United States.
Worldwide sales of Noxafil, for the prevention of invasive fungal infections,
declined 11% in 2019 driven primarily by generic competition in the United
States. The patent that provided U.S. market exclusivity for certain forms of
Noxafil representing the majority of U.S. Noxafil sales expired in July 2019.
Accordingly, the Company is experiencing a decline in U.S. Noxafil sales as a
result of generic competition and expects the decline to continue. Additionally,
the patent for Noxafil expired in a number of major European markets in December
2019. As a result, the Company anticipates sales of Noxafil in these markets
will decline significantly in future periods.
Global sales of Invanz, for the treatment of certain infections, declined 47% in
2019 driven by generic competition in the United States. The patent that
provided U.S. market exclusivity for Invanz expired in November 2017 and generic
competition began in the second half of 2018. The Company subsequently
experienced a significant decline in Invanz sales in the United States as a
result of this generic competition and has since lost most of its U.S. Invanz
sales.
Global sales of Cubicin, an I.V. antibiotic for complicated skin and skin
structure infections or bacteremia when caused by designated susceptible
organisms, declined 30% in 2019 resulting primarily from ongoing generic
competition in the United States following expiration of the U.S. composition
patent for Cubicin in 2016.
In 2019, the FDA and EC approved expanded indications for Zerbaxa for the
treatment of HABP/VABP caused by certain susceptible Gram-negative
microorganisms based on the results of the pivotal Phase 3 ASPECT-NP trial.
Zerbaxa was previously approved in the United States and EU for the treatment of
adults with certain complicated urinary tract and intra-abdominal infections.
In July 2019, the FDA approved Recarbrio for injection, a new combination
antibacterial for the treatment of adults who have limited or no alternative
treatment options with complicated urinary tract infections and complicated
intra-abdominal infections caused by certain susceptible Gram-negative
microorganisms. Recarbrio was approved by the EC in February 2020. Merck
anticipates making Recarbrio available in the first half of 2020.
In January 2020, the FDA approved Dificid (fidaxomicin) for oral suspension and
Dificid tablets for the treatment of Clostridioides (formerly Clostridium)
difficile-associated diarrhea in children aged six months and older.

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Immunology
                                       % Change                            % Change
                                       Excluding                           Excluding
($ in millions)  2019     % Change     Exchange      2018     % Change     Exchange      2017
Simponi         $ 830       (7 )%         (2 )%     $ 893        9  %          5  %     $ 819
Remicade          411      (29 )%        (25 )%       582      (31 )%        (33 )%       837


Sales of Simponi, a once-monthly subcutaneous treatment for certain inflammatory
diseases (marketed by the Company in Europe, Russia and Turkey), declined 7% in
2019 driven by the unfavorable effect of foreign exchange and lower pricing in
Europe. Sales of Simponi are being unfavorably affected by the launch of
biosimilars for a competing product. The Company expects this competition will
continue to unfavorably affect sales of Simponi.
Sales of Remicade, a treatment for inflammatory diseases (marketed by the
Company in Europe, Russia and Turkey), declined 29% in 2019 driven by ongoing
biosimilar competition in the Company's marketing territories. 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
                                                    % Change                                 % Change
                                                    Excluding                               Excluding
($ in millions)            2019       % Change      Exchange       2018       % Change       Exchange       2017
Isentress/Isentress HD   $   975        (15 )%        (10 )%     $ 1,140         (5 )%         (5 )%      $ 1,204


Worldwide sales of Isentress/Isentress HD, an HIV integrase inhibitor for use in
combination with other antiretroviral agents for the treatment of HIV-1
infection, declined 15% in 2019 primarily reflecting lower demand in the United
States and in the EU due to competitive pressure.
In September 2019, the FDA approved supplemental New Drug Applications (NDA) for
Pifeltro (doravirine) in combination with other antiretroviral agents, and for
Delstrigo (doravirine/lamivudine/tenofovir disoproxil fumarate) as a complete
regimen, that expand their indications to include adult patients with HIV-1
infection who are virologically suppressed on a stable antiretroviral regimen.
Cardiovascular
                                       % Change                              % Change
                                       Excluding                             Excluding
($ in millions)  2019     % Change     Exchange       2018      % Change     Exchange       2017
Zetia/Vytorin   $ 874      (35 )%        (34 )%     $ 1,355      (35 )%        (38 )%     $ 2,095
Atozet            391       13  %         18  %         347       54  %         48  %         225
Rosuzet           120      107  %        115  %          58       12  %          9  %          52
Adempas           419       27  %         30  %         329       10  %          7  %         300


Combined global sales of Zetia (marketed in most countries outside the United
States as Ezetrol) and Vytorin (marketed outside the United States as Inegy),
medicines for lowering LDL cholesterol, declined 35% in 2019 driven primarily by
lower sales in the EU. The EU patents for Ezetrol and Inegy expired in April
2018 and April 2019, respectively. Accordingly, the Company is experiencing
sales declines in these markets as a result of generic competition and expects
the declines to continue. The sales decline was also attributable to loss of
exclusivity in Australia. Merck lost market exclusivity in the United States for
Zetia in 2016 and Vytorin in 2017 and subsequently lost nearly all U.S. sales of
these products as a result of generic competition.
Sales of Atozet (marketed outside of the United States), a medicine for lowering
LDL cholesterol, grew 13% in 2019, primarily driven by higher demand in the EU
and in Korea.
Sales of Rosuzet (marketed outside of the United States), a medicine for
lowering LDL cholesterol, more than doubled in 2019, primarily driven by the
launch in Japan, as well as higher demand in Korea.

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Adempas, a cardiovascular drug for the treatment of pulmonary arterial
hypertension, is part of a worldwide clinical development collaboration with
Bayer AG (Bayer) to market and develop soluble guanylate cyclase (sGC)
modulators including Adempas (see Note 4 to the consolidated financial
statements). The increase in alliance revenue of 27% in 2019 was driven both by
higher profits from Bayer and higher sales of Adempas in Merck's marketing
territories.
Diabetes
                                        % Change                             % Change
                                        Excluding                            Excluding
($ in millions)   2019     % Change     Exchange       2018     % Change     Exchange       2017
Januvia/Janumet $ 5,524      (7 )%        (4 )%      $ 5,914       - %      

(1 )% $ 5,896

Worldwide combined sales of Januvia and Janumet, medicines that help lower blood
sugar levels in adults with type 2 diabetes, declined 7% in 2019 as a result of
continued pricing pressure in the United States, partially offset by higher
demand in most international markets. The Company expects U.S. pricing pressure
to continue. The patents that provide market exclusivity for Januvia and Janumet
in the United States expire in July 2022 (although six-month pediatric
exclusivity may extend this date). The patent that provides market exclusivity
for Januvia in the EU expires in July 2022 (although pediatric exclusivity may
extend this date to September 2022). The supplementary patent certificate that
provides market exclusivity for Janumet in the EU expires in April 2023. The
Company anticipates sales of Januvia and Janumet in these markets will decline
substantially after these patent expiries.
Women's Health
                                         % Change                            % Change
                                         Excluding                          Excluding
($ in millions)     2019    % Change     Exchange      2018     % Change     Exchange     2017
NuvaRing           $ 879      (3 )%        (2 )%      $ 902        19 %         18 %     $ 761
Implanon/Nexplanon   787      12  %        14  %        703         2 %          3 %       686


Worldwide sales of NuvaRing, a vaginal contraceptive product, declined 3% in
2019 driven primarily by lower demand in the EU due to generic competition,
largely offset by higher sales in the United States reflecting higher pricing
that was partially offset by lower demand. The patent that provided U.S. market
exclusivity for NuvaRing expired in April 2018 and generic competition began in
December 2019. The Company anticipates a rapid and substantial decline in U.S.
NuvaRing sales in 2020 as a result of this generic competition.
Worldwide sales of Implanon/Nexplanon, a single-rod subdermal contraceptive
implant, grew 12% in 2019, primarily driven by higher demand and pricing in the
United States.
Biosimilars
                                    % Change                        % Change
                                    Excluding                       Excluding
($ in millions)  2019    % Change   Exchange     2018    % Change   Exchange     2017
Biosimilars     $ 252           *           *   $  64           *           *   $   5


* Calculation not meaningful.
Biosimilar products are marketed by the Company pursuant to an agreement with
Samsung Bioepis Co., Ltd. (Samsung) to develop and commercialize multiple
pre-specified biosimilar candidates. Currently, the Company markets Renflexis
(infliximab-abda), a tumor necrosis factor (TNF) antagonist biosimilar to
Remicade (infliximab) for the treatment of certain inflammatory diseases;
Ontruzant (trastuzumab-dttb), a human epidermal growth factor receptor 2 (HER2)/
neu receptor antagonist biosimilar to Herceptin (trastuzumab) for the treatment
of HER2-positive breast cancer and HER2 overexpressing gastric cancer; and
Brenzys (etanercept biosimilar), a TNF antagonist biosimilar to Enbrel for the
treatment of certain inflammatory diseases. Merck's commercialization
territories under the agreement vary by product. Sale growth of biosimilars in
2019 was driven by continued uptake of Renflexis in United States since launch
in 2017, continued uptake of Ontruzant in the EU since launch in 2018, and the
launch of Brenzys in Brazil in 2019.


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Animal Health Segment
                                         % Change                             % Change
                                        Excluding                            Excluding
($ in millions)    2019     % Change     Exchange      2018      % Change     Exchange      2017
Livestock        $ 2,784       6 %          11 %     $ 2,630         6 %          7 %     $ 2,484
Companion Animal   1,609       2 %           5 %       1,582        14 %         13 %       1,391


Sales of livestock products grew 6% in 2019 predominantly due to products
obtained in the April 2019 acquisition of Antelliq, a leader in digital animal
identification, traceability and monitoring solutions (see Note 3 to the
consolidated financial statements). Growth in sales of livestock products was
also driven by higher demand for aqua and swine products. Sales of companion
animal products grew 2% in 2019 driven primarily by higher demand for the
Bravecto line of products for parasitic control.
Costs, Expenses and Other
($ in millions)                       2019      Change       2018      Change       2017
Cost of sales                       $ 14,112      4 %     $ 13,509        5  %   $ 12,912
Selling, general and administrative   10,615      5 %       10,102        -  %     10,074
Research and development               9,872      1 %        9,752       -6  %     10,339
Restructuring costs                      638      1 %          632      -19  %        776
Other (income) expense, net              139      *           (402 )    -20  %       (500 )
                                    $ 35,376      5 %     $ 33,593        -  %   $ 33,601


* Greater than 100%.
Cost of Sales
Cost of sales was $14.1 billion in 2019 compared with $13.5 billion in 2018.
Cost of sales includes the amortization of intangible assets recorded in
connection with business acquisitions, which totaled $1.4 billion in 2019
compared with $2.7 billion in 2018. Cost of sales also includes the amortization
of amounts capitalized in connection with collaborations of $464 million in 2019
compared with $347 million in 2018 (see Note 8 to the consolidated financial
statements). Additionally, costs in 2019 include intangible asset impairment
charges of $705 million related to marketed products recorded in connection with
business acquisitions (see Note 8 to the consolidated financial statements). The
Company may recognize additional non-cash impairment charges in the future
related to intangible assets that were measured at fair value and capitalized in
connection with business acquisitions and such charges could be material. Costs
in 2018 include a $423 million charge related to the termination of a
collaboration agreement with Samsung for insulin glargine (see Note 3 to the
consolidated financial statements). Also included in cost of sales are expenses
associated with restructuring activities which amounted to $251 million in 2019
compared with $21 million in 2018, primarily reflecting accelerated depreciation
and asset write-offs related to the planned sale or closure of manufacturing
facilities. Separation costs associated with manufacturing-related headcount
reductions have been incurred and are reflected in Restructuring costs as
discussed below.
Gross margin was 69.9% in 2019 compared with 68.1% in 2018. The gross margin
improvement in 2019 reflects the charge recorded in 2018 in connection with the
termination of the collaboration agreement with Samsung (noted above), favorable
product mix, and lower amortization of intangible assets (noted above). These
improvements in gross margin were partially offset by unfavorable manufacturing
variances, inventory write-offs, pricing pressure, and higher restructuring
costs.
Selling, General and Administrative
Selling, general and administrative (SG&A) expenses were $10.6 billion in 2019,
an increase of 5% compared with 2018, driven primarily by higher administrative
costs, acquisition and divestiture-related costs (largely related to the
acquisition of Antelliq), promotional expenses primarily in support of strategic
brands, and restructuring costs, partially offset by the favorable effect of
foreign exchange and lower selling costs. SG&A expenses in 2019 include
restructuring costs of $34 million related primarily to accelerated depreciation
for facilities to be closed or divested. Separation costs associated with sales
force reductions have been incurred and are reflected in Restructuring costs as
discussed below. SG&A expenses include acquisition and divestiture-related costs
of $126 million in 2019 compared

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with $32 million in 2018, consisting of integration, transaction, and certain
other costs related to business acquisitions and divestitures.
Research and Development
Research and development (R&D) expenses were $9.9 billion in 2019, an increase
of 1% compared with 2018. The increase was driven primarily by a $993 million
charge in 2019 for the acquisition of Peloton (see Note 3 to the consolidated
financial statements), as well as higher expenses related to clinical
development and increased investment in discovery research and early drug
development. The increase in R&D expenses in 2019 was partially offset by a $1.4
billion charge in 2018 related to the formation of an oncology collaboration
with Eisai (see Note 4 to the consolidated financial statements), a $344 million
charge in 2018 related to the acquisition of Viralytics Limited (Viralytics)
(see Note 3 to the consolidated financial statements), and the favorable effect
of foreign exchange.
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 $6.1 billion in 2019 compared
with $5.6 billion in 2018. 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, which in the aggregate were $2.6 billion in 2019 and $2.3
billion in 2018. R&D expenses also include in-process research and development
(IPR&D) impairment charges of $172 million and $152 million in 2019 and 2018,
respectively (see Note 8 to the consolidated financial statements). The Company
may recognize additional non-cash impairment charges in the future related to
the cancellation or delay of other pipeline programs that were measured at fair
value and capitalized in connection with business acquisitions and such charges
could be material. In addition, R&D expenses include expense or income related
to changes in the estimated fair value measurement of liabilities for contingent
consideration recorded in connection with business acquisitions. During 2019 and
2018, the Company recorded a net reduction in expenses of $39 million and $54
million, respectively, related to changes in these estimates.
Restructuring Costs
In early 2019, Merck approved a new global restructuring program (Restructuring
Program) as part of a worldwide initiative focused 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, builds on prior restructuring programs and does not include any
actions associated with the planned spin-off of NewCo. As the Company continues
to evaluate its global footprint and overall operating model, it has
subsequently identified additional actions under the Restructuring Program, and
could identify further actions over time. The actions currently contemplated
under the Restructuring Program are expected to be substantially completed by
the end of 2023, with the cumulative pretax costs to be incurred by the Company
to implement the program now estimated to be approximately $2.5 billion. The
Company expects to record charges of approximately $800 million in 2020 related
to the Restructuring Program. The Company anticipates the actions under the
Restructuring Program to result in annual net cost savings of approximately $900
million by the end of 2023. Actions under previous global restructuring programs
have been substantially completed.
Restructuring costs, primarily representing separation and other related costs
associated with these restructuring activities, were $638 million in 2019 and
$632 million in 2018. 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. Also included in restructuring costs are asset abandonment, facility
shut-down and other related costs, as well as employee-related costs such as
curtailment, settlement and termination charges associated with pension and
other postretirement benefit plans and share-based compensation plan costs. For
segment reporting, restructuring costs are unallocated expenses.
Additional costs associated with the Company's restructuring activities are
included in Cost of sales, Selling, general and administrative and Research and
development. The Company recorded aggregate pretax costs of $927 million in 2019
and $658 million in 2018 related to restructuring program activities (see Note 5
to the consolidated financial statements).

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Other (Income) Expense, Net
For details on the components of Other (income) expense, net, see Note 14 to the
consolidated financial statements.
Segment Profits
($ in millions)                         2019         2018         2017

Pharmaceutical segment profits $ 28,324 $ 24,871 $ 23,018 Animal Health segment profits

           1,609        1,659        1,552

Other non-reportable segment profits (7 ) 103 275 Other

                                 (18,462 )    (17,932 )    (18,324 )
Income Before Taxes                  $ 11,464     $  8,701     $  6,521


Pharmaceutical segment profits are comprised of segment sales less standard
costs, as well as SG&A expenses directly incurred by the segment. Animal Health
segment profits are comprised of segment sales, less all cost of sales, as well
as SG&A and R&D expenses directly incurred by the segment. For internal
management reporting presented to the chief operating decision maker, Merck does
not allocate the remaining cost of sales not included in segment profits as
described above, research and development expenses incurred by 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 costs related to
restructuring activities and acquisition and divestiture-related costs,
including amortization of purchase accounting adjustments, intangible asset
impairment charges and changes in the estimated fair value measurement of
liabilities for contingent consideration. 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. 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 MRL. Prior period Pharmaceutical segment profits have been recast to
reflect these changes on a comparable basis.
Pharmaceutical segment profits grew 14% in 2019 compared with 2018 driven
primarily by higher sales, as well as lower selling costs. Animal Health segment
profits declined 3% in 2019 driven primarily by unfavorable product mix, higher
investments in selling and product development, and the unfavorable effect of
foreign exchange, partially offset by higher sales.
Taxes on Income
The effective income tax rates of 14.7% in 2019 and 28.8% in 2018 reflect the
impacts of acquisition and divestiture-related costs, restructuring costs and
the beneficial impact of foreign earnings, including product mix. The effective
income tax rate in 2019 also reflects the favorable impact of a $364 million net
tax benefit related to the settlement of certain federal income tax matters (see
Note 15 to the consolidated financial statements) and the reversal of tax
reserves established in connection with the 2014 divestiture of Merck's Consumer
Care (MCC) business due to the lapse in the statute of limitations. In addition,
the effective income tax rate in 2019 reflects the unfavorable impacts of a
charge for the acquisition of Peloton for which no tax benefit was recognized
and charges of $117 million related to the finalization of treasury regulations
for the transition tax associated with the 2017 enactment of U.S. tax
legislation known as the Tax Cuts and Jobs Act (TCJA) (see Note 15 to the
consolidated financial statements). The effective income tax rate in 2018
includes measurement-period adjustments to the provisional amounts recorded in
2017 associated with the enactment of the TCJA, including $124 million related
to the transition tax. In addition, the effective income tax rate for 2018
reflects the unfavorable impacts of a charge recorded in connection with the
formation of a collaboration with Eisai and a charge related to the termination
of a collaboration agreement with Samsung for which no tax benefit was
recognized.

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Net (Loss) Income Attributable to Noncontrolling Interests
Net (loss) income attributable to noncontrolling interests was $(66) million in
2019 compared with $(27) million in 2018. The losses in 2019 and 2018 were
driven primarily by the portion of goodwill impairment charges related to
certain business in the Healthcare Services segment that are attributable to
noncontrolling interests.
Net Income and Earnings per Common Share
Net income attributable to Merck & Co., Inc. was $9.8 billion in 2019 and $6.2
billion in 2018. EPS was $3.81 in 2019 and $2.32 in 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. In addition, senior management's annual compensation is
derived in part using non-GAAP pretax income. Since non-GAAP income and
non-GAAP EPS are not measures determined in accordance with GAAP, they have no
standardized meaning prescribed by GAAP and, therefore, may not be comparable to
the calculation of similar measures of other companies. The information on
non-GAAP income and non-GAAP EPS should be considered in addition to, but not as
a substitute for or superior to, net income and EPS prepared in accordance with
generally accepted accounting principles in the United States (GAAP).

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A reconciliation between GAAP financial measures and non-GAAP financial measures
is as follows:
($ in millions except per share amounts)                    2019         2018         2017
Income before taxes as reported under GAAP               $ 11,464     $  8,701     $  6,521
Increase (decrease) for excluded items:
Acquisition and divestiture-related costs                   2,681        3,066        3,760
Restructuring costs                                           927          658          927
Other items:
Charge for the acquisition of Peloton                         993            -            -
Charge related to the formation of an oncology
collaboration with Eisai                                        -        1,400            -

Charge related to the termination of a collaboration with Samsung

                                                    -          423            -
Charge for the acquisition of Viralytics                        -          344            -
Charge related to the formation of an oncology
collaboration with AstraZeneca                                  -            -        2,350
Other                                                          55          (57 )        (16 )
Non-GAAP income before taxes                               16,120       14,535       13,542
Taxes on income as reported under GAAP                      1,687        2,508        4,103
Estimated tax benefit on excluded items (1)                   695          

535 785 Net tax charge related to the enactment of the TCJA and subsequent finalization of related treasury regulations (2)

                                                          (117 )       

(160 ) (2,625 ) Net tax benefit from the settlement of certain federal income tax matters

                                            364           

- 234 Tax benefit from the reversal of tax reserves related to the divestiture of MCC

                                         86            -            -
Tax benefit related to the settlement of a state income
tax matter                                                      -            -           88
Non-GAAP taxes on income                                    2,715        2,883        2,585
Non-GAAP net income                                        13,405      

11,652 10,957 Less: Net (loss) income attributable to noncontrolling interests as reported under GAAP

                              (66 )        

(27 ) 24 Acquisition and divestiture-related costs attributable to noncontrolling interests

                                   (89 )        

(58 ) - Non-GAAP net income attributable to noncontrolling interests

                                                      23           31           24

Non-GAAP net income attributable to Merck & Co., Inc. $ 13,382 $ 11,621 $ 10,933 EPS assuming dilution as reported under GAAP

$   3.81     $   2.32     $   0.87
EPS difference                                               1.38         2.02         3.11
Non-GAAP EPS assuming dilution                           $   5.19     $   

4.34 $ 3.98

(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) Amount in 2017 was provisional (see Note 15 to the consolidated financial
statements).
Acquisition and Divestiture-Related Costs
Non-GAAP income and non-GAAP EPS exclude the impact of certain amounts recorded
in connection with business acquisitions and divestitures. These amounts include
the amortization of intangible assets and amortization of purchase accounting
adjustments to inventories, as well as intangible asset impairment charges and
expense or income related to changes in the estimated fair value measurement of
liabilities for contingent consideration. Also excluded are integration,
transaction, and certain other costs associated with business acquisitions and
divestitures.
Restructuring Costs
Non-GAAP income and non-GAAP EPS exclude costs related to restructuring actions
(see Note 5 to the consolidated financial statements). These amounts include
employee separation costs and accelerated depreciation 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

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will be closed or divested or the equipment disposed of, and depreciation
expense as determined utilizing the useful life prior to the restructuring
actions. Restructuring costs also include asset abandonment, facility shut-down
and other related costs, as well as employee-related costs such as curtailment,
settlement and termination charges associated with pension and other
postretirement benefit plans and share-based compensation costs.
Certain Other Items
These items are adjusted for after they are evaluated on an individual basis
considering their quantitative and qualitative aspects. Typically, these consist
of items that are unusual in nature, significant to the results of a particular
period or not indicative of future operating results. Excluded from non-GAAP
income and non-GAAP EPS in 2019 is a charge for the acquisition of Peloton (see
Note 3 to the consolidated financial statements), tax charges related to the
finalization of U.S. treasury regulations related to the TCJA, a net tax benefit
related to the settlement of certain federal income tax matters, and a tax
benefit related to the reversal of tax reserves established in connection with
the 2014 divestiture of MCC (see Note 15 to the consolidated financial
statements). Excluded from non-GAAP income and non-GAAP EPS in 2018 is a charge
related to the formation of a collaboration with Eisai (see Note 4 to the
consolidated financial statements), a charge related to the termination of a
collaboration agreement with Samsung for insulin glargine (see Note 3 to the
consolidated financial statements), a charge for the acquisition of Viralytics
(see Note 3 to the consolidated financial statements), and measurement-period
adjustments related to the provisional amounts recorded for the TCJA (see Note
15 to the consolidated financial statements). Excluded from non-GAAP income and
non-GAAP EPS in 2017 is a charge related to the formation of a collaboration
with AstraZeneca (see Note 4 to the consolidated financial statements), as well
as a provisional net tax charge related to the enactment of the TCJA, a net tax
benefit related to the settlement of certain federal income tax matters and a
tax benefit related to the settlement of a state income tax matter (see Note 15
to the consolidated financial statements).
Research and Development
A chart reflecting the Company's current research pipeline as of February 21,
2020 is set forth in Item 1. "Business - Research and Development" above.

Research and Development Update
The Company currently has several candidates under regulatory review in the
United States and internationally.
Keytruda is an anti-PD-1 therapy approved for the treatment of many cancers that
is in clinical development for expanded indications. These approvals were the
result of a broad clinical development program that currently consists of more
than 1,000 clinical trials, including more than 600 trials that combine Keytruda
with other cancer treatments. These studies encompass more than 30 cancer types
including: biliary tract, cervical, colorectal, cutaneous squamous cell,
endometrial, gastric, head and neck, hepatocellular, Hodgkin lymphoma,
non-Hodgkin lymphoma, melanoma, mesothelioma, nasopharyngeal, non-small-cell
lung, ovarian, PMBCL, prostate, renal, small-cell lung, triple-negative breast
and urothelial, many of which are currently in Phase 3 clinical development.
Further trials are being planned for other cancers.
Keytruda is 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 based on results
from the Phase 3 KEYNOTE-042 trial.
Keytruda is under review in Japan as monotherapy and in combination with
chemotherapy for the first-line treatment of advanced gastric or
gastroesophageal junction adenocarcinoma based on results from the pivotal Phase
3 KEYNOTE-062 trial.
Keytruda is also under review in Japan 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. Merck has made
the decision to withdraw its Type II variation application for Keytruda for this
indication in the EU.
In October 2019, the FDA accepted a supplemental Biologics License Application
(BLA) seeking use of Keytruda for the treatment of patients with recurrent
and/or metastatic cutaneous squamous cell carcinoma (cSCC) that

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is not curable by surgery or radiation based on the results of the KEYNOTE-629
trial. The FDA set a Prescription Drug User Fee Act (PDUFA) date of June 29,
2020.
In February 2020, Merck announced the FDA issued a Complete Response Letter
regarding Merck's supplemental BLAs seeking to update the dosing frequency for
Keytruda to include a 400 mg dose infused over 30 minutes every-six-weeks (Q6W)
option in multiple indications. The submitted applications are based on
pharmacokinetic modeling and simulation data presented at the 2018 American
Society of Clinical Oncology (ASCO) Annual Meeting. These data supported the EC
approval of 400 mg Q6W dosing for Keytruda monotherapy indications in March
2019. Merck is reviewing the letter and will discuss next steps with the FDA.
Additionally, Keytruda has received Breakthrough Therapy designation from the
FDA in combination with neoadjuvant chemotherapy for the treatment of high-risk,
early-stage triple-negative breast cancer (TNBC) and in combination with
enfortumab vedotin, in the first-line setting for the treatment of patients with
unresectable locally advanced or metastatic urothelial cancer who are not
eligible for cisplatin-containing chemotherapy. The FDA's Breakthrough Therapy
designation is intended to expedite the development and review of a candidate
that is planned for use, alone or in combination, to treat a serious or
life-threatening disease or condition when preliminary clinical evidence
indicates that the drug may demonstrate substantial improvement over existing
therapies on one or more clinically significant endpoints.
In September 2019, Merck announced results from the pivotal neoadjuvant/adjuvant
Phase 3 KEYNOTE-522 trial in patients with early-stage TNBC. The trial
investigated a regimen of neoadjuvant Keytruda plus chemotherapy, followed by
adjuvant Keytruda as monotherapy (the Keytruda regimen) compared with a regimen
of neoadjuvant chemotherapy followed by adjuvant placebo (the
chemotherapy-placebo regimen). Interim findings were presented at the European
Society for Medical Oncology (ESMO) 2019 Congress. In the neoadjuvant phase,
Keytruda plus chemotherapy resulted in a statistically significant increase in
pathological complete response (pCR) versus chemotherapy in patients with
early-stage TNBC. The improvement seen when adding Keytruda to neoadjuvant
chemotherapy was observed regardless of PD-L1 expression. In the other dual
primary endpoint of event-free-survival (EFS), with a median follow-up of 15.5
months, the Keytruda regimen reduced the risk of progression in the neoadjuvant
phase and recurrence in the adjuvant phase compared with the
chemotherapy-placebo regimen. Merck continues to discuss interim analysis data
from KEYNOTE-522 with regulatory authorities. The Keytruda breast cancer
clinical development program encompasses several internal and external
collaborative studies.
In February 2020, Merck announced that the pivotal Phase 3 KEYNOTE-355 trial
investigating Keytruda in combination with chemotherapy met one of its dual
primary endpoints of progression-free survival (PFS) in patients with metastatic
triple-negative breast cancer (mTNBC) whose tumors expressed PD-L1 (CPS ?10).
Based on an interim analysis conducted by an independent Data Monitoring
Committee (DMC), first-line treatment with Keytruda in combination with
chemotherapy (nab-paclitaxel, paclitaxel or gemcitabine/carboplatin)
demonstrated a statistically significant and clinically meaningful improvement
in PFS compared to chemotherapy alone in these patients. Based on the
recommendation of the DMC, the trial will continue without changes to evaluate
the other dual primary endpoint of overall survival (OS).
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 TNBC did not meet its pre-specified primary endpoint of superior OS
compared to chemotherapy. Other endpoints were not formally tested per the study
protocol because the primary endpoint of OS was not met.
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 ASCO Annual Meeting. 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

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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 January 2020, Merck announced that the Phase 3 KEYNOTE-604 trial
investigating Keytruda in combination with chemotherapy met one of its dual
primary endpoints of PFS in the first-line treatment of patients with extensive
stage SCLC. At the final analysis of the study, there was also an improvement in
OS for patients treated with Keytruda in combination with chemotherapy compared
to chemotherapy alone; however, these OS results did not meet statistical
significance per the pre-specified statistical plan. Results will be presented
at an upcoming medical meeting and discussed with regulatory authorities.
Lynparza is an oral PARP inhibitor currently approved for certain types of
advanced ovarian, breast and pancreatic cancers being co-developed for multiple
cancer types as part of a collaboration with AstraZeneca (see Note 4 to the
consolidated financial statements).
Lynparza is under review in the EU as a first-line maintenance monotherapy for
patients with gBRCAm metastatic pancreatic cancer whose disease has not
progressed following first-line platinum-based chemotherapy. Lynparza was
approved for this indication by the FDA in December 2019 based on results from
the Phase 3 POLO trial. A decision from the European Medicines Agency (EMA) is
expected in the second half of 2020.
In January 2020, the FDA accepted a supplemental NDA for Lynparza in combination
with bevacizumab for the maintenance treatment of women with advanced ovarian
cancer whose disease showed a complete or partial response to first-line
treatment with platinum-based chemotherapy and bevacizumab based on the results
from the pivotal Phase 3 PAOLA-1 trial. A PDUFA date is set for the second
quarter of 2020. This indication is also under review in the EU.
In January 2020, the FDA accepted for Priority Review a supplemental NDA for
Lynparza for the treatment of patients with metastatic castration-resistant
prostate cancer (mCRPC) and deleterious or suspected deleterious germline or
somatic homologous recombination repair (HRR) gene mutations, who have
progressed following prior treatment with a new hormonal agent based on positive
results from the Phase 3 PROfound trial. A PDUFA date is set for the second
quarter of 2020. This indication is also under review in the EU.
In June 2019, Merck and AstraZeneca presented full results from the Phase 3
SOLO-3 trial which evaluated Lynparza, compared to chemotherapy, for the
treatment of platinum-sensitive relapsed patients with gBRCAm advanced ovarian
cancer, who have received two or more prior lines of chemotherapy. The results
from the trial showed a statistically-significant and clinically-meaningful
improvement in objective response rate (ORR) in the Lynparza arm compared to the
chemotherapy arm. The key secondary endpoint of PFS was also significantly
increased in the Lynparza arm compared to the chemotherapy arm. The results were
presented at the 2019 ASCO Annual Meeting.
MK-5618, selumetinib, is a MEK 1/2 inhibitor being co-developed as part of a
strategic collaboration with AstraZeneca (see Note 4 to the consolidated
financial statements). Selumetinib is under Priority Review with the FDA as a
potential new medicine for pediatric patients aged three years and older with
neurofibromatosis type 1 (NF1) and symptomatic, inoperable plexiform
neurofibromas. This regulatory submission was based on positive results from the
National Cancer Institute Cancer Therapy Evaluation Program-sponsored SPRINT
Phase 2 Stratum 1 trial. A PDUFA date is set for the second quarter of 2020.
V503 is under review in Japan for an initial indication in females for the
prevention of certain HPV-related diseases and precursors.
In February 2020, the FDA accepted for Priority Review a supplemental BLA for
Gardasil 9 for the prevention of certain head and neck cancers caused by
vaccine-type HPV in females and males 9 through 45 years of age. The FDA set a
PDUFA date of June 2020.
In addition to the candidates under regulatory review, the Company has several
drug candidates in Phase 3 clinical development in addition to the Keytruda
programs discussed above.
Lynparza, in addition to the indications under review discussed above, is in
Phase 3 development in combination with Keytruda for the treatment of NSCLC.
Lenvima is an orally available tyrosine kinase inhibitor currently approved for
certain types of thyroid cancer, HCC, and in combination for certain patients
with RCC being co-developed as part of a strategic collaboration with Eisai (see
Note 4 to the consolidated financial statements). Pursuant to the agreement, the
companies will jointly

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initiate clinical studies evaluating the Keytruda/Lenvima combination in six
types of cancer (endometrial cancer, NSCLC, HCC, HNSCC, bladder cancer and
melanoma), as well as a basket trial targeting multiple cancer types. The FDA
granted Breakthrough Therapy designation for Keytruda in combination with
Lenvima both for the potential treatment of patients with advanced and/or
metastatic RCC and for the potential treatment of patients with unresectable HCC
not amenable to locoregional treatment.
MK-7264, gefapixant, is a selective, non-narcotic, orally-administered
P2X3-receptor antagonist being investigated in Phase 3 trials for the treatment
of refractory, chronic cough and in a Phase 2 trial for the treatment of women
with endometriosis-related pain.
MK-1242, vericiguat, is a sGC stimulator for the potential treatment of patients
with worsening chronic heart failure being developed as part of a worldwide
strategic collaboration between Merck and Bayer (see Note 4 to the consolidated
financial statements). Vericiguat is being studied in patients suffering from
chronic heart failure with reduced ejection fraction (Phase 3 clinical trial)
and from chronic heart failure with preserved ejection fraction (Phase 2
clinical trial). In November 2019, Merck announced that the Phase 3 VICTORIA
study evaluating the efficacy and safety of vericiguat met the primary efficacy
endpoint. Vericiguat reduced the risk of the composite endpoint of heart failure
hospitalization or cardiovascular death in patients with worsening chronic heart
failure with reduced ejection fraction compared to placebo when given in
combination with available heart failure therapies. The results of the VICTORIA
study will be presented at an upcoming medical meeting in 2020.
V114 is an investigational polyvalent conjugate vaccine for the prevention of
pneumococcal disease. In June 2018, Merck initiated the first Phase 3 study in
the adult population for the prevention of invasive pneumococcal disease.
Currently six Phase 3 adult studies are ongoing, including studies in healthy
adults 50 years of age or older, adults with risk factors for pneumococcal
disease, those infected with HIV, and those who are recipients of allogeneic
hematopoietic stem cell transplant. In October 2018, Merck began the first Phase
3 study in the pediatric population. Currently, eight studies are ongoing,
including studies in healthy infants and in children afflicted with sickle cell
disease. V114 has received Breakthrough Therapy designation from the FDA for the
prevention of invasive pneumococcal disease caused by the vaccine serotypes in
pediatric patients (6 weeks to 18 years of age) and in adults.
The Company maintains a number of long-term exploratory and fundamental research
programs in biology and chemistry as well as research programs directed toward
product development. The Company's research and development model is designed to
increase productivity and improve the probability of success by prioritizing the
Company's research and development resources on candidates the Company believes
are capable of providing unambiguous, promotable advantages to patients and
payers and delivering the maximum value of its approved medicines and vaccines
through new indications and new formulations. Merck is pursuing emerging product
opportunities independent of therapeutic area or modality (small molecule,
biologics and vaccines) and is building its biologics capabilities. The Company
is committed to ensuring that externally sourced programs remain an important
component of its pipeline strategy, with a focus on supplementing its internal
research with a licensing and external alliance strategy focused on the entire
spectrum of collaborations from early research to late-stage compounds, as well
as access to new technologies.
The Company's clinical pipeline includes candidates in multiple disease areas,
including cancer, cardiovascular diseases, diabetes and other metabolic
diseases, infectious diseases, neurosciences, pain, respiratory diseases, and
vaccines.

Acquired In-Process Research and Development
In connection with business acquisitions, the Company has recorded the fair
value of in-process research projects which, at the time of acquisition, had not
yet reached technological feasibility. At December 31, 2019, the balance of
IPR&D was $1.0 billion.
The IPR&D projects that remain in development are subject to the inherent risks
and uncertainties in drug development and it is possible that the Company will
not be able to successfully develop and complete the IPR&D programs and
profitably commercialize the underlying product candidates. The time periods to
receive approvals from the FDA and other regulatory agencies are subject to
uncertainty. Significant delays in the approval process, or the Company's
failure to obtain approval at all, would delay or prevent the Company from
realizing revenues from these products. Additionally, if certain of the IPR&D
programs fail or are abandoned during development, then the Company will not
realize the future cash flows it has estimated and recorded as IPR&D as of the
acquisition date. If such

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circumstances were to occur, the Company's future operating results could be
adversely affected and the Company may recognize impairment charges and such
charges could be material.
In 2019, 2018, and 2017 the Company recorded IPR&D impairment charges within
Research and development expenses of $172 million, $152 million and $483
million, respectively (see Note 8 to the consolidated financial statements).
Additional research and development will be required before any of the remaining
programs reach technological feasibility. The costs to complete the research
projects will depend on whether the projects are brought to their final stages
of development and are ultimately submitted to the FDA or other regulatory
agencies for approval.

Acquisitions, Research Collaborations and License Agreements
Merck continues to remain focused on pursuing opportunities that have the
potential to drive both near- and long-term growth. Certain recent transactions
are described below. Merck is actively monitoring the landscape for growth
opportunities that meet the Company's strategic criteria.
In April 2019, Merck acquired Immune Design, a late-stage immunotherapy company
employing next-generation in vivo approaches to enable the body's immune system
to fight disease, for $301 million in cash. The transaction was accounted for as
an acquisition of a business. Merck recognized intangible assets for IPR&D of
$156 million, cash of $83 million and other net assets of $42 million. The
excess of the consideration transferred over the fair value of net assets
acquired of $20 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 July 2019, Merck acquired Peloton, a clinical-stage biopharmaceutical company
focused on the development of novel small molecule therapeutic candidates
targeting hypoxia-inducible factor-2? (HIF-2?) for the treatment of patients
with cancer and other non-oncology diseases. Peloton's lead candidate, MK-6482
(formerly PT2977), is a novel oral HIF-2? inhibitor in late-stage development
for renal cell carcinoma. Merck made an upfront payment of $1.2 billion in cash;
additionally, former Peloton shareholders will be eligible to receive $50
million upon U.S. regulatory approval, $50 million upon first commercial sale in
the United States, and up to $1.05 billion of sales-based milestones. The
transaction was accounted for as an acquisition of an asset. Merck recorded cash
of $157 million, deferred tax liabilities of $52 million, and other net
liabilities of $4 million at the acquisition date and Research and development
expenses of $993 million in 2019 related to the transaction.
In January 2020, Merck acquired ArQule, Inc. (ArQule), a publicly traded
biopharmaceutical company focused on kinase inhibitor discovery and development
for the treatment of patients with cancer and other diseases for $2.7 billion.
ArQule's lead investigational candidate, MK-1026 (formerly ARQ 531), is a novel,
oral Bruton's tyrosine kinase (BTK) inhibitor currently in a Phase 2 dose
expansion study for the treatment of B-cell malignancies. The Company is in the
process of determining the preliminary fair value of assets acquired,
liabilities assumed and total consideration transferred in this transaction,
which will be accounted for as an acquisition of a business.
Capital Expenditures
Capital expenditures were $3.5 billion in 2019, $2.6 billion in 2018 and $1.9
billion in 2017. Expenditures in the United States were $1.9 billion in 2019,
$1.5 billion in 2018 and $1.2 billion in 2017. The increased capital
expenditures in 2019 reflect investment in new capital projects focused
primarily on increasing manufacturing capacity for Merck's key products. As
previously announced, the Company plans to invest more than $19 billion in new
capital projects from 2019-2023.
Depreciation expense was $1.7 billion in 2019, $1.4 billion in 2018 and $1.5
billion in 2017, of which $1.2 billion in 2019, $1.0 billion in 2018 and $1.0
billion in 2017, related to locations in the United States. Total depreciation
expense in 2019 and 2017 included accelerated depreciation of $233 million and
$60 million, respectively, associated with restructuring activities (see Note 5
to the consolidated financial statements).
Analysis of Liquidity and Capital Resources
Merck's strong financial profile enables it to fund research and development,
focus on external alliances, support in-line products and maximize upcoming
launches while providing significant cash returns to shareholders.

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Selected Data
($ in millions)                              2019        2018        2017
Working capital                            $ 5,263     $ 3,669     $ 6,152

Total debt to total liabilities and equity 31.2 % 30.4 % 27.8 % Cash provided by operations to total debt 0.5:1 0.4:1 0.3:1

Cash provided by operating activities was $13.4 billion in 2019 compared with
$10.9 billion in 2018, reflecting stronger operating performance and increased
accounts receivable factoring as discussed below. 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 used in investing activities was $2.6 billion in 2019 compared with cash
provided by investing activities of $4.3 billion in 2018. The change was driven
primarily by lower proceeds from the sales of securities and other investments,
the acquisitions of Antelliq and Peloton in 2019, and higher capital
expenditures, partially offset by lower purchases of securities and other
investments.
Cash used in financing activities was $8.9 billion in 2019 compared with $13.2
billion in 2018. The lower use of cash in financing activities was driven
primarily by proceeds from the issuance of debt and lower purchases of treasury
stock reflecting the accelerated share repurchase (ASR) program in 2018 as
discussed below, as well as lower payments on debt, partially offset by the
repayment of short-term borrowings, higher dividends paid to shareholders and
lower proceeds from the exercise of stock options.
The Company has accounts receivable factoring agreements with financial
institutions in certain countries to sell accounts receivable (see Note 6 to the
consolidated financial statements). The Company factored $2.7 billion and $1.1
billion of accounts receivable in the fourth quarter of 2019 and 2018,
respectively, under these factoring arrangements, which reduced outstanding
accounts receivable. The cash received from the financial institutions is
reported within operating activities in the Consolidated Statement of Cash
Flows. In certain of these factoring arrangements, for ease of administration,
the Company will collect customer payments related to the factored receivables,
which it then remits to the financial institutions. At December 31, 2019, the
Company had collected $256 million on behalf of the financial institutions,
which was remitted to them in January 2020. The net cash flows from these
collections are reported as financing activities in the Consolidated Statement
of Cash Flows.
The Company's contractual obligations as of December 31, 2019 are as follows:
Payments Due by Period
($ in millions)                Total           2020         2021-2022       2023-2024       Thereafter
Purchase obligations (1)   $     3,167     $    1,097     $     1,108     $       421     $        541
Loans payable and current
portion of long-term debt        3,612          3,612               -               -                -
Long-term debt                  22,779              -           4,515           3,058           15,206
Interest related to debt
obligations                     10,021            760           1,372           1,189            6,700
Unrecognized tax benefits
(2)                                 49             49               -               -                -
Transition tax related to
the enactment of the TCJA
(3)                              3,397            390             781           1,181            1,045
Milestone payments related
to collaborations (4)              400            400               -               -                -
Leases (5)                       1,012            254             354             202              202
                           $    44,437     $    6,562     $     8,130     $     6,051     $     23,694


(1)   Includes future inventory purchases the Company has committed to in
      connection with certain divestitures.

(2) As of December 31, 2019, the Company's Consolidated Balance Sheet reflects

liabilities for unrecognized tax benefits, interest and penalties of $1.5

billion, including $49 million reflected as a current liability. Due to the

high degree of uncertainty regarding the timing of future cash outflows of

liabilities for unrecognized tax benefits beyond one year, a reasonable

estimate of the period of cash settlement for years beyond 2020 cannot be

made.

(3) In connection with the enactment of the TCJA, the Company is required to

pay a one-time transition tax, which the Company has elected to pay over a

period of eight years through 2025 as permitted under the TCJA (see Note 15

to the consolidated financial statements).

(4) Reflects payments under collaborative agreements for sales-based milestones

      that were achieved in 2019 (and therefore deemed to be contractual
      obligations) but not paid until January 2020 (see Note 4 to the
      consolidated financial statements).

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

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Purchase obligations are enforceable and legally binding obligations for
purchases of goods and services including minimum inventory contracts, research
and development and advertising. Amounts do not include contingent milestone
payments related to collaborative arrangements or acquisitions as they are not
considered contractual obligations until the successful achievement of
developmental, regulatory approval or commercial milestones. At December 31,
2019, the Company has recognized liabilities for contingent sales-based
milestone payments related to collaborations with AstraZeneca, Eisai and Bayer
where payment remains subject to the achievement of the related sales milestone
aggregating $1.4 billion (see Note 4 to the consolidated financial statements).
Excluded from research and development obligations are potential future funding
commitments of up to approximately $60 million for investments in research
venture capital funds. Loans payable and current portion of long-term debt
reflects $226 million of long-dated notes that are subject to repayment at the
option of the holders. Required funding obligations for 2020 relating to the
Company's pension and other postretirement benefit plans are not expected to be
material. However, the Company currently anticipates contributing approximately
$100 million to its U.S. pension plans, $150 million to its international
pension plans and $15 million to its other postretirement benefit plans during
2020.
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.
In December 2018, the Company exercised a make-whole provision on its $1.25
billion, 5.00% notes due 2019 and repaid this debt.
In November 2017, the Company launched tender offers for certain outstanding
notes and debentures. The Company paid $810 million in aggregate consideration
(applicable purchase price together with accrued interest) to redeem $585
million principal amount of debt that was validly tendered in connection with
the tender offers.
The Company has a $6.0 billion credit facility that matures in June 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.
Effective as of November 3, 2009, the Company executed a full and unconditional
guarantee of the then existing debt of its subsidiary Merck Sharp & Dohme Corp.
(MSD) and MSD executed a full and unconditional guarantee of the then existing
debt of the Company (excluding commercial paper), including for payments of
principal and interest. These guarantees do not extend to debt issued subsequent
to that date.
The Company continues to maintain a conservative financial profile. The Company
places its cash and investments in instruments that meet high credit quality
standards, as specified in its investment policy guidelines. These guidelines
also limit the amount of credit exposure to any one issuer. The Company does not
participate in any off-balance sheet arrangements involving unconsolidated
subsidiaries that provide financing or potentially expose the Company to
unrecorded financial obligations.
In November 2019, Merck's Board of Directors declared a quarterly dividend of
$0.61 per share on the Company's outstanding common stock that was paid in
January 2020. In January 2020, the Board of Directors declared a quarterly
dividend of $0.61 per share on the Company's common stock for the second quarter
of 2020 payable in April 2020.
In October 2018, Merck's Board of Directors authorized purchases of up to $10
billion of Merck's common stock for its treasury. The treasury stock purchase
authorization has no time limit and will be made over time in open-market
transactions, block transactions, on or off an exchange, or in privately
negotiated transactions. The Company spent $4.8 billion to purchase 59 million
shares of its common stock for its treasury during 2019. In addition, the
Company received 7.7 million shares in settlement of ASR agreements as discussed
below. As of December 31, 2019, the Company's remaining share repurchase
authorization was $7.2 billion. The Company purchased $9.1 billion and $4.0
billion of its common stock during 2018 and 2017, respectively, under authorized
share repurchase programs.

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On October 25, 2018, the Company entered into 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. 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.
Financial Instruments Market Risk Disclosures
The Company manages the impact of foreign exchange rate movements and interest
rate movements on its earnings, cash flows and fair values of assets and
liabilities through operational means and through the use of various financial
instruments, including derivative instruments.
A significant portion of the Company's revenues and earnings in foreign
affiliates is exposed to changes in foreign exchange rates. The objectives of
the Company's foreign currency risk management program, as well as its interest
rate risk management activities are discussed below.

Foreign Currency Risk Management
The Company has established revenue hedging, balance sheet risk management, and
net investment hedging programs to protect against volatility of future foreign
currency cash flows and changes in fair value caused by changes in foreign
exchange rates.
The objective of the revenue hedging program is to reduce the variability caused
by changes in foreign exchange rates that would affect the U.S. dollar value of
future cash flows derived from foreign currency denominated sales, primarily the
euro, Japanese yen and Chinese renminbi. To achieve this objective, the Company
will hedge a portion of its forecasted foreign currency denominated third-party
and intercompany distributor entity sales (forecasted sales) that are expected
to occur over its planning cycle, typically no more than two years into the
future. The Company will layer in hedges over time, increasing the portion of
forecasted sales hedged as it gets closer to the expected date of the forecasted
sales. The portion of forecasted sales hedged is based on assessments of
cost-benefit profiles that consider natural offsetting exposures, revenue and
exchange rate volatilities and correlations, and the cost of hedging
instruments. The Company manages its anticipated transaction exposure
principally with purchased local currency put options, forward contracts, and
purchased collar options.
Because Merck principally sells foreign currency in its revenue hedging program,
a uniform weakening of the U.S. dollar would yield the largest overall potential
loss in the market value of these hedge instruments. The market value of Merck's
hedges would have declined by an estimated $456 million and $441 million at
December 31, 2019 and 2018, respectively, from a uniform 10% weakening of the
U.S. dollar. The market value was determined using a foreign exchange option
pricing model and holding all factors except exchange rates constant. Although
not predictive in nature, the Company believes that a 10% threshold reflects
reasonably possible near-term changes in Merck's major foreign currency
exposures relative to the U.S. dollar. The cash flows from these contracts are
reported as operating activities in the Consolidated Statement of Cash Flows.
The Company manages operating activities and net asset positions at each local
subsidiary in order to mitigate the effects of exchange on monetary assets and
liabilities. The Company also uses a balance sheet risk management program to
mitigate the exposure of net monetary assets that are denominated in a currency
other than a subsidiary's functional currency from the effects of volatility in
foreign exchange. In these instances, Merck principally utilizes forward
exchange contracts to offset the effects of exchange on exposures denominated in
developed country currencies, primarily the euro and Japanese yen. For exposures
in developing country currencies, the Company will enter into forward contracts
to partially offset the effects of exchange on exposures when it is deemed
economical to do so based on a cost-benefit analysis that considers the
magnitude of the exposure, the volatility of the exchange rate and the cost of
the hedging instrument. The cash flows from these contracts are reported as
operating activities in the Consolidated Statement of Cash Flows.
A sensitivity analysis to changes in the value of the U.S. dollar on foreign
currency denominated derivatives, investments and monetary assets and
liabilities indicated that if the U.S. dollar uniformly weakened by 10% against

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all currency exposures of the Company at December 31, 2019 and 2018, Income
before taxes would have declined by approximately $110 million and $134 million
in 2019 and 2018, respectively. Because the Company was in a net short (payable)
position relative to its major foreign currencies after consideration of forward
contracts, a uniform weakening of the U.S. dollar will yield the largest overall
potential net loss in earnings due to exchange. This measurement assumes that a
change in one foreign currency relative to the U.S. dollar would not affect
other foreign currencies relative to the U.S. dollar. Although not predictive in
nature, the Company believes that a 10% threshold reflects reasonably possible
near-term changes in Merck's major foreign currency exposures relative to the
U.S. dollar. The cash flows from these contracts are reported as operating
activities in the Consolidated Statement of Cash Flows.
The economy of Argentina was determined to be hyperinflationary in 2018;
consequently, in accordance with U.S. GAAP, the Company began remeasuring its
monetary assets and liabilities for those operations in earnings. The impact to
the Company's results was immaterial.
The Company also uses forward exchange contracts to hedge a portion of its net
investment in foreign operations against movements in exchange rates. The
forward contracts are designated as hedges of the net investment in a foreign
operation. The unrealized gains or losses on these contracts are recorded in
foreign currency translation adjustment within Other Comprehensive Income (Loss)
(OCI), and remain in Accumulated Other Comprehensive Income (Loss) (AOCI) until
either the sale or complete or substantially complete liquidation of the
subsidiary. The Company excludes certain portions of the change in fair value of
its derivative instruments from the assessment of hedge effectiveness (excluded
component). Changes in fair value of the excluded components are recognized in
OCI. The Company recognizes in earnings the initial value of the excluded
component on a straight-line basis over the life of the derivative instrument,
rather than using the mark-to-market approach. The cash flows from these
contracts are reported as investing activities in the Consolidated Statement of
Cash Flows.
Foreign exchange risk is also managed through the use of foreign currency debt.
The Company's senior unsecured euro-denominated notes have been designated as,
and are effective as, economic hedges of the net investment in a foreign
operation. Accordingly, foreign currency transaction gains or losses due to spot
rate fluctuations on the euro-denominated debt instruments are included in
foreign currency translation adjustment within OCI.

Interest Rate Risk Management
The Company may use interest rate swap contracts on certain investing and
borrowing transactions to manage its net exposure to interest rate changes and
to reduce its overall cost of borrowing. The Company does not use leveraged
swaps and, in general, does not leverage any of its investment activities that
would put principal capital at risk.
At December 31, 2019, the Company was a party to 19 pay-floating, receive-fixed
interest rate swap contracts designated as fair value hedges of fixed-rate notes
in which the notional amounts match the amount of the hedged fixed-rate notes as
detailed in the table below.
($ in millions)                                                     2019
                                                                Number of
                                                                 Interest
                                              Par Value of      Rate Swaps       Total Swap
Debt Instrument                                   Debt             Held        Notional Amount
1.85% notes due 2020                         $       1,250              5     $         1,250
3.875% notes due 2021                                1,150              5               1,150
2.40% notes due 2022                                 1,000              4               1,000
2.35% notes due 2022                                 1,250              5               1,250


The interest rate swap contracts are designated hedges of the fair value changes
in the notes attributable to changes in the benchmark London Interbank Offered
Rate (LIBOR) swap rate. The fair value changes in the notes attributable to
changes in the LIBOR swap rate are recorded in interest expense along with the
offsetting fair value changes in the swap contracts. The cash flows from these
contracts are reported as operating activities in the Consolidated Statement of
Cash Flows.
The Company's investment portfolio includes cash equivalents and short-term
investments, the market values of which are not significantly affected by
changes in interest rates. The market value of the Company's medium- to
long-term fixed-rate investments is modestly affected by changes in
U.S. interest rates. Changes in medium- to long-term U.S. interest rates have a
more significant impact on the market value of the Company's fixed-rate
borrowings, which generally have longer maturities. A sensitivity analysis to
measure potential changes in the market value of

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Merck's investments and debt from a change in interest rates indicated that a
one percentage point increase in interest rates at December 31, 2019 and 2018
would have positively affected the net aggregate market value of these
instruments by $2.0 billion and $1.2 billion, respectively. A one percentage
point decrease at December 31, 2019 and 2018 would have negatively affected the
net aggregate market value by $2.2 billion and $1.4 billion, respectively. The
fair value of Merck's debt was determined using pricing models reflecting one
percentage point shifts in the appropriate yield curves. The fair values of
Merck's investments were determined using a combination of pricing and duration
models.
Critical Accounting Policies
The Company's consolidated financial statements are prepared in conformity with
GAAP and, accordingly, include certain amounts that are based on management's
best estimates and judgments. Estimates are used when accounting for amounts
recorded in connection with acquisitions, including initial fair value
determinations of assets and liabilities, primarily IPR&D, other intangible
assets and contingent consideration, as well as subsequent fair value
measurements. Additionally, estimates are used in determining such items as
provisions for sales discounts and returns, depreciable and amortizable lives,
recoverability of inventories, including those produced in preparation for
product launches, amounts recorded for contingencies, environmental liabilities,
accruals for contingent sales-based milestone payments and other reserves,
pension and other postretirement benefit plan assumptions, share-based
compensation assumptions, restructuring costs, impairments of long-lived assets
(including intangible assets and goodwill) and investments, and taxes on income.
Because of the uncertainty inherent in such estimates, actual results may differ
from these estimates. Application of the following accounting policies result in
accounting estimates having the potential for the most significant impact on the
financial statements.
Acquisitions and Dispositions
To determine whether transactions should be accounted for as acquisitions (or
disposals) of assets or businesses, the Company makes certain judgments, which
include assessment of the inputs, processes, and outputs associated with the
acquired set of activities. If the Company determines that substantially all of
the fair value of gross assets included in a transaction is concentrated in a
single asset (or a group of similar assets), the assets would not represent a
business. To be considered a business, the assets in a transaction need to
include an input and a substantive process that together significantly
contribute to the ability to create outputs.
In a business combination, the acquisition method of accounting requires that
the assets acquired and liabilities assumed be recorded as of the date of the
acquisition at their respective fair values with limited exceptions. Assets
acquired and liabilities assumed in a business combination that arise from
contingencies are generally recognized at fair value. If fair value cannot be
determined, the asset or liability is recognized if probable and reasonably
estimable; if these criteria are not met, no asset or liability is recognized.
Fair value is defined as the exchange price that would be received for an asset
or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. Accordingly, the Company may be
required to value assets at fair value measures that do not reflect the
Company's intended use of those assets. Any excess of the purchase price
(consideration transferred) over the estimated fair values of net assets
acquired is recorded as goodwill. Transaction costs and costs to restructure the
acquired company are expensed as incurred. The operating results of the acquired
business are reflected in the Company's consolidated financial statements after
the date of the acquisition. The fair values of intangible assets, including
acquired IPR&D, are determined utilizing information available near the
acquisition date based on expectations and assumptions that are deemed
reasonable by management. Given the considerable judgment involved in
determining fair values, the Company typically obtains assistance from
third-party valuation specialists for significant items. Amounts allocated to
acquired IPR&D are capitalized and accounted for as indefinite-lived intangible
assets, subject to impairment testing until completion or abandonment of the
projects. Upon successful completion of each project, Merck will make a
determination as to the then-useful life of the intangible asset, generally
determined by the period in which the substantial majority of the cash flows are
expected to be generated, and begin amortization. Certain of the Company's
business acquisitions involve the potential for future payment of consideration
that is contingent upon the achievement of performance milestones, including
product development milestones and royalty payments on future product sales. The
fair value of contingent consideration liabilities is determined at the
acquisition date using unobservable inputs. These inputs include the estimated
amount and timing of projected cash flows, the probability of success
(achievement of the contingent event) and the risk-adjusted discount rate used
to present value the probability-weighted cash flows. Subsequent to the
acquisition date, at each reporting period until the contingency is resolved,
the contingent consideration liability is

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remeasured at current fair value with changes (either expense or income)
recorded in earnings. Changes in any of the inputs may result in a significantly
different fair value adjustment.
The judgments made in determining estimated fair values assigned to assets
acquired and liabilities assumed in a business combination, as well as asset
lives, can materially affect the Company's results of operations.
The fair values of identifiable intangible assets related to currently marketed
products and product rights are primarily determined by using an income approach
through which fair value is estimated based on each asset's discounted projected
net cash flows. The Company's estimates of market participant net cash flows
consider historical and projected pricing, margins and expense levels; the
performance of competing products where applicable; relevant industry and
therapeutic area growth drivers and factors; current and expected trends in
technology and product life cycles; the time and investment that will be
required to develop products and technologies; the ability to obtain marketing
and regulatory approvals; the ability to manufacture and commercialize the
products; the extent and timing of potential new product introductions by the
Company's competitors; and the life of each asset's underlying patent, if any.
The net cash flows are then probability-adjusted where appropriate to consider
the uncertainties associated with the underlying assumptions, as well as the
risk profile of the net cash flows utilized in the valuation. The
probability-adjusted future net cash flows of each product are then discounted
to present value utilizing an appropriate discount rate.
The fair values of identifiable intangible assets related to IPR&D are also
determined using an income approach, through which fair value is estimated based
on each asset's probability-adjusted future net cash flows, which reflect the
different stages of development of each product and the associated probability
of successful completion. The net cash flows are then discounted to present
value using an appropriate discount rate.
If the Company determines the transaction will not be accounted for as an
acquisition of a business, the transaction will be accounted for as an asset
acquisition rather than a business combination and, therefore, no goodwill will
be recorded. In an asset acquisition, acquired IPR&D with no alternative future
use is charged to expense and contingent consideration is not recognized at the
acquisition date. In these instances, product development milestones are
recognized upon achievement and sales-based milestones are recognized when the
milestone is deemed probable by the Company of being achieved.
Revenue Recognition
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. For businesses within
the Company's Healthcare Services segment and certain services in the Animal
Health segment, revenue is recognized over time, generally ratably over the
contract term as services are provided. These service revenues are not material.
The nature of the Company's business gives rise to several types of variable
consideration including discounts and returns, which are estimated at the time
of sale generally using the expected value method, although the most likely
amount method is used for prompt pay discounts.
In the United States, sales discounts are issued to customers at the
point-of-sale, through an intermediary wholesaler (known as chargebacks), or in
the form of rebates. Additionally, sales are generally made with a limited right
of return under certain conditions. Revenues are recorded net of provisions for
sales discounts and returns, which are established at the time of sale. In
addition, revenues are recorded net of time value of money discounts if
collection of accounts receivable is expected to be in excess of one year.
The U.S. provision for aggregate customer discounts covers chargebacks and
rebates. Chargebacks are discounts that occur when a contracted customer
purchases through an intermediary wholesaler. The contracted customer generally
purchases product from the wholesaler at its contracted price plus a mark-up.
The wholesaler, in turn, charges

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the Company back for the difference between the price initially paid by the
wholesaler and the contract price paid to the wholesaler by the customer. The
provision for chargebacks is based on expected sell-through levels by the
Company's wholesale customers to contracted customers, as well as estimated
wholesaler inventory levels. Rebates are amounts owed based upon definitive
contractual agreements or legal requirements with private sector and public
sector (Medicaid and Medicare Part D) benefit providers, after the final
dispensing of the product by a pharmacy to a benefit plan participant. The
provision for rebates is based on expected patient usage, as well as inventory
levels in the distribution channel to determine the contractual obligation to
the benefit providers. The Company uses historical customer segment utilization
mix, sales forecasts, changes to product mix and price, inventory levels in the
distribution channel, government pricing calculations and prior payment history
in order to estimate the expected provision. Amounts accrued for aggregate
customer discounts are evaluated on a quarterly basis through comparison of
information provided by the wholesalers, health maintenance organizations,
pharmacy benefit managers, federal and state agencies, and other customers to
the amounts accrued.
The Company continually monitors its provision for aggregate customer discounts.
There were no material adjustments to estimates associated with the aggregate
customer discount provision in 2019, 2018 or 2017.
Summarized information about changes in the aggregate customer discount accrual
related to U.S. sales is as follows:
($ in millions)               2019         2018
Balance January 1          $  2,630     $  2,551
Current provision            11,999       10,837

Adjustments to prior years (230 ) (117 ) Payments

                    (11,963 )    (10,641 )

Balance December 31 $ 2,436 $ 2,630

Accruals for chargebacks are reflected as a direct reduction to accounts
receivable and accruals for rebates as current liabilities. The accrued balances
relative to these provisions included in Accounts receivable and Accrued and
other current liabilities were $233 million and $2.2 billion, respectively, at
December 31, 2019 and were $245 million and $2.4 billion, respectively, at
December 31, 2018.
Outside of the United States, variable consideration in the form of discounts
and rebates are a combination of commercially-driven discounts in highly
competitive product classes, discounts required to gain or maintain
reimbursement, or legislatively mandated rebates. In certain European countries,
legislatively mandated rebates are calculated based on an estimate of the
government's total unbudgeted spending and the Company's specific payback
obligation. Rebates may also be required based on specific product sales
thresholds. The Company applies an estimated factor against its actual invoiced
sales to represent the expected level of future discount or rebate obligations
associated with the sale.
The Company maintains a returns policy that allows its U.S. pharmaceutical
customers to return product within a specified period prior to and subsequent to
the expiration date (generally, three to six months before and 12 months after
product expiration). The estimate of the provision for returns is based upon
historical experience with actual returns. Additionally, the Company considers
factors such as levels of inventory in the distribution channel, product dating
and expiration period, whether products have been discontinued, entrance in the
market of generic competition, changes in formularies or launch of
over-the-counter products, among others. The product returns provision for U.S.
pharmaceutical sales as a percentage of U.S. net pharmaceutical sales was 1.1%
in 2019, 1.6% in 2018 and 2.1% in 2017. Outside of the United States, returns
are only allowed in certain countries on a limited basis.
Merck's payment terms for U.S. pharmaceutical customers are typically 36 days
from receipt of invoice and for U.S. animal health customers are typically 30
days from receipt of invoice; however, certain products, including Keytruda,
have longer payment terms up to 90 days. Outside of the United States, payment
terms are typically 30 days to 90 days, although certain markets have longer
payment terms.
Through its distribution programs with U.S. wholesalers, the Company encourages
wholesalers to align purchases with underlying demand and maintain inventories
below specified levels. The terms of the programs allow the wholesalers to earn
fees upon providing visibility into their inventory levels, as well as by
achieving certain performance parameters such as inventory management, customer
service levels, reducing shortage claims and reducing

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product returns. Information provided through the wholesaler distribution
programs includes items such as sales trends, inventory on-hand, on-order
quantity and product returns.
Wholesalers generally provide only the above-mentioned data to the Company, as
there is no regulatory requirement to report lot level information to
manufacturers, which is the level of information needed to determine the
remaining shelf life and original sale date of inventory. Given current
wholesaler inventory levels, which are generally less than a month, the Company
believes that collection of order lot information across all wholesale customers
would have limited use in estimating sales discounts and returns.
Inventories Produced in Preparation for Product Launches
The Company capitalizes inventories produced in preparation for product launches
sufficient to support estimated initial market demand. Typically, capitalization
of such inventory does not begin until the related product candidates are in
Phase 3 clinical trials and are considered to have a high probability of
regulatory approval. The Company monitors the status of each respective product
within the regulatory approval process; however, the Company generally does not
disclose specific timing for regulatory approval. If the Company is aware of any
specific risks or contingencies other than the normal regulatory approval
process or if there are any specific issues identified during the research
process relating to safety, efficacy, manufacturing, marketing or labeling, the
related inventory would generally not be capitalized. Expiry dates of the
inventory are affected by the stage of completion. The Company manages the
levels of inventory at each stage to optimize the shelf life of the inventory in
relation to anticipated market demand in order to avoid product expiry issues.
For inventories that are capitalized, anticipated future sales and shelf lives
support the realization of the inventory value as the inventory shelf life is
sufficient to meet initial product launch requirements. Inventories produced in
preparation for product launches capitalized at December 31, 2019 and 2018 were
$168 million and $7 million, respectively.
Contingencies and Environmental Liabilities
The Company is involved in various claims and legal proceedings of a nature
considered normal to its business, including product liability, intellectual
property and commercial litigation, as well as certain additional matters
including governmental and environmental matters (see Note 10 to the
consolidated financial statements). The Company records accruals for
contingencies when it is probable that a liability has been incurred and the
amount can be reasonably estimated. These accruals are adjusted periodically as
assessments change or additional information becomes available. For product
liability claims, a portion of the overall accrual is actuarially determined and
considers such factors as past experience, number of claims reported and
estimates of claims incurred but not yet reported. Individually significant
contingent losses are accrued when probable and reasonably estimable.
Legal defense costs expected to be incurred in connection with a loss
contingency are accrued when probable and reasonably estimable. Some of the
significant factors considered in the review of these legal defense reserves are
as follows: the actual costs incurred by the Company; the development of the
Company's legal defense strategy and structure in light of the scope of its
litigation; the number of cases being brought against the Company; the costs and
outcomes of completed trials and the most current information regarding
anticipated timing, progression, and related costs of pre-trial activities and
trials in the associated litigation. The amount of legal defense reserves as of
December 31, 2019 and 2018 of approximately $240 million and $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.
The Company and its subsidiaries are parties to a number of proceedings brought
under the Comprehensive Environmental Response, Compensation and Liability Act,
commonly known as Superfund, and other federal and state equivalents. When a
legitimate claim for contribution is asserted, a liability is initially accrued
based upon the estimated transaction costs to manage the site. Accruals are
adjusted as site investigations, feasibility studies and related cost
assessments of remedial techniques are completed, and as the extent to which
other potentially responsible parties who may be jointly and severally liable
can be expected to contribute is determined.
The Company is also remediating environmental contamination resulting from past
industrial activity at certain of its sites and takes an active role in
identifying and accruing for these costs. In the past, Merck performed a
worldwide survey to assess all sites for potential contamination resulting from
past industrial activities. Where

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assessment indicated that physical investigation was warranted, such
investigation was performed, providing a better evaluation of the need for
remedial action. Where such need was identified, remedial action was then
initiated. As definitive information became available during the course of
investigations and/or remedial efforts at each site, estimates were refined and
accruals were established or adjusted accordingly. These estimates and related
accruals continue to be refined annually.
The Company believes that there are no compliance issues associated with
applicable environmental laws and regulations that would have a material adverse
effect on the Company. Expenditures for remediation and environmental
liabilities were $19 million in 2019 and are estimated at $47 million in the
aggregate for the years 2020 through 2024. In management's opinion, the
liabilities for all environmental matters that are probable and reasonably
estimable have been accrued and totaled $67 million and $71 million at
December 31, 2019 and 2018, respectively. These liabilities are undiscounted, do
not consider potential recoveries from other parties and will be paid out over
the periods of remediation for the applicable sites, which are expected to occur
primarily over the next 15 years. Although it is not possible to predict with
certainty the outcome of these matters, or the ultimate costs of remediation,
management does not believe that any reasonably possible expenditures that may
be incurred in excess of the liabilities accrued should exceed $58 million in
the aggregate. Management also does not believe that these expenditures should
result in a material adverse effect on the Company's financial condition,
results of operations or liquidity for any year.
Share-Based Compensation
The Company expenses all share-based payment awards to employees, including
grants of stock options, over the requisite service period based on the grant
date fair value of the awards. The Company determines the fair value of certain
share-based awards using the Black-Scholes option-pricing model which uses both
historical and current market data to estimate the fair value. This method
incorporates various assumptions such as the risk-free interest rate, expected
volatility, expected dividend yield and expected life of the options. Total
pretax share-based compensation expense was $417 million in 2019, $348 million
in 2018 and $312 million in 2017. At December 31, 2019, there was $603 million
of total pretax unrecognized compensation expense related to nonvested stock
option, restricted stock unit and performance share unit awards which will be
recognized over a weighted average period of 1.9 years. For segment reporting,
share-based compensation costs are unallocated expenses.
Pensions and Other Postretirement Benefit Plans
Net periodic benefit cost for pension plans totaled $137 million in 2019, $195
million in 2018 and $201 million in 2017. Net periodic benefit (credit) for
other postretirement benefit plans was $(49) million in 2019, $(45) million in
2018 and $(60) million in 2017. Pension and other postretirement benefit plan
information for financial reporting purposes is calculated using actuarial
assumptions including a discount rate for plan benefit obligations and an
expected rate of return on plan assets. The changes in net periodic benefit cost
year over year for pension plans are largely attributable to changes in the
discount rate affecting net loss amortization.
The Company reassesses its benefit plan assumptions on a regular basis. For both
the pension and other postretirement benefit plans, the discount rate is
evaluated on measurement dates and modified to reflect the prevailing market
rate of a portfolio of high-quality fixed-income debt instruments that would
provide the future cash flows needed to pay the benefits included in the benefit
obligation as they come due. The discount rates for the Company's U.S. pension
and other postretirement benefit plans ranged from 3.20% to 3.50% at
December 31, 2019, compared with a range of 4.00% to 4.40% at December 31, 2018.
The expected rate of return for both the pension and other postretirement
benefit plans represents the average rate of return to be earned on plan assets
over the period the benefits included in the benefit obligation are to be paid.
In developing the expected rate of return, the Company considers long-term
compound annualized returns of historical market data, current market conditions
and actual returns on the Company's plan assets. Using this reference
information, the Company develops forward-looking return expectations for each
asset category and a weighted-average expected long-term rate of return for a
target portfolio allocated across these investment categories. The expected
portfolio performance reflects the contribution of active management as
appropriate. For 2020, the expected rate of return for the Company's U.S.
pension and other postretirement benefit plans will range from 7.00% to 7.30%,
compared to a range of 7.70% to 8.10% in 2019. The decrease reflects lower
expected asset returns and a modest shift in asset allocation.
The Company has established investment guidelines for its U.S. pension and other
postretirement plans to create an asset allocation that is expected to deliver a
rate of return sufficient to meet the long-term obligation of each plan, given
an acceptable level of risk. The target investment portfolio of the Company's
U.S. pension and other

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postretirement benefit plans is allocated 30% to 45% in U.S. equities, 15% to
30% in international equities, 35% to 45% in fixed-income investments, and up to
5% in cash and other investments. The portfolio's equity weighting is consistent
with the long-term nature of the plans' benefit obligations. The expected annual
standard deviation of returns of the target portfolio, which approximates 10%,
reflects both the equity allocation and the diversification benefits among the
asset classes in which the portfolio invests. For non-U.S. pension plans, the
targeted investment portfolio varies based on the duration of pension
liabilities and local government rules and regulations. Although a significant
percentage of plan assets are invested in U.S. equities, concentration risk is
mitigated through the use of strategies that are diversified within management
guidelines.
Actuarial assumptions are based upon management's best estimates and judgment. A
reasonably possible change of plus (minus) 25 basis points in the discount rate
assumption, with other assumptions held constant, would have had an estimated
$70 million favorable (unfavorable) impact on the Company's net periodic benefit
cost in 2019. A reasonably possible change of plus (minus) 25 basis points in
the expected rate of return assumption, with other assumptions held constant,
would have had an estimated $50 million favorable (unfavorable) impact on
Merck's net periodic benefit cost in 2019. Required funding obligations for 2020
relating to the Company's pension and other postretirement benefit plans are not
expected to be material. The preceding hypothetical changes in the discount rate
and expected rate of return assumptions would not impact the Company's funding
requirements.
Net loss amounts, which reflect experience differentials primarily relating to
differences between expected and actual returns on plan assets as well as the
effects of changes in actuarial assumptions, are recorded as a component of
AOCI. Expected returns for pension plans are based on a calculated
market-related value of assets. Under this methodology, asset gains/losses
resulting from actual returns that differ from the Company's expected returns
are recognized in the market-related value of assets ratably over a five-year
period. Also, net loss amounts in AOCI in excess of certain thresholds are
amortized into net periodic benefit cost over the average remaining service life
of employees.
Restructuring Costs
Restructuring costs have been recorded in connection with restructuring programs
designed to streamline the Company's cost structure. As a result, the Company
has made estimates and judgments regarding its future plans, including future
termination benefits and other exit costs to be incurred when the restructuring
actions take place. When accruing termination costs, the Company will recognize
the amount within a range of costs that is the best estimate within the range.
When no amount within the range is a better estimate than any other amount, the
Company recognizes the minimum amount within the range. In connection with these
actions, management also assesses the recoverability of long-lived assets
employed in the business. In certain instances, asset lives have been shortened
based on changes in the expected useful lives of the affected assets. Severance
and other related costs are reflected within Restructuring costs. Asset-related
charges are reflected within Cost of sales, Selling, general and administrative
expenses and Research and development expenses depending upon the nature of the
asset.
Impairments of Long-Lived Assets
The Company assesses changes in economic, regulatory and legal conditions and
makes assumptions regarding estimated future cash flows in evaluating the value
of the Company's property, plant and equipment, goodwill and other intangible
assets.
The Company periodically evaluates whether current facts or circumstances
indicate that the carrying values of its long-lived assets to be held and used
may not be recoverable. If such circumstances are determined to exist, an
estimate of the undiscounted future cash flows of these assets, or appropriate
asset groupings, is compared to the carrying value to determine whether an
impairment exists. If the asset is determined to be impaired, the loss is
measured based on the difference between the asset's fair value and its carrying
value. If quoted market prices are not available, the Company will estimate fair
value using a discounted value of estimated future cash flows approach.
Goodwill represents the excess of the consideration transferred over the fair
value of net assets of businesses acquired. Goodwill is assigned to reporting
units and evaluated for impairment on at least an annual basis, or more
frequently if impairment indicators exist, by first assessing qualitative
factors to determine whether it is more likely than not that the fair value of a
reporting unit is less than its carrying amount. Some of the factors considered
in the assessment include general macroeconomic conditions, conditions specific
to the industry and market, cost factors which could have a significant effect
on earnings or cash flows, the overall financial performance of the reporting
unit, and whether there have been sustained declines in the Company's share
price. If the Company concludes it is more

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likely than not that the fair value of a reporting unit is less than its
carrying amount, a quantitative fair value test is performed. If the carrying
value of a reporting unit is greater than its fair value, a goodwill impairment
charge will be recorded for the difference (up to the carrying value of
goodwill).
Other acquired intangible assets (excluding IPR&D) are initially recorded at
fair value, assigned an estimated useful life, and amortized primarily on a
straight-line basis over their estimated useful lives. When events or
circumstances warrant a review, the Company will assess recoverability from
future operations using pretax undiscounted cash flows derived from the lowest
appropriate asset groupings. Impairments are recognized in operating results to
the extent that the carrying value of the intangible asset exceeds its fair
value, which is determined based on the net present value of estimated future
cash flows.
IPR&D that the Company acquires in conjunction with the acquisition of a
business represents the fair value assigned to incomplete research projects
which, at the time of acquisition, have not reached technological feasibility.
The amounts are capitalized and accounted for as indefinite-lived intangible
assets, subject to impairment testing until completion or abandonment of the
projects. The Company evaluates IPR&D for impairment at least annually, or more
frequently if impairment indicators exist, by performing a quantitative test
that compares the fair value of the IPR&D intangible asset with its carrying
value. For impairment testing purposes, the Company may combine separately
recorded IPR&D intangible assets into one unit of account based on the relevant
facts and circumstances. Generally, the Company will combine IPR&D intangible
assets for testing purposes if they operate as a single asset and are
essentially inseparable. If the fair value is less than the carrying amount, an
impairment loss is recognized in operating results.
The judgments made in evaluating impairment of long-lived intangibles can
materially affect the Company's results of operations.
Impairments of Investments
The Company reviews its investments in marketable debt securities for
impairments based on the determination of whether the decline in market value of
the investment below the carrying value is other-than-temporary. The Company
considers available evidence in evaluating potential impairments of its
investments in marketable debt securities, including the duration and extent to
which fair value is less than cost. Changes in fair value that are considered
temporary are reported net of tax in OCI. An other-than-temporary impairment has
occurred if the Company does not expect to recover the entire amortized cost
basis of the marketable debt security. If the Company does not intend to sell
the impaired debt security, and it is not more likely than not it will be
required to sell the debt security before the recovery of its amortized cost
basis, the amount of the other-than-temporary impairment recognized in earnings,
recorded in Other (income) expense, net, is limited to the portion attributed to
credit loss. The remaining portion of the other-than-temporary impairment
related to other factors is recognized in OCI.
Investments in publicly traded equity securities are reported at fair value
determined using quoted market prices in active markets for identical assets or
quoted prices for similar assets or other inputs that are observable or can be
corroborated by observable market data. Changes in fair value are included in
Other (income) expense, net. Investments in equity securities without readily
determinable fair values are recorded at cost, plus or minus subsequent
observable price changes in orderly transactions for identical or similar
investments, minus impairments. Such adjustments are recognized in Other
(income) expense, net. Realized gains and losses for equity securities are
included in Other (income) expense, net.
Taxes on Income
The Company's effective tax rate is based on pretax income, statutory tax rates
and tax planning opportunities available in the various jurisdictions in which
the Company operates. An estimated effective tax rate for a year is applied to
the Company's quarterly operating results. In the event that there is a
significant unusual or one-time item recognized, or expected to be recognized,
in the Company's quarterly operating results, the tax attributable to that item
would be separately calculated and recorded at the same time as the unusual or
one-time item. The Company considers the resolution of prior year tax matters to
be such items. Significant judgment is required in determining the Company's tax
provision and in evaluating its tax positions. The recognition and measurement
of a tax position is based on management's best judgment given the facts,
circumstances and information available at the reporting date. The Company
evaluates tax positions to determine whether the benefits of tax positions are
more likely than not of being sustained upon audit based on the technical merits
of the tax position. For tax positions that are more likely than not of being
sustained upon audit, the Company recognizes the largest amount of the benefit
that is greater than 50% likely

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of being realized upon ultimate settlement in the financial statements. For tax
positions that are not more likely than not of being sustained upon audit, the
Company does not recognize any portion of the benefit in the financial
statements. If the more likely than not threshold is not met in the period for
which a tax position is taken, the Company may subsequently recognize the
benefit of that tax position if the tax matter is effectively settled, the
statute of limitations expires, or if the more likely than not threshold is met
in a subsequent period (see Note 15 to the consolidated financial statements).
Tax regulations require items to be included in the tax return at different
times than the items are reflected in the financial statements. Timing
differences create deferred tax assets and liabilities. Deferred tax assets
generally represent items that can be used as a tax deduction or credit in the
tax return in future years for which the Company has already recorded the tax
benefit in the financial statements. The Company establishes valuation
allowances for its deferred tax assets when the amount of expected future
taxable income is not likely to support the use of the deduction or credit.
Deferred tax liabilities generally represent tax expense recognized in the
financial statements for which payment has been deferred or expense for which
the Company has already taken a deduction on the tax return, but has not yet
recognized as expense in the financial statements.
Recently Issued Accounting Standards
For a discussion of recently issued accounting standards, see Note 2 to the
consolidated financial statements.
Cautionary Factors That May Affect Future Results
This report and other written reports and oral statements made from time to time
by the Company may contain so-called "forward-looking statements," all of which
are based on management's current expectations and are subject to risks and
uncertainties which may cause results to differ materially from those set forth
in the statements. One can identify these forward-looking statements by their
use of words such as "anticipates," "expects," "plans," "will," "estimates,"
"forecasts," "projects" and other words of similar meaning, or negative
variations of any of the foregoing. One can also identify them by the fact that
they do not relate strictly to historical or current facts. These statements are
likely to address the Company's growth strategy, financial results, product
development, product approvals, product potential 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 this Form 10-K and Forms 10-Q and 8-K. In
Item 1A. "Risk Factors" of this annual report on Form 10-K the Company discusses
in more detail various important risk factors that could cause actual results to
differ from expected or historic results. The Company notes these factors for
investors as permitted by the Private Securities Litigation Reform Act of 1995.
One should understand that it is not possible to predict or identify all such
factors. Consequently, the reader should not consider any such list to be a
complete statement of all potential risks or uncertainties.

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