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Financial Instruments
 9 Months Ended
Sep. 30, 2023
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Financial Instruments Financial Instruments
Derivative Instruments and Hedging Activities
The Company manages the impact of foreign exchange rate movements and interest rate movements on its earnings, cash flows and fair values of assets and liabilities through operational means and through the use of various financial instruments, including derivative instruments.
A significant portion of the Company’s revenues and earnings in foreign affiliates is exposed to changes in foreign exchange rates. The objectives of and accounting related to the Company’s foreign currency risk management program, as well as its interest rate risk management activities are discussed below.
Foreign Currency Risk Management
The Company has established revenue hedging, balance sheet risk management and net investment hedging programs to protect against volatility of future foreign currency cash flows and changes in fair value caused by 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.
The fair values of these derivative contracts are recorded as either assets (gain positions) or liabilities (loss positions) in the Condensed Consolidated Balance Sheet. Changes in the fair value of derivative contracts are recorded each period in either current earnings or Other comprehensive income (OCI), depending on whether the derivative is designated as part of a hedge transaction and, if so, the type of hedge transaction. For derivatives that are designated as cash flow hedges, the unrealized gains or losses on these contracts are recorded in Accumulated Other Comprehensive Loss (AOCL) and reclassified into Sales when the hedged anticipated revenue is recognized. For those derivatives which are not designated as cash flow hedges, but serve as economic hedges of forecasted sales, unrealized gains or losses are recorded in Sales each period. The cash flows from both designated and non-designated contracts are reported as operating activities in the Condensed Consolidated Statement of Cash Flows. The Company does not enter into derivatives for trading or speculative purposes.
The Company manages operating activities and net asset positions at each local subsidiary in order to mitigate the effects of exchange on monetary assets and liabilities. Monetary assets and liabilities denominated in a currency other than the functional currency of a given subsidiary are remeasured at spot rates in effect on the balance sheet date with the effects of changes in spot rates reported in Other (income) expense, net. The Company also uses a balance sheet risk management program to mitigate the exposure of such assets and liabilities from the effects of volatility in foreign exchange. Merck principally utilizes forward exchange contracts to offset the effects of exchange in developed country currencies, primarily the euro, Japanese yen, British pound, Canadian dollar, Australian dollar and Swiss franc. For exposures in developing country currencies, including the Chinese renminbi, the Company will enter into forward contracts to 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 forward contracts are not designated as hedges and are marked to market through Other (income) expense, net. Accordingly, fair value changes in the forward contracts help mitigate the changes in the value of the remeasured assets and liabilities attributable to changes in foreign currency exchange rates, except to the extent of the spot-forward differences. These differences are not significant due to the short-term nature of the contracts, which typically have average maturities at inception of less than six months. The cash flows from these contracts are reported as operating activities in the Condensed Consolidated Statement of Cash Flows.
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 OCI and remain in AOCL 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 components). Changes in fair value of the excluded components are recognized in OCI. The Company recognizes in earnings the initial value of the excluded components on a straight-line basis over the life of the derivative instrument, rather than using the mark-to-market approach. The cash flows from these contracts are reported as investing activities in the Condensed Consolidated Statement of Cash Flows.
Foreign exchange risk is also managed through the use of foreign currency debt. The Company’s senior unsecured euro-denominated notes have been designated as, and are effective as, economic hedges of the net investment in a foreign operation. Accordingly, foreign currency transaction gains or losses due to spot rate fluctuations on the euro-denominated debt instruments are included in foreign currency translation adjustment within OCI.
The effects of the Company’s net investment hedges on OCI and the Condensed Consolidated Statement of Operations are shown below:
Amount of Pretax (Gain) Loss Recognized in Other Comprehensive Income (1)
Amount of Pretax (Gain) Loss Recognized in Other (income) expense, net for Amounts Excluded from Effectiveness Testing
Three Months Ended September 30,Nine Months Ended September 30,Three Months Ended September 30,Nine Months Ended September 30,
($ in millions)20232022202320222023202220232022
Net Investment Hedging Relationships
Foreign exchange contracts$(1)$(1)$— $(47)$— $— $1 $(2)
Euro-denominated notes(100)(250)(26)(431)— — — — 
(1)    No amounts were reclassified from AOCL into income related to the sale of a subsidiary.
Interest Rate Risk Management
The Company may use interest rate swap contracts on certain investing and borrowing transactions to manage its net exposure to interest rate changes and to reduce its overall cost of borrowing. The Company does not use leveraged swaps and, in general, does not leverage any of its investment activities that would put principal at risk.
At September 30, 2023, the Company was a party to three pay-floating, receive-fixed interest rate swap contracts designated as fair value hedges of a portion of fixed-rate notes as detailed in the table below.
September 30, 2023
($ in millions)
Par Value of Debt
Number of Interest Rate Swaps Held
Total Swap Notional Amount
4.50% notes due 2033
$1,500 3 $750 
The interest rate swap contracts are designated hedges of the fair value changes in the notes attributable to changes in the benchmark Secured Overnight Financing Rate (SOFR) swap rate. The fair value change in the notes attributable to changes in the SOFR swap rate are recorded in interest expense along with the offsetting fair value changes in the swap contracts. In October 2023, the Company entered into an additional interest rate swap with a notional amount of $250 million also related to its 4.50% notes due 2033. The cash flows from these contracts are reported as operating activities in the Condensed Consolidated Statement of Cash Flows.
The table below presents the location of amounts recorded on the Condensed Consolidated Balance Sheet related to cumulative basis adjustments for fair value hedges:
Carrying Amount of Hedged Liabilities
Cumulative Amount of Fair Value Hedging Adjustment Increase (Decrease) Included in the Carrying Amount
($ in millions)
September 30, 2023December 31, 2022September 30, 2023December 31, 2022
Balance Sheet Line Item in which Hedged Item is Included
Long-Term Debt
$743 $— $(7)$— 
Presented in the table below is the fair value of derivatives on a gross basis segregated between those derivatives that are designated as hedging instruments and those that are not designated as hedging instruments:
  September 30, 2023December 31, 2022
  Fair Value of DerivativeU.S. Dollar
Notional		Fair Value of DerivativeU.S. Dollar
Notional
($ in millions)AssetLiabilityAssetLiability
Derivatives Designated as Hedging InstrumentsBalance Sheet Caption
Interest rate swap contracts
Other Noncurrent Liabilities$— $8 $750 $— $— $— 
Foreign exchange contractsOther current assets321 — 8,059 220 — 4,824 
Foreign exchange contractsOther Assets51 — 1,746 27 — 1,609 
Foreign exchange contractsAccrued and other current liabilities— 4 680 — 101 2,691 
Foreign exchange contractsOther Noncurrent Liabilities— 1 178 — 1 91 
  $372 $13 $11,413 $247 $102 $9,215 
Derivatives Not Designated as Hedging InstrumentsBalance Sheet Caption      
Foreign exchange contractsOther current assets$229 $— $8,485 $186 $— $8,540 
Foreign exchange contractsAccrued and other current liabilities— 163 9,910 — 307 10,926 
  $229 $163 $18,395 $186 $307 $19,466 
  $601 $176 $29,808 $433 $409 $28,681 
As noted above, the Company records its derivatives on a gross basis in the Condensed Consolidated Balance Sheet. The Company has master netting agreements with several of its financial institution counterparties (see Concentrations of Credit Risk below). The following table provides information on the Company’s derivative positions subject to these master netting arrangements as if they were presented on a net basis, allowing for the right of offset by counterparty and cash collateral exchanged per the master agreements and related credit support annexes:
 September 30, 2023December 31, 2022
($ in millions)AssetLiabilityAssetLiability
Gross amounts recognized in the condensed consolidated balance sheet$601 $176 $433 $409 
Gross amounts subject to offset in master netting arrangements not offset in the condensed consolidated balance sheet(138)(138)(220)(220)
Cash collateral received/posted(143)— (66)(19)
Net amounts$320 $38 $147 $170 
The table below provides information regarding the location and amount of pretax gains and losses of derivatives designated in fair value or cash flow hedging relationships:
Three Months Ended September 30,Nine Months Ended September 30,
($ in millions)202320222023202220232022202320222023202220232022
Financial Statement Caption in which Effects of Fair Value or Cash Flow Hedges are RecordedSales
Other (income) expense, net (1)
Other comprehensive income (loss)Sales
Other (income) expense, net (1)
Other comprehensive income (loss)
$15,962 $14,959 $126 $429 $(16)$(416)$45,485 $45,453 $388 $1,576 $(148)$(314)
(Gain) loss on fair value hedging relationships:
Interest rate swap contracts
Hedged items— — (7)1 — — — — (7)(13)— — 
Derivatives designated as hedging instruments— — 8 — — — — — 8 4 — — 
Impact of cash flow hedging relationships:
Foreign exchange contracts
Amount of gain recognized in OCI on derivatives
— — — — 247 682 — — — — 375 1,233 
Increase in Sales as a result of AOCL reclassifications
45 253 — — (45)(253)170 491 — — (170)(491)
Interest rate contracts
Amount of gain recognized in Other (income) expense, net on derivatives
— — — (1)— — — — (1)(2)— — 
Amount of (loss) gain recognized in OCI on derivatives
— — — — — (1)— — — — 13 (2)
(1)    Interest expense is a component of Other (income) expense, net.
The table below provides information regarding the income statement effects of derivatives not designated as hedging instruments:
Amount of Derivative Pretax (Gain) Loss Recognized in Income
Three Months Ended September 30,Nine Months Ended September 30,
($ in millions)2023202220232022
Derivatives Not Designated as Hedging InstrumentsIncome Statement Caption
Foreign exchange contracts (1)
Other (income) expense, net$60 $(41)$32 $(77)
Foreign exchange contracts (2)
Sales— (4)(3)(42)
(1)    These derivative contracts primarily mitigate changes in the value of remeasured foreign currency denominated monetary assets and liabilities attributable to changes in foreign currency exchange rates.
(2)    These derivative contracts serve as economic hedges of forecasted transactions.
At September 30, 2023, the Company estimates $269 million of pretax net unrealized gains on derivatives maturing within the next 12 months that hedge foreign currency denominated sales over that same period will be reclassified from AOCL to Sales. The amount ultimately reclassified to Sales may differ as foreign exchange rates change. Realized gains and losses are ultimately determined by actual exchange rates at maturity.
Investments in Debt and Equity Securities
Information on investments in debt and equity securities is as follows:
 September 30, 2023December 31, 2022
 Amortized
Cost		Gross UnrealizedFair
Value		Amortized
Cost		Gross UnrealizedFair
Value
($ in millions)GainsLossesGainsLosses
Commercial paper$168 $— $— $168 $498 $— $— $498 
U.S. government and agency securities67 — — 67 68 — — 68 
Corporate notes and bonds12 — — 12 3 — — 3 
Total debt securities$247 $— $— $247 $569 $— $— $569 
Publicly traded equity securities (1)
1,746 1,284 
Total debt and publicly traded equity securities$1,993 $1,853 
(1)    Unrealized net gains of $61 million and $327 million were recorded in Other (income) expense, net in the third quarter and first nine months of 2023, respectively, on equity securities still held at September 30, 2023. Unrealized net losses of $221 million and $415 million were recorded in Other (income) expense, net in the third quarter and first nine months of 2022, respectively, on equity securities still held at September 30, 2022.
At September 30, 2023 and September 30, 2022, the Company also had $863 million and $705 million, respectively, of equity investments without readily determinable fair values included in Other Assets. The Company records unrealized gains on these equity investments based on favorable observable price changes from transactions involving similar investments of the same investee and records unrealized losses based on unfavorable observable price changes, which are included in Other (income) expense, net. During the first nine months of 2023, the Company recorded unrealized gains of $7 million and unrealized losses of $24 million related to certain of these equity investments still held at September 30, 2023. During the first nine months of 2022, the Company recorded unrealized gains of $21 million and unrealized losses of $12 million related to certain of these equity investments still held at September 30, 2022. Cumulative unrealized gains and cumulative unrealized losses based on observable price changes for investments in equity investments without readily determinable fair values still held at September 30, 2023 were $296 million and $40 million, respectively.
At September 30, 2023 and September 30, 2022, the Company also had $467 million and $655 million, respectively, recorded in Other Assets for equity securities held through ownership interests in investment funds. Losses recorded in Other (income) expense, net relating to these investment funds were $93 million and $141 million for the third quarter of 2023 and 2022, respectively, and were $66 million and $952 million for the first nine months of 2023 and 2022, respectively.
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company uses a fair value hierarchy which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. There are three levels of inputs used to measure fair value with Level 1 having the highest priority and Level 3 having the lowest:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities;
Level 3 - Unobservable inputs that are supported by little or no market activity. Level 3 assets or liabilities are those whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques with significant unobservable inputs, as well as assets or liabilities for which the determination of fair value requires significant judgment or estimation.
If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
Financial assets and liabilities measured at fair value on a recurring basis are summarized below:
Fair Value Measurements UsingFair Value Measurements Using
 Level 1Level 2Level 3TotalLevel 1Level 2Level 3Total
($ in millions)September 30, 2023December 31, 2022
Assets
Investments
Commercial paper$— $168 $— $168 $— $498 $— $498 
Publicly traded equity securities1,306 — — 1,306 1,015 — — 1,015 
 1,306 168 — 1,474 1,015 498 — 1,513 
Other assets (1)
U.S. government and agency securities67 — — 67 68 — — 68 
Corporate notes and bonds12 — — 12 3 — — 3 
Publicly traded equity securities (2)
440 — — 440 269 — — 269 
519 — — 519 340 — — 340 
Derivative assets (3)
Forward exchange contracts— 431 — 431 — 218 — 218 
Purchased currency options— 170 — 170 — 215 — 215 
 — 601 — 601 — 433 — 433 
Total assets$1,825 $769 $— $2,594 $1,355 $931 $— $2,286 
Liabilities
Other liabilities
Contingent consideration$— $— $345 $345 $— $— $456 $456 
Derivative liabilities (3)
Forward exchange contracts— 160 — 160 — 402 — 402 
Written currency options— 8 — 8 — 7 — 7 
Interest rate swaps
— 8 — 8 — — — — 
— 176 — 176 — 409 — 409 
Total liabilities$— $176 $345 $521 $— $409 $456 $865 
(1)    Investments included in other assets are restricted as to use, including for the payment of benefits under employee benefit plans.
(2)    Balance at September 30, 2023 includes securities with a total fair value of $132 million, which are subject to a contractual sale restriction that expires in July 2024.
(3)    The fair value determination of derivatives includes the impact of the credit risk of counterparties to the derivatives and the Company’s own credit risk, the effects of which were not significant.
As of September 30, 2023 and December 31, 2022, Cash and cash equivalents included $7.8 billion and $11.3 billion of cash equivalents, respectively (which would be considered Level 2 in the fair value hierarchy).
Contingent Consideration
Summarized information about the changes in the fair value of liabilities for contingent consideration associated with business combinations is as follows:
($ in millions)20232022
Fair value January 1$456 $777 
Changes in estimated fair value (1)
6 (156)
Payments(117)(119)
Other— (3)
Fair value September 30 (2)
$345 $499 
(1)    Recorded in Cost of sales, Research and development expenses, and Other (income) expense, net. Includes cumulative translation adjustments.
(2)    At September 30, 2023, $255 million of the liabilities relate to the termination of the Sanofi Pasteur MSD joint venture in 2016. As part of the termination, Merck recorded a liability for contingent future royalty payments of 11.5% on net sales of all Merck products that were previously sold by the joint venture through December 31, 2024. The fair value of this liability is determined utilizing the estimated amount and timing of projected cash flows using a risk-adjusted discount rate to present value the cash flows. Balance at September 30, 2023 includes $126 million recorded as a current liability for amounts expected to be paid within the next 12 months.
The payments of contingent consideration in both periods relate to the Sanofi Pasteur MSD liabilities described above.
Other Fair Value Measurements
Some of the Company’s financial instruments, such as cash and cash equivalents, receivables and payables, are reflected in the balance sheet at carrying value, which approximates fair value due to their short-term nature.
The estimated fair value of loans payable and long-term debt (including current portion) at September 30, 2023, was $29.5 billion compared with a carrying value of $34.9 billion and at December 31, 2022, was $26.7 billion compared with a carrying value of $30.7 billion. Fair value was estimated using recent observable market prices and would be considered Level 2 in the fair value hierarchy.
Concentrations of Credit Risk
On an ongoing basis, the Company monitors concentrations of credit risk associated with corporate and government issuers of securities and financial institutions with which it conducts business. Credit exposure limits are established to limit a concentration with any single issuer or institution. Cash and investments are placed in instruments that meet high credit quality standards as specified in the Company’s investment policy guidelines.
The majority of the Company’s accounts receivable arise from product sales in the U.S., Europe and China and are primarily due from drug wholesalers, distributors and retailers, hospitals and government agencies. The Company monitors the financial performance and creditworthiness of its customers so that it can properly assess and respond to changes in their credit profile. The Company also continues to monitor global economic conditions, including the volatility associated with international sovereign economies, and associated impacts on the financial markets and its business.
The Company has accounts receivable factoring agreements with financial institutions in certain countries to sell accounts receivable. The Company factored $3.5 billion and $2.5 billion of accounts receivable as of September 30, 2023 and December 31, 2022, respectively, under these factoring arrangements, which reduced outstanding accounts receivable. The cash received from the financial institutions is reported within operating activities in the Condensed 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, generally within thirty days after receipt. As of September 30, 2023 and December 31, 2022, the Company had collected $39 million and $67 million, respectively, on behalf of the financial institutions, which is reflected as restricted cash in Other current assets and the related obligation to remit the cash within Accrued and other current liabilities. The net cash flows related to these collections are reported as financing activities in the Condensed Consolidated Statement of Cash Flows. The cost of factoring such accounts receivable was de minimis.
Derivative financial instruments are executed under International Swaps and Derivatives Association master agreements. The master agreements with several of the Company’s financial institution counterparties also include credit support annexes. These annexes contain provisions that require collateral to be exchanged depending on the value of the derivative assets and liabilities, the Company’s credit rating, and the credit rating of the counterparty. Cash collateral received by the Company from various counterparties was $143 million and $66 million at September 30, 2023 and December 31, 2022, respectively. The obligation to return such collateral is recorded in Accrued and other current liabilities. Cash collateral advanced by the Company to various counterparties was $19 million at December 31, 2022.