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-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KPly1my06wCH1rSA+lQRdeGL20PmlqUqn/azcnUfQoy2UzFgV5DDOC9XR+QeTKGq lPZvM0p8mVOID2ldxTbvgA== 0000950123-04-009382.txt : 20040806 0000950123-04-009382.hdr.sgml : 20040806 20040806160829 ACCESSION NUMBER: 0000950123-04-009382 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040806 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERCK & CO INC CENTRAL INDEX KEY: 0000064978 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 221109110 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03305 FILM NUMBER: 04958247 BUSINESS ADDRESS: STREET 1: ONE MERCK DR STREET 2: P O BOX 100 CITY: WHITEHOUSE STATION STATE: NJ ZIP: 08889-0100 BUSINESS PHONE: 9084234044 MAIL ADDRESS: STREET 1: ONE MERCK DR STREET 2: PO BOX 100 WS3AB-05 CITY: WHITEHOUSE STATION STATE: NJ ZIP: 08889-0100 10-Q 1 y99716e10vq.htm MERCK & CO., INC. MERCK & CO., INC.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


(Mark One)

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

		For the quarterly period ended June 30, 2004

		OR

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

		For the transition period from to

Commission File No. 1-3305

MERCK & CO., INC.

P. O. Box 100
One Merck Drive
Whitehouse Station, N.J. 08889-0100
(908) 423-1000


Incorporated in New Jersey		I.R.S. Employer Identification
		No. 22-1109110

The number of shares of common stock outstanding as of the close of business on July 30, 2004:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes [X] No [ ]

TABLE OF CONTENTS


Part I — Financial Information
	Item 1. Financial Statements
		INTERIM CONSOLIDATED STATEMENT OF INCOME
		CONSOLIDATED BALANCE SHEET
		INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
		Notes to Consolidated Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 4. Controls and Procedures
PART II — Other Information
	Item 1. Legal Proceedings
	Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 6. Exhibits and Report on Form 8-K
Signatures
EXHIBIT INDEX
PLAN FOR DEFERRED PAYMENT OF DIRECTORS COMPENSATION
MERCK & CO., INC. DEFERRAL PROGRAM
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
CERTIFICATION
CERTIFICATION
CERTIFICATION
CERTIFICATION

Part I - Financial Information

Item 1. Financial Statements

MERCK & CO., INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(Unaudited, $ in millions except per share amounts)


	Three Months						Six Months
	Ended June 30						Ended June 30
	2004			2003			2004			2003
Sales	$	6,021.7		$	5,525.4		$	11,652.6		$	11,096.8

Costs, Expenses and Other
Materials and production		1,131.3			988.5			2,247.1			2,068.6
Marketing and administrative		1,616.2			1,589.9			3,227.6			3,103.9
Research and development		986.0			786.4			1,982.3			1,597.1
Equity income from affiliates		(220.5	)		(187.4	)		(415.2	)		(284.7	)
Other (income) expense, net		69.9			(121.8	)		(170.9	)		(74.0	)

		3,582.9			3,055.6			6,870.9			6,410.9

Income from Continuing Operations Before Taxes		2,438.8			2,469.8			4,781.7			4,685.9
Taxes on Income		670.7			685.3			1,395.0			1,356.5

Income from Continuing Operations		1,768.1			1,784.5			3,386.7			3,329.4
Income from Discontinued Operations, Net of Taxes		—			82.5			—			248.0

Net Income	$	1,768.1		$	1,867.0		$	3,386.7		$	3,577.4

Basic Earnings per Common Share
Continuing Operations	$	.80		$	.80		$	1.52		$	1.48
Discontinued Operations		—			.04			—			.11

Net Income	$	.80		$	.83	*	$	1.52		$	1.60	*

Earnings per Common Share Assuming Dilution
Continuing Operations	$	.79		$	.79		$	1.52		$	1.47
Discontinued Operations		—			.04			—			.11

Net Income	$	.79		$	.83		$	1.52		$	1.58

Dividends Declared per Common Share	$	.37		$	.36		$	.74		$	.72

*Amount does not add as a result of rounding.

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

- 1 -

MERCK & CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 2004 AND DECEMBER 31, 2003
(Unaudited, $ in millions)


	June 30			December 31
	2004			2003
ASSETS
Current Assets
Cash and cash equivalents	$	1,599.8		$	1,201.0
Short-term investments		4,577.3			2,972.0
Accounts receivable		3,888.6			4,023.6
Inventories		2,520.8			2,554.7
Prepaid expenses and taxes		701.9			775.9

Total current assets		13,288.4			11,527.2

Investments		7,205.4			7,941.2
Property, Plant and Equipment, at cost, net of allowance for depreciation of $7,502.4 in 2004 and $7,124.7 in 2003		14,299.3			14,169.0
Goodwill		1,085.7			1,085.4
Other Intangibles, net		769.5			864.0
Other Assets		5,206.3			5,000.7

	$	41,854.6		$	40,587.5

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Loans payable and current portion of long-term debt	$	1,710.8		$	1,700.0
Trade accounts payable		469.9			520.5
Accrued and other current liabilities		3,759.8			3,987.5
Income taxes payable		2,919.2			2,538.9
Dividends payable		821.9			822.7

Total current liabilities		9,681.6			9,569.6

Long-Term Debt		4,894.2			5,096.0

Deferred Income Taxes and Noncurrent Liabilities		6,396.5			6,430.3

Minority Interests		3,914.9			3,915.2

Stockholders’ Equity
Common stock
Authorized - 5,400,000,000 shares
Issued - 2,976,230,393 shares		29.8			29.8
Other paid-in capital		6,899.0			6,956.6
Retained earnings		35,883.8			34,142.0
Accumulated other comprehensive (loss)/income		(49.6	)		65.5

		42,763.0			41,193.9
Less treasury stock, at cost
756,134,851 shares - June 30, 2004
754,466,884 shares - December 31, 2003		25,795.6			25,617.5

Total stockholders’ equity		16,967.4			15,576.4

	$	41,854.6		$	40,587.5

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

- 2 -

MERCK & CO., INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(Unaudited, $ in millions)


	Six Months
	Ended June 30
	2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES OF CONTINUING OPERATIONS
Net Income	$	3,386.7		$	3,577.4
Less: Income from discontinued operations, net of tax		—			248.0

Income from continuing operations		3,386.7			3,329.4
Adjustments to reconcile income from continuing operations to net cash provided by operating activities from continuing operations:
Depreciation and amortization		700.5			666.9
Deferred income taxes		188.0			229.4
Other		(67.0	)		(185.9	)
Net changes in assets and liabilities		(31.9	)		(784.3	)

NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS		4,176.3			3,255.5

CASH FLOWS FROM INVESTING ACTIVITIES OF CONTINUING OPERATIONS
Capital expenditures		(762.1	)		(903.1	)
Purchase of securities, subsidiaries and other investments		(26,708.0	)		(27,771.4	)
Proceeds from sale of securities, subsidiaries and other investments		25,869.3			26,563.0
Banyu acquisition		(10.1	)		(1,389.5	)
Other		(1.5	)		(4.1	)

NET CASH USED BY INVESTING ACTIVITIES OF CONTINUING OPERATIONS		(1,612.4	)		(3,505.1	)

CASH FLOWS FROM FINANCING ACTIVITIES OF CONTINUING OPERATIONS
Net change in short-term borrowings		(548.1	)		469.8
Proceeds from issuance of debt		405.1			1,263.4
Payments on debt		(4.0	)		(146.3	)
Purchase of treasury stock		(444.0	)		(772.5	)
Dividends paid to stockholders		(1,645.8	)		(1,616.4	)
Other		75.9			180.2

NET CASH USED BY FINANCING ACTIVITIES OF CONTINUING OPERATIONS		(2,160.9	)		(621.8	)

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS		(4.2	)		101.0

NET CASH PROVIDED BY DISCONTINUED OPERATIONS		—			192.1

NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS		398.8			(578.3	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		1,201.0			2,243.0

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	1,599.8		$	1,664.7

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

Notes to Consolidated Financial Statements

1. The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and disclosures required by accounting principles generally accepted in the United States for complete consolidated financial statements are not included herein. The interim statements should be read in conjunction with the financial statements and notes thereto included in the Company’s latest Annual Report on Form 10-K.

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

Certain reclassifications have been made to prior year amounts to conform with current year presentation.

- 3 -

Notes to Consolidated Financial Statements (continued)

In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). FIN 46 requires a variable interest entity (VIE) to be consolidated when a company is subject to the majority of the risk of loss from the VIE’s activities or is entitled to receive the majority of the entity’s residual returns, or both. In December 2003, the FASB issued a revision to FIN 46 (FIN 46R) which partially delayed the effective date of the interpretation to March 31, 2004 and added additional scope exceptions. Adoption of FIN 46R did not have a material impact on the Company’s financial position or results of operations.

2. In 2004, as part of an ongoing compensation review, the Company made certain changes to its stock-based compensation programs. Under the new approach, the Company began granting performance share units (PSUs) and restricted stock units (RSUs), in addition to stock options, to certain management level employees. The financial value of individual stock-based incentive grants under the new approach is designed to be equivalent to the prior approach, only the mix of stock vehicles has changed. Both PSU and RSU payouts will be in shares of Company stock after the end of a three-year period, subject to the terms applicable to such awards. Additionally, PSU payouts will be contingent on the Company achieving certain earnings per share related targets.

Employee stock-based compensation is recognized using the intrinsic value method. Generally, employee stock options are granted to purchase shares of Company stock at the fair market value at the time of grant. Accordingly, no compensation expense is recognized for the Company’s stock-based compensation programs other than for its employee performance-based awards (including PSUs), RSUs and options granted to employees of certain equity method investees.

Option grants beginning in 2002 generally vest ratably over three years, while grants prior to 2002 generally vest after five years. Prior to January 1, 2004, pro forma compensation expense for options with graded vesting terms has been calculated using the Black-Scholes model based on a single-option valuation approach using the straight-line method of amortization. In January 2004, the Company revised the assumptions utilized by the Black-Scholes model in determining pro forma compensation expense based on historical data, such that the expense is determined using separate expected term assumptions for each vesting tranche. As a result, beginning in January 2004, the Company has calculated pro forma compensation expense for any stock options granted since that time using the accelerated amortization method prescribed in FASB Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans.

The effect on net income and earnings per common share if the Company had applied the fair value method for recognizing employee stock-based compensation is as follows:


	($ in millions)
	Three Months						Six Months
	Ended June 30						Ended June 30
	2004			2003			2004			2003
Net income, as reported	$	1,768.1		$	1,867.0		$	3,386.7		$	3,577.4
Compensation expense, net of tax:
Reported		5.9			1.9			10.3			2.6
Fair value method		(122.5	)		(125.4	)		(239.5	)		(243.2	)

Pro forma net income	$	1,651.5		$	1,743.5		$	3,157.5		$	3,336.8

Earnings per common share from continuing operations:
Assuming dilution – as reported	$	.79		$	.79		$	1.52		$	1.47
Assuming dilution – pro forma	$	.74		$	.74		$	1.41		$	1.38
Earnings per common share:
Basic – as reported	$	.80		$	.83		$	1.52		$	1.60
Basic – pro forma	$	.74		$	.78		$	1.42		$	1.49
Assuming dilution – as reported	$	.79		$	.83		$	1.52		$	1.58
Assuming dilution – pro forma	$	.74		$	.77		$	1.41		$	1.48

- 4 -

Notes to Consolidated Financial Statements (continued)

3. In February, Merck and H. Lundbeck A/S (Lundbeck) entered into an agreement for the exclusive U.S. development and commercialization of gaboxadol, a compound currently in Phase III development for the treatment of sleep disorders. Under the terms of the agreement, Merck made an initial payment of $70.0 million, recorded as Research and development expense in the first quarter and may pay up to $200.0 million in additional milestone payments in the future. Merck and Lundbeck will jointly complete the ongoing Phase III clinical program, with Merck funding the majority of the remaining development activities. In June, Merck and Lundbeck announced an extension of their agreement for the exclusive development and commercialization of gaboxadol to Japan.

4. In March, the Company acquired Aton Pharma, Inc. (Aton), a privately held biotechnology company focusing on the development of novel treatments for cancer and other serious diseases. Aton’s clinical pipeline of histone deacetylase inhibitors represents a class of anti-tumor agents with potential for efficacy based on a novel mechanism of action. Aton’s lead product candidate, suberoylanilide hydroxamic acid, known as SAHA, has been extensively studied in Phase I clinical trials and is currently in Phase II clinical trials for the treatment of cutaneous T-cell lymphoma. Consideration for the acquisition consisted of an upfront payment and may include contingent payments based upon the regulatory filing, approval and sale of products. In connection with the transaction, the Company recorded a charge of $125.5 million for acquired research associated with products in development for which, at the acquisition date, technological feasibility had not been established and no alternative future use existed. This charge was recorded in Research and development expense in the first quarter and was determined based upon the present value of projected future cash flows utilizing an income approach reflecting the appropriate risk-adjusted discount rate based on the product candidate’s stage of completion and its probability of technical and marketing success. The remaining net assets acquired in this transaction were not material. Because Aton was a development stage company that had not commenced its planned principal operations, the transaction was accounted for as an acquisition of assets rather than as a business combination and, therefore, goodwill was not recorded. Aton’s results of operations have been included with the Company’s since the acquisition date.

5. In March, Merck completed the sale of its 50-percent equity stake in Johnson & Johnson/MSD Europe, a non-prescription pharmaceuticals joint venture, to Johnson & Johnson for $244.0 million and recorded a $176.8 million gain as Other (income) expense, net in the first quarter. In addition to the sales proceeds, Merck will continue to benefit through royalties on certain products. Merck has also regained the rights to potential future products that switch from prescription to over-the-counter status in Europe. Johnson & Johnson/Merck Consumer Pharmaceuticals Co., a 50/50 joint venture between Johnson & Johnson and Merck that operates in the United States and Canada, is unaffected by this transaction.

6. In April, Merck and Bristol-Myers Squibb Company entered into a global collaborative agreement for muraglitazar, Bristol-Myers Squibb’s dual PPAR (peroxisome proliferator-activated receptor) agonist, currently in Phase III clinical development for use in treating both blood glucose and lipid abnormalities in patients with type 2 diabetes. Under the terms of the agreement, Bristol-Myers Squibb received a $100.0 million upfront payment and may receive up to $275.0 million in additional payments based upon the achievement of certain regulatory milestones. The Company recorded the upfront payment as Research and development expense in the second quarter. The companies will jointly develop the clinical and marketing strategy for muraglitazar and share equally in future development and commercialization costs.

7. In August 2003, Merck completed the spin-off of Medco Health Solutions, Inc. (Medco Health). Following the spin-off, the Company’s prior period Consolidated Statements of Income and Cash Flows and related disclosures have been restated to present the results of Medco Health separately as discontinued operations.

Summarized financial information for discontinued operations is as follows:


	($ in millions)
	Three Months		Six Months
	Ended June 30, 2003		Ended June 30, 2003
Total net revenues	$	7,755.8	$	15,572.9
Income before taxes		127.0		374.8
Taxes on income		44.5		126.8
Income, net of taxes		82.5		248.0

- 5 -

Notes to Consolidated Financial Statements (continued)

8. In 2003, the Company announced the reduction of 4,400 positions worldwide as part of an effort to fundamentally lower its cost structure. Approximately 4,000 positions had been eliminated as of June 30, 2004 and the program is expected to be completed by the end of 2004. For the three months ended June 30, 2004, the Company recorded restructuring costs of $20.5 million, of which $18.1 million related to employee severance benefits and $2.4 million related to termination charges on the Company’s pension and other postretirement benefit plans (see Note 13). For the six months ended June 30, 2004, the Company recorded restructuring costs of $54.6 million, of which $44.6 million related to employee severance benefits, $8.6 million related to termination charges on the Company’s pension and other postretirement benefit plans (see Note 13) and $1.4 million related to a modification in the terms of certain employees’ stock option grants. In the fourth quarter of 2003, the Company recorded restructuring costs of $194.6 million, of which $101.8 million related to employee severance benefits, $86.0 million related to curtailment, settlement and termination charges on the Company’s pension and other postretirement benefit plans and $6.8 million related to a modification in the terms of certain employees’ stock option grants. All restructuring costs were recorded in Marketing and administrative expense. Additional costs are expected to be incurred as the program is completed by the end of 2004.

A summary of the employee severance liability is as follows:


	($ in millions)
2003 expense	$	101.8
2003 payments		(23.5	)

Accrued balance as of December 31, 2003		78.3
Six months-to-date expense		44.6
Six months-to-date payments		(63.1	)

Accrued balance as of June 30, 2004	$	59.8

9. Inventories consisted of:


	($ in millions)
	June 30		December 31
	2004		2003
Finished goods	$	526.7	$	552.5
Raw materials and work in process		2,227.6		2,309.8
Supplies		94.2		90.5

Total (approximates current cost)		2,848.5		2,952.8
Reduction to LIFO cost		—		—

	$	2,848.5	$	2,952.8

Recognized as:
Inventories	$	2,520.8	$	2,554.7
Other assets		327.7		398.1

Amounts recognized as Other assets consist of inventories held in preparation for product launches not expected to be sold within one year.

10. In the first quarter of 2004, the Company issued $350.0 million of 2.5% three-year notes and $50.0 million of variable rate notes due in 2044 that are subject to repayment at the option of the holders on an annual basis. The Company also entered into an interest rate swap contract that effectively converts the 2.5% fixed rate notes to floating rate instruments. The interest rate swap is designated as a hedge 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 are fully offset in interest expense by the fair value changes in the swap contract.

11. 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 additional matters such as antitrust actions.

- 6 -

Notes to Consolidated Financial Statements (continued)

As previously disclosed, beginning in 1993, the Company was named in a number of antitrust suits, certain of which were certified as class actions, instituted by most of the nation’s retail pharmacies and consumers in several states. In 1994, these actions, except for those pending in state courts, were consolidated for pre-trial purposes in the federal court in Chicago, Illinois. In 1996, the Company and several other defendants settled the federal class action, which represented the single largest group of claims. Since that time, the Company has settled substantially all of the remaining cases on satisfactory terms. The Company has not engaged in any conspiracy and no admission of wrongdoing was made nor was included in any settlement agreements. While it is not feasible to predict the final outcome of the few remaining cases, in the opinion of the Company, these proceedings should not ultimately result in any liability which would have a material adverse effect on the Company’s financial position, results of operations or liquidity.

As previously disclosed, the Company anticipates that one or more of the lawsuits alleging personal injuries related to Vioxx may go to trial in the second half of 2004. The Company believes that these lawsuits are without merit and will vigorously defend against them. However, litigation is inherently subject to uncertainties and no assurance can be given on the outcome of any given trial. A series of highly unfavorable outcomes could have a material adverse effect on the Company’s financial position, liquidity and results of operations.

As previously disclosed, the Company is a party in claims brought under the Consumer Protection Act of 1987 in the United Kingdom, which allege that certain children suffer from a variety of conditions as a result of being vaccinated with various bivalent vaccines for measles and rubella and/or trivalent vaccines for measles, mumps and rubella, including the Company’s M-M-R II. In early September 2003, the Legal Services Commission announced its decision to withdraw public funding of the litigation brought by the claimants. This decision was confirmed on appeal by the Funding Review Committee on September 30, 2003. The claimants’ application for judicial review of the decision to withdraw public funding has been dismissed. The lead claimants have decided not to apply to the Court of Appeal for permission to appeal that decision. The April 2004 trial date has been vacated and each claimant had been ordered to indicate by May 14 whether he or she intended to discontinue or proceed with their claim. The claimants have recently been given until October 22 to state their intentions. The Company believes that these lawsuits are without merit and will vigorously defend against them.

As previously disclosed, the Company is also a party to individual and class action product liability lawsuits and claims in the United States involving pediatric vaccines (i.e., hepatitis B vaccine and haemophilus influenza type b vaccine) that contained thimerosal, a preservative used in vaccines. Other defendants include vaccine manufacturers who produced pediatric vaccines containing thimerosal as well as manufacturers of thimerosal. In these actions, the plaintiffs allege, among other things, that they have suffered neurological and other injuries as a result of having thimerosal introduced into their developing bodies. The Company has been successful in having many of these cases either dismissed or stayed on the ground that the National Vaccine Injury Compensation Program (NVICP) prohibits any person from filing or maintaining a civil action seeking damages against a vaccine manufacturer for vaccine-related injuries unless a petition is first filed in the United States Court of Federal Claims. A number of similar cases (M-M-R II alone and/or thimerosal-containing vaccines) have been filed in the United States Court of Federal Claims under the NVICP for a determination first on general causation issues. The Company believes that these lawsuits and claims are without merit and will vigorously defend against them in the proceedings in which it is a party.

As previously disclosed, a number of purported class action lawsuits have been filed by several individual shareholders in the United States District Court for the Eastern District of Louisiana naming as defendants the Company and several current or former officers of the Company, and alleging that the defendants made false and misleading statements regarding the Company’s drug Vioxx in violation of the federal securities laws. The plaintiffs request certification of a class of purchasers of the Company’s common stock between May 22, 1999 and October 22, 2003, and seek unspecified compensatory damages and the costs of suit, including attorney fees. The Company believes that these lawsuits are without merit and will vigorously defend against them.

As previously disclosed, in March 2004, two shareholder derivative actions were filed in federal court in New Orleans naming the Company and certain members of the Board (past and present), together with certain executive officers, as defendants. The complaints arise out of substantially the same factual allegations that are made in the Vioxx-related federal securities putative class actions filed against the Company, which principally allege that the Company made false and misleading statements regarding Vioxx. The derivative suits, which are purportedly brought to assert rights of the Company, assert claims against the Board members and officers for breach of fiduciary duty, waste of corporate assets and unjust enrichment. The court has consolidated the shareholder derivative actions with the securities actions. The Company believes that the lawsuits are without merit.

- 7 -

Notes to Consolidated Financial Statements (continued)

As previously disclosed, the Company has received a subpoena from the U.S. Department of Justice in connection with its investigation of the Company’s marketing and selling activities. The Company has also reported that it has received a Civil Investigative Demand from the Attorney General of Texas regarding the Company’s marketing and selling activities relating to Texas. In April 2004, the Company received a subpoena from the office of the Inspector General for the District of Columbia in connection with an investigation of the Company’s interactions with physicians in the District of Columbia, Maryland, and Virginia. The Company is cooperating with all of these investigations. The Company cannot predict the outcome of these investigations, however, it is possible that highly unfavorable outcomes could have a material adverse effect on the Company’s financial position, liquidity and results of operations. In addition, from time to time, other federal or state regulators may seek information about practices in the pharmaceutical industry in inquiries other than the investigations discussed in this paragraph. It is not feasible to predict the outcome of any such inquiries.

As previously disclosed, on July 6, 2004, the United States District Court for the District of New Jersey granted a motion by the Company, Medco Health Solutions, Inc. (“Medco Health”) and certain officers and directors to dismiss a purported class action complaint involving claims related to the Company’s revenue recognition practice for retail co-payments paid by individuals to whom Medco Health provides pharmaceutical benefits as well as other allegations. The complaint was dismissed with prejudice. The Court’s decision is subject to appeal. The Company is awaiting a decision on a motion before the same Court to dismiss a related shareholder derivative action.

Prior to the spin-off of Medco Health, as previously disclosed, the Company and Medco Health agreed to settle, on a class action basis, a number of lawsuits asserting violations of the Employee Retirement Income Security Act (“ERISA”). Medco Health and the Company agreed to the settlement in order to avoid the significant cost and distraction of protracted litigation. By order dated May 25, 2004, the United States District Court for the Southern District of New York certified a class action, determined that the settlement was fair, reasonable, and adequate, and gave final approval to the settlement agreement among the Company, Medco Health and Class Counsel. Under the settlement, the Company and Medco Health have agreed to pay a total of $42.5 million, and Medco Health has agreed to modify certain business practices or to continue certain specified business practices for a period of five years. The financial compensation is intended to benefit members of the settlement class, which includes ERISA plans for which Medco Health administered a pharmacy benefit at any time between December 17, 1994 and the date of final approval.

The settlement becomes final only if and when all appeals have been resolved. Two notices of appeal have been filed. Certain class member plans have indicated that they will not participate in the settlement. Currently, cases initiated by three such plans and two individuals remain pending in the Southern District of New York. Plaintiffs in these cases have asserted claims that are the same as or similar to the claims that had been asserted by settling class members. The Company, along with Medco Health, is a named defendant in these cases.

At the time of the spin-off of Medco Health, Medco Health assumed substantially all of the liability exposure for the matters discussed in the foregoing two paragraphs. The Company believes that these cases, which are being defended by Medco Health, are without merit.

There are various other legal proceedings, principally product liability and intellectual property suits involving the Company, which are pending but not discussed in this report. While it is not feasible to predict the outcome of these proceedings, in the opinion of the Company, such proceedings are either adequately covered by insurance or, if not so covered, should not ultimately result in any liability that would have a material adverse effect on the financial position, liquidity or results of operations of the Company.

12. As previously disclosed, the IRS has substantially completed its examination of the Company’s tax returns for the years 1993 to 1996 and on April 28, 2004 issued a preliminary notice of deficiency with respect to a partnership transaction entered into in 1993. Specifically, the IRS is proposing to disallow certain royalty and other expenses claimed as deductions on the 1993-1996 tax returns of the Company. The Company anticipates receiving a similar notice for 1997-1999, shortly. If the IRS ultimately prevails in its positions, the Company’s income tax due for the years 1993-1999 would increase by approximately $970 million plus interest to date of approximately $490 million. The IRS will likely make similar claims for years subsequent to 1999 in future audits with respect to this transaction. The potential disallowance for these later years, computed on a similar basis to the 1993-1999 disallowances, would be approximately $540 million plus interest to date of approximately $40 million. The IRS has proposed penalties on the Company with respect to all periods that have been examined and the Company anticipates the IRS would seek to impose penalties on all other periods.

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Notes to Consolidated Financial Statements (continued)

The Company vigorously disagrees with the proposed adjustments and intends to aggressively contest this matter through applicable IRS and judicial procedures, as appropriate. Although the final resolution of the proposed adjustments is uncertain and involves unsettled areas of the law, based on currently available information, the Company has provided for the best estimate of the probable tax liability for this matter. While the resolution of the issue may result in tax liabilities which are significantly higher or lower than the reserves established for this matter, management currently believes that the resolution will not have a material effect on the Company’s financial position or liquidity. However, an unfavorable resolution could have a material effect on the Company’s results of operations or cash flows in the quarter in which an adjustment is recorded or the tax is due or paid.

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


	($ in millions)
	Three Months						Six Months
	Ended June 30						Ended June 30
	2004			2003			2004			2003
Service cost	$	82.0		$	70.4		$	152.6		$	129.1
Interest cost		80.0			70.6			143.9			129.2
Expected return on plan assets		(100.7	)		(93.2	)		(181.6	)		(169.5	)
Net amortization		30.1			30.5			60.0			57.9
Termination benefits		1.6			—			7.1			—

	$	93.0		$	78.3		$	182.0		$	146.7

The Company provides medical, dental and life insurance benefits, principally to its eligible U.S. retirees and similar benefits to their dependants, through its other postretirement benefits plans. The net cost of such plans consisted of the following components:


	($ in millions)
	Three Months						Six Months
	Ended June 30						Ended June 30
	2004			2003			2004			2003
Service cost	$	14.9		$	17.5		$	40.8		$	34.6
Interest cost		18.3			23.3			50.5			45.9
Expected return on plan assets		(15.3	)		(16.1	)		(38.8	)		(31.6	)
Net amortization		4.6			7.2			14.4			14.2
Curtailments		(12.3	)		(3.6	)		(12.3	)		(3.6	)
Termination benefits		0.8			—			1.5			—

	$	11.0		$	28.3		$	56.1		$	59.5

During the second quarter 2004, in accordance with FASB Staff Position No. 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act), the Company began accounting for the effect of the federal subsidy under the Act, which reduced the benefit obligation of certain of its other postretirement benefit plans by $168.4 million. The service cost, interest cost and net amortization components of net postretirement benefit cost were reduced by $3.9 million, $5.2 million and $6.3 million, respectively, for the three and six month periods ended June 30, 2004. While the Company is recognizing the subsidy in accordance with current accounting requirements, it will continue to evaluate the Act and regulations that follow to determine the optimal approach to incorporating the impact of the Act.

The Company changed participant contributions and the service recognized for eligibility for certain of its other postretirement benefit plans. These amendments generated curtailment gains of $12.3 million and $3.6 million for the three and six month periods ended June 30, 2004 and 2003, respectively.

The Company recorded termination charges for the three and six month periods ended June 30, 2004 of $1.6 million and $7.1 million, respectively, on its pension plans and $0.8 million and $1.5 million, respectively, on its other postretirement benefit plans related to expanded eligibility for certain employees under the restructuring action (see Note 8).

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Notes to Consolidated Financial Statements (continued)

14. Other (income) expense, net, consisted of:


	($ in millions)
	Three Month						Six Months
	Ended June 30						Ended June 30
	2004			2003			2004			2003
Interest income	$	(68.5	)	$	(82.2	)	$	(134.2	)	$	(169.6	)
Interest expense		71.6			94.6			144.4			189.8
Exchange losses/(gains)		14.9			(16.3	)		7.1			(23.4	)
Minority interests		36.8			40.6			76.4			92.4
Amortization of other intangibles		37.2			36.9			74.5			68.2
Other, net		(22.1	)		(195.4	)		(339.1	)		(231.4	)

	$	69.9		$	(121.8	)	$	(170.9	)	$	(74.0	)

Minority interests include third parties’ share of exchange gains and losses arising from translation of the financial statements into U.S. dollars.

The change in Other, net for the three and six months ended June 30, 2004 reflects lower realized net gains on the Company’s investment portfolios compared with the respective periods ended June 30, 2003. In addition, the six month period ended June 30, 2004 reflects the gain on the divestiture of Merck’s 50-percent equity stake in Johnson & Johnson/MSD Europe.

Interest paid for the six month periods ended June 30, 2004 and 2003 was $140.5 million and $175.8 million, respectively.

15. The weighted average common shares used in the computations of basic earnings per common share and earnings per common share assuming dilution (shares in millions) are as follows:


	Three Months				Six Months
	Ended June 30				Ended June 30
	2004		2003		2004		2003
Average common shares outstanding		2,221.4		2,241.4		2,221.9		2,242.8
Common shares issuable⁽¹⁾		8.7		19.7		9.3		18.8

Average common shares outstanding assuming dilution		2,230.1		2,261.1		2,231.2		2,261.6

⁽¹⁾ Issuable primarily under stock-based compensation programs, including unvested PSUs and RSUs.

16. Comprehensive income for the three months ended June 30, 2004 and 2003, representing all changes in stockholders’ equity during the period other than changes resulting from the Company’s stock, was $1,638.1 million and $1,804.6 million, respectively. Comprehensive income for the six months ended June 30, 2004 and 2003 was $3,271.6 million and $3,504.8 million, respectively.

17. The Company’s operations are principally managed on a products basis. The Merck Pharmaceutical segment includes products marketed either directly or through joint ventures. These products consist of therapeutic and preventive agents, sold by prescription, for the treatment of human disorders. All Other includes non-reportable human and animal health segments.

Revenues and profits for these segments are as follows:


	($ in millions)
	Three Months				Six Months
	Ended June 30				Ended June 30
	2004		2003		2004		2003
Segment revenues:
Merck Pharmaceutical	$	5,703.0	$	5,200.5	$	10,994.5	$	10,431.6
All Other		265.9		273.1		542.2		558.3

	$	5,968.9	$	5,473.6	$	11,536.7	$	10,989.9

Segment profits:
Merck Pharmaceutical	$	3,773.8	$	3,321.5	$	7,178.5	$	6,648.2
All Other		255.0		262.7		521.0		515.8

	$	4,028.8	$	3,584.2	$	7,699.5	$	7,164.0

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Notes to Consolidated Financial Statements (continued)

Segment profits are comprised of segment revenues less certain elements of materials and production costs and operating expenses, including components of equity income from affiliates and depreciation and amortization expenses. For internal management reporting presented to the chief operating decision maker, the Company does not allocate the vast majority of indirect production costs, research and development expenses and general and administrative expenses, as well as 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.

A reconciliation of segment profits to total income from continuing operations before taxes is as follows:


	($ in millions)
	Three Months						Six Months
	Ended June 30						Ended June 30
	2004			2003			2004			2003
Segment profits	$	4,028.8		$	3,584.2		$	7,699.5		$	7,164.0
Other profits		(14.9	)		26.3			24.6			66.1
Adjustments		117.9			106.8			233.7			206.4
Unallocated:
Interest income		68.5			82.2			134.2			169.6
Interest expense		(71.6	)		(94.6	)		(144.4	)		(189.8	)
Equity income from affiliates		17.6			30.7			60.0			28.9
Depreciation and amortization		(314.1	)		(294.5	)		(624.0	)		(577.0	)
Research and development		(986.0	)		(786.4	)		(1,982.3	)		(1,597.1	)
Other expenses, net		(407.4	)		(184.9	)		(619.6	)		(585.2	)

	$	2,438.8		$	2,469.8		$	4,781.7		$	4,685.9

Other profits are primarily comprised of miscellaneous corporate profits as well as operating profits related to divested products or businesses and other supply sales. Adjustments represent the elimination of the effect of double counting certain items of income and expense. Equity income from affiliates includes taxes paid at the joint venture level and a portion of equity income that is not reported in segment profits. Other expenses, net, include expenses from corporate and manufacturing cost centers and other miscellaneous income (expense), net.

- 11 -

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

Operating Results

Summary

Earnings per share for the second quarter of 2004 were $0.79, level with earnings per share from continuing operations* during the same period in 2003. Net income was $1,768.1 million, compared to income from continuing operations of $1,784.5 million in the second quarter of last year. Worldwide sales grew 9% to $6.0 billion for the quarter.

For the first six months of 2004, earnings per share were $1.52, compared to earnings per share from continuing operations of $1.47 during the first six months of 2003. Net income was $3,386.7 million, compared to income from continuing operations of $3,329.4 million for the first six months of 2003. Worldwide sales grew 5% for the period to $11.7 billion.

Second quarter sales growth of Merck’s major in-line franchises collectively was partially offset by lower revenues from Merck’s relationship with AstraZeneca LP (AZLP), which were primarily driven by generic and over-the-counter competition. Overall, second-quarter sales performance included a 3-point favorable effect from foreign exchange. Sales outside of the United States accounted for 43% of second-quarter sales, compared to 42% of sales for the second quarter of 2003.

Sales growth for the quarter includes a favorable comparison to 2003, which was impacted by $405 million of wholesaler buy-out. Following the implementation of the new distribution program for U.S. wholesalers in the fourth quarter of 2003, fluctuations in 2004 sales caused by wholesaler investment buying have significantly moderated.

The Company’s gross margin was 81.2% in the second quarter compared to 82.1% in the second quarter of 2003 and 80.7% compared to 81.4% for the respective six-month period, reflecting the impact of changes in product mix.

Marketing and administrative expenses increased 2% and 4%, respectively, for the three and six month periods ended June 30, 2004 compared with the same periods last year. Excluding the impact of $20.5 million and $54.6 million for restructuring costs related to position eliminations for the current three and six month periods, respectively, marketing and administrative expense for the three months ended June 30, 2004 were at the same level as 2003 and increased 2% for the six months ended June 30, 2004 compared with the same period last year. The Company is on track to eliminate 4,400 positions worldwide. Approximately 4,000 positions had been eliminated as of June 30. This program, which was announced in October 2003, will be completed by the end of 2004.

Research and development expenses increased 25% and 24%, respectively, for the three and six month periods ended June 30, 2004 compared with the same periods last year. The increases primarily reflect the impact of Merck’s external collaborations, such as with Bristol-Myers Squibb Company, H. Lundbeck A/S and Vertex Pharmaceuticals Incorporated as well as higher acquired research expense related to the acquisition of Aton Pharma, Inc. in 2004 compared with the acquired research expense related to the increase in the Company’s ownership of Banyu Pharmaceutical Co. Ltd. in 2003.

The change in Other (income) expense, net for the three and six months ended June 30, 2004 primarily reflects lower realized net gains on the Company’s investment portfolios compared with the respective periods ended June 30, 2003. In addition, the six month period ended June 30, 2004 reflects the gain on the divestiture of Merck’s 50-percent equity stake in Johnson & Johnson/MSD Europe.

Sales

Sales by category of the Company’s products were as follows:


	($ in millions)
	Three Months				Six Months
	Ended June 30				Ended June 30
	2004		2003		2004		2003
Atherosclerosis	$	1,376.2	$	1,239.3	$	2,680.5	$	2,430.9
Hypertension/heart failure		953.8		794.7		1,781.0		1,640.7
Osteoporosis		791.9		544.8		1,550.9		1,339.5
Anti-inflammatory/analgesics		731.4		830.1		1,437.0		1,363.6
Respiratory		642.6		422.0		1,265.5		886.6
Anti-bacterial/anti-fungal		286.7		242.7		555.0		473.4
Vaccines/biologicals		223.5		236.5		452.5		477.9
Urology		184.5		180.7		359.3		311.4
Ophthalmologicals		175.1		173.2		347.0		319.5
Human immunodeficiency virus (HIV)		64.3		81.2		128.5		164.4
Other		591.7		780.2		1,095.4		1,688.9

	$	6,021.7	$	5,525.4	$	11,652.6	$	11,096.8

*Continuing operations exclude only the results from Medco Health Solutions, Inc., which was spun off on August 19, 2003.

- 12 -

Sales by individual therapeutic class are presented net of rebates and discounts. Other primarily includes sales of other human pharmaceuticals, pharmaceutical and animal health supply sales to the Company’s joint ventures and revenue from the Company’s relationship with AZLP.

Each of Merck’s major in-line franchises ranks either No. 1 or 2 in its class, in terms of worldwide sales, as Merck continues to demonstrate the value of its medicines to patients, physicians and payers through proven health outcomes.

Worldwide sales of Zocor, Merck’s statin for modifying cholesterol, reached $1.4 billion in the second quarter and $2.7 billion for the first six months, increasing 12% and 11% over the prior year respective periods. U.S. mail-order-adjusted prescription levels for Zocor increased by approximately 3 percent for the quarter, as compared to the second quarter of 2003. Merck continues to communicate the results of the landmark Heart Protection Study (HPS) to physicians and consumers.

In July, the National Cholesterol Education Program (NCEP) issued a report recommending modifications to the Adult Treatment Panel III (ATP III) guidelines. The report, which was based on five major studies, including HPS, was endorsed by: the American Heart Association; the American College of Cardiology; and the National Heart, Lung, and Blood Institute. The new report may lead to an increase in the number of people for whom cholesterol-lowering medicines should be considered. Under the NCEP ATP III guidelines, an estimated 36 million people would be eligible for cholesterol-lowering medication such as Zocor for cholesterol management. According to the new report, in high-risk persons, the recommended LDL-C goal is < 100 mg/dL. The report also indicates that when risk is very high, such as for a patient with established cardiovascular disease plus multiple major risk factors (especially diabetes), an LDL-C goal of < 70 mg/dL is a reasonable clinical strategy for physicians.

Fosamax continued as the most-prescribed medicine worldwide for the treatment of postmenopausal, male and glucocorticoid-induced osteoporosis. Global sales were strong, reaching $791.9 million during the quarter and $1.6 billion for the first six months, increasing 45% and 16% over the prior year, respectively. U.S. mail-order-adjusted prescription levels for Fosamax were in line with second-quarter 2003 levels.

In April, the Journal of Internal Medicine published findings from the first international head-to-head study that compared the efficacy of Fosamax Once Weekly (alendronate) 70 mg to Evista (raloxifene) 60 mg once daily, which showed that Fosamax provided significantly greater increases in bone mineral density at the lumbar spine and total hip.

The potential for continued growth in the osteoporosis market remains strong worldwide. Fewer than 25 percent of women with osteoporosis in seven major markets (the United States, Canada, the United Kingdom, France, Italy, Germany and Spain) have been diagnosed and treated. In the United States, market research suggests that fewer than 40 percent of women who have had a bone mineral density test - and have been told by their doctors they have osteoporosis or osteopenia - receive treatment.

Global sales of Merck’s antihypertensive medicines, Cozaar and Hyzaar**, were strong, reaching $725.1 million for the quarter and $1.4 billion for the first six months, increasing 34% and 15% over the comparable prior year periods. Cozaar and Hyzaar compete in the fastest-growing class in the antihypertensive market, angiotensin II antagonists (AIIA). Cozaar is the second-most-frequently prescribed AIIA in the United States and the largest-selling AIIA in Europe. U.S. mail-order-adjusted prescription levels for Cozaar and Hyzaar increased by 5 percent during the quarter, as compared to the second quarter of 2003.

Worldwide sales of Singulair, a once-a-day oral medicine indicated for the treatment of chronic asthma and the relief of symptoms of seasonal allergic rhinitis, were strong, reaching $642.6 million in the second quarter and $1.3 billion during the first six months, representing increases of 52% and 43% over the respective prior year periods. U.S. mail-order-adjusted prescription levels for Singulair increased by 21 percent during the quarter, as compared to the second quarter of 2003. Singulair continues to be the second-most-prescribed product in the overall respiratory market in the United States as patients, physicians and managed care organizations continue to recognize the value Singulair offers to those who suffer from asthma or seasonal allergic rhinitis.

**Cozaar and Hyzaar are registered trademarks of E.I. DuPont de Nemours & Company, Wilmington, Del.

- 13 -

Worldwide sales of Vioxx, Merck’s arthritis and pain medicine, were $653.3 million for the second quarter and $1.3 billion for the first six months, representing an 18% decrease for the comparable quarter and an even performance with the six month period of 2003. U.S. mail-order-adjusted prescription levels for Vioxx decreased by 5 percent during the quarter, as compared to the second quarter of 2003.

Following Food and Drug Administration (FDA) approval for the acute treatment of migraine in late March, Vioxx is now approved for treating more types of painful conditions than any other coxib in the United States and remains the only coxib approved to relieve migraine pain and associated migraine symptoms. Merck continues to seek new uses for Vioxx to extend the clinical benefits of the product to new populations. A supplemental New Drug Application (NDA) for Vioxx is under review by the FDA for the treatment of juvenile rheumatoid arthritis.

Outside of the United States, Vioxx continues to be the best-selling arthritis and pain medicine. Indications for Vioxx for migraine and juvenile rheumatoid arthritis also are being sought outside of the United States.

Global sales of Merck’s newest coxib, Arcoxia, reached $62.1 million in the second quarter and $92.4 million for the first six months. To date, Arcoxia has been launched in 45 countries outside of the United States. Additional launches will continue in other countries throughout the year.

During the second quarter, the FDA informed Merck that there are no plans for an Advisory Committee meeting for Arcoxia at this time. Under PDUFA (Prescription Drug User Fee Act), for standard NDAs filed in 2003, FDA’s goal is to review and act on 90 percent of NDAs within 10 months of filing. The goal PDUFA date for the NDA for Arcoxia is October 30, 2004.

Results from two acute dental pain studies with Arcoxia were published during the second quarter. The first study, published in Clinical Therapeutics, showed that patients taking Arcoxia 120 mg experienced pain relief lasting for a full 24 hours compared with 10 hours for patients taking ibuprofen. In the second study, published in the Clinical Journal of Pain, patients taking Arcoxia 120 mg or naproxen sodium 550 mg had significantly greater pain relief scores over eight hours than those taking a commonly used narcotic, acetaminophen with codeine.

Sales of Merck’s other promoted medicines and vaccines were $1.3 billion during the second quarter and $2.5 billion for the first six months. Sales of these products were $1.2 billion and $2.4 billion, respectively, during the same periods last year. These products treat or prevent a broad range of conditions, such as infectious disease, glaucoma, benign prostate enlargement and migraine.

Global sales of Zetia (branded Ezetrol outside of the United States), the cholesterol absorption inhibitor developed and marketed by the Merck /Schering-Plough partnership, reached $242.1 million in the second quarter and $431.7 million for the first six months. More than 9.6 million prescriptions have been written in the United States since the U.S. launch of Zetia in mid-November 2002, according to IMS Health. Zetia currently accounts for 6 percent of new prescriptions in the cholesterol-lowering class and is now reimbursed for nearly 90 percent of all patients in managed care plans across the United States. To date, Ezetrol has been launched in more than 40 countries outside of the United States. Additional markets are expected to launch Ezetrol in 2004 upon completion of pricing/reimbursement national processes. The Company records the results from its interest in the Merck/Schering-Plough partnership in Equity income from affiliates.

On July 23, the FDA approved Vytorin for the treatment of high LDL cholesterol (LDL-C) in patients with primary hypercholesterolemia or mixed hyperlipidemia as adjunctive therapy to diet when diet alone is not enough. Vytorin, developed and marketed by the Merck/Schering-Plough partnership, is the first and only product approved to treat the two sources of cholesterol by inhibiting the production of cholesterol in the liver and blocking the absorption of cholesterol in the intestine, including cholesterol from food. Vytorin (branded Inegy in many countries outside of the United States) has been recently launched in Germany and Mexico. Additional markets are expected to launch Vytorin in 2004 upon completion of pricing/reimbursement national processes.

Research and Development

As expected, Merck’s investigational compound, MK-431, a DP-IV inhibitor for the treatment of type 2 diabetes, entered Phase III clinical trials during the second quarter. The Company anticipates filing for regulatory approval in 2006.

- 14 -

Merck’s investigational pentavalent rotavirus vaccine, RotaTeq, demonstrated 100-percent efficacy against severe rotavirus gastroenteritis and 74-percent efficacy against rotavirus gastroenteritis of any severity in healthy infants, according to results from a new dose-ranging study presented at the annual meeting of the European Society for Pediatric Infectious Diseases in May. Merck is currently conducting the large-scale Rotavirus Efficacy and Safety Trial (REST) with more than 65,000 infants at clinical sites around the world, which will provide additional safety and efficacy data. The Company expects to submit a Product License Application (PLA) to the FDA for RotaTeq in the second half of 2005. In children under 5, rotavirus causes approximately one-third of diarrhea-associated hospitalizations in developing countries and nearly half a million deaths worldwide every year.

In a new study presented at the National Immunization Conference, a single dose of ProQuad in 4- to 6-year-olds used in place of the routinely administered second dose of M-M-R II was generally well-tolerated and resulted in antibody responses similar to those developed with M-M-R II and Varivax separately. ProQuad is Merck’s investigational vaccine that adds the chickenpox vaccine to Merck’s existing measles, mumps and rubella vaccine. The Company expects to submit a PLA to the FDA for ProQuad in the second half of 2004.

Merck continued to augment its internal research efforts with a comprehensive licensing and external alliance strategy across the entire spectrum of collaborations from early research to late-stage compounds, as well as new technologies and targeted acquisitions. In the first half of 2004, Merck executed 26 significant transactions, including research collaborations, pre-clinical and clinical compounds and technology transactions, and has more than 40 opportunities currently in detailed review. Since the beginning of 2002, Merck has entered into more than 110 such transactions.

In April, Merck and Bristol-Myers Squibb Company entered into a global collaborative agreement for muraglitazar, Bristol-Myers Squibb’s dual PPAR (peroxisome proliferator-activated receptor) agonist, currently in Phase III clinical development for use in treating both blood glucose and lipid abnormalities in patients with type 2 diabetes. Bristol-Myers Squibb received a $100.0 million upfront payment and may receive up to $275.0 million in additional payments based on the achievement of certain regulatory milestones. Merck and Bristol-Myers Squibb plan to file the U.S. NDA for muraglitazar in the next six months. Merck and Bristol-Myers Squibb will jointly develop the clinical and marketing strategy for muraglitazar and share equally in future development and commercialization costs. Both companies will co-promote the product to physicians on a global basis, and Merck will receive payments based on net sales levels.

In June, Merck and Vertex Pharmaceuticals Incorporated (Vertex) entered into a global collaboration to develop and commercialize VX-680, Vertex’s lead Aurora kinase inhibitor that is expected to enter clinical development this year for the treatment of cancer. Aurora kinases are implicated in the onset and progression of many different human cancers, and novel Aurora kinase inhibitors such as VX-680 have the potential to play an important future role in the treatment and management of a wide range of tumor types. Vertex received a $20.0 million upfront payment and could receive up to an additional $14.0 million in research funding over the next two years. In addition, Vertex could receive additional milestone payments based upon the achievement of significant development events, regulatory filings and other events and approvals.

Also in June, Merck and H. Lundbeck A/S (Lundbeck) announced an extension of their agreement for the exclusive development and commercialization of the sleep disorder compound gaboxadol to Japan. In February, the two companies announced their alliance for the exclusive U.S. development and commercialization of gaboxadol. The companies anticipate that Merck will file an NDA with the FDA between late 2006 and mid-2007. Under the terms of the extended agreement, Merck and Lundbeck will jointly conduct the clinical program required for filing an NDA in Japan, with Merck funding the majority of the development activities. Following approval, the companies plan to co-promote gaboxadol in Japan. Lundbeck will receive a share of Japanese gaboxadol sales.

The chart below reflects the Company’s research pipeline as of July 30, 2004. Candidates shown in Phase III include specific products. Candidates shown in Phase I, II and III include the most advanced compound with a specific mechanism in a given therapeutic area. Back-up compounds, regardless of their phase of development, additional indications in the same therapeutic areas and additional line extensions or formulations for in-line products are not shown. Preclinical areas shown are those where the Company has initiated Good Laboratory Practices (GLP) studies in compounds with mechanisms distinct from those in Phase I, II and III. The Company’s programs are generally designed to focus on the development of novel medicines to address large, unmet medical needs.

- 15 -


Preclinical	Phase I	Phase II	Phase III
Diabetes Obesity Alzheimer’s Disease Parkinson’s Disease Sleep Disorders Pain Cancer Osteoporosis Arthritis Immunology Glaucoma Urinary Incontinence Antibacterial Vaccines	Diabetes c-3347 Pain c-1246 Alzheimer’s Disease c-7617 c-9138 Glaucoma c-3859 Osteoporosis c-3578 Multiple Sclerosis c-6448 AIDS c-1605 Vaccines HIV vaccine	Alzheimer’s Disease c-9136 Arthritis c-5997 c-4462 Respiratory Disease c-3193 c-3885 Obesity c-5093 c-2624 c-2735 Atherosclerosis c-8834 Psychiatric Disease c-9054 CINV c-9280 Cancer SAHA Vaccines Pediatric combination	Vaccines Rotavirus RotaTeq Shingles Zoster vaccine Human Papillomavirus HPV vaccine Diabetes MK-431 Muraglitazar* Sleep Disorders Gaboxadol in collaboration with Bristol-Myers Squibb 2003 U.S. Submissions* Arthritis/Pain *Arcoxia* 2004 U.S. Submissions Pediatric Vaccine *ProQuad* (2H04)

Financial Guidance for 2004

Worldwide net sales will be driven by the Company’s major in-line products, including the impact of new studies and indications. Sales forecasts for those products for 2004 are as follows: Zocor $4.9 to $5.1 billion, Fosamax $3.0 to $3.2 billion, Cozaar and Hyzaar $2.7 to $2.9 billion, coxibs (Vioxx and Arcoxia) $2.8 to $3.0 billion, and Singulair $2.4 to $2.7 billion.

Under an agreement with AZLP, Merck receives revenue at predetermined rates on the U.S. sales of certain products by AZLP, most notably Prilosec and Nexium. In 2004, Merck anticipates these revenues to be approximately $1.5 to $1.7 billion.

The income contribution related to the Merck and Schering-Plough partnership is expected to be positive in 2004. Equity income from affiliates includes the results of the Merck and Schering-Plough partnership combined with the results of Merck’s other joint venture relationships. Equity income from affiliates is expected to be approximately $850 to $950 million for 2004.

Merck continues to expect that manufacturing productivity will offset inflation on product costs.

Product gross margin percentage is estimated to be approximately 80% to 81% as a result of changes to the sales mix.

Research and development expense (which excludes joint ventures) is anticipated to increase at a high-teens percentage growth rate over the full-year 2003 level. This guidance includes acquired research and development expenses in 2003 and 2004.

Consolidated marketing and administrative expense is estimated to be at the same level as the full-year 2003 expense. This guidance excludes restructuring costs in 2003 and 2004.

The consolidated 2004 tax rate is estimated to be approximately 28% to 29%.

- 16 -

Merck plans to continue its stock buyback program in 2004. As of June 30, $9.1 billion remains under the current buyback authorizations approved by Merck’s Board of Directors.

The Company is on track to eliminate 4,400 positions worldwide. Approximately 4,000 positions had been eliminated as of June 30. This program, which was announced in October 2003, will be completed by the end of 2004. Restructuring costs for full-year 2004 are expected to be approximately $60 to $80 million. When complete, the cost reductions are expected to generate annual savings of payroll and benefits costs of $250 to $300 million starting in 2005.

Given these guidance elements, and including the effect of the restructuring, Merck anticipates full-year 2004 earnings per share (EPS) of $3.11 to $3.17 and third-quarter EPS of $0.80 to $0.84.

Liquidity and Capital Resources


($ in millions)	June 30, 2004			December 31, 2003
Cash, cash equivalents and short-term investments	$	6,177.1		$	4,173.0
Working capital	$	3,606.8		$	1,957.6
Total debt to total liabilities and equity		15.8	%		16.7	%

Cash provided by operations continues to be the Company’s primary source of funds to finance operating needs and capital expenditures. Net cash provided by operating activities totaled $4.2 billion and $3.3 billion for the six months ended June 30, 2004 and 2003, respectively.

Capital expenditures for the six months totaled $762.1 million and $903.1 million in 2004 and 2003, respectively. Capital expenditures for the full year 2004 are expected to approximate $1.7 billion.

Dividends paid to stockholders were $1.6 billion for the first six months of 2004 and 2003. In May and July 2004, the Board of Directors declared quarterly dividends of 37 and 38 cents per share on the Company’s common stock for the third and fourth quarters of 2004, respectively. The Company’s total dividends paid during 2004 will be $1.49 per share, a three percent increase over the amount paid during the same period in 2003.

The Company purchased $444.0 million of its Common Stock (9.5 million shares) for its Treasury during the first six months of 2004. The Company has approximately $9.1 billion remaining under the July 2002 treasury stock purchase authorization.

Other Matters

In order to ensure there are no reporting relationships among members of Merck’s Board of Directors, William Daley and Heidi Miller recently resigned from the Merck Board. Mr. Daley has assumed a position with JP Morgan Chase, where Merck Board member William B. Harrison, Jr. is chairman and chief executive officer. Ms. Miller, who was an employee of Bank One prior to its merger with JP Morgan Chase, assumed a position with JP Morgan Chase after the merger.

Legal Proceedings

As previously disclosed, the Company has received a subpoena from the U.S. Department of Justice in connection with its investigation of the Company’s marketing and selling activities. The Company has also reported that it has received a Civil Investigative Demand from the Attorney General of Texas regarding the Company’s marketing and selling activities relating to Texas. In April, 2004, the Company received a subpoena from the office of the Inspector General for the District of Columbia in connection with an investigation of the Company’s interactions with physicians in the District of Columbia, Maryland, and Virginia. The Company is cooperating with all of these investigations. The Company cannot predict the outcome of these investigations, however, it is possible that highly unfavorable outcomes could have a material adverse effect on the Company’s financial position, liquidity and results of operations. In addition, from time to time, other federal or state regulators may seek information about practices in the pharmaceutical industry in inquiries other than the investigations in this paragraph. It is not feasible to predict the outcome of any such inquiries.

- 17 -

As previously disclosed, the trial in the United States involving the alendronate weekly product was held in March 2003. On August 28, 2003, the U.S. District Court in Delaware, upheld the validity of the Company’s U.S. patent covering the weekly administration of alendronate. As a result of the court’s decision, the patent is valid and infringed by Teva Pharmaceuticals USA, Inc.’s (“Teva”) Abbreviated New Drug Application filing. The court’s decision has been appealed by Teva, and a hearing was held on the appeal on July 8, 2004. A decision is expected in late 2004 or early 2005.

As previously announced by the Company, on July 20, 2004, the Opposition Division (the “Opposition Division”) of the European Patent Office (the “EPO”) rendered an oral decision to revoke the Company’s patent in Europe that covers the weekly administration of alendronate. The Opposition Division typically provides the written reasoning within two months following an oral decision. The Company disagrees with the decision and intends to appeal, pending the formal written notification from the EPO. If the decision is reversed on appeal, the Company’s patent for the weekly administration of alendronate will expire in 2018. Based on other patents, the alendronate weekly product is protected in most major European markets until at least 2007. Generic manufacturers have also filed challenges to the patent covering the alendronate weekly product in a number of other countries, including Australia, Canada, Mexico, and New Zealand. The Company intends to vigorously defend its patents, which it believes are valid, against infringement by generic companies attempting to market products prior to the expiration dates of such patents. As with any litigation, including litigation concerning the alendronate weekly product, there can be no assurance of the outcomes, which, if adverse, could result in significantly shortened periods of exclusivity in the applicable markets.

In addition, in the United Kingdom, a previously disclosed case brought by a generic company concerning data exclusivity and the alendronate weekly product has recently been withdrawn. The Company believes that the Licensing Authority in the United Kingdom is now allowing generic manufacturers to rely on the Company’s data in their product license applications.

Item 4. Controls and Procedures

Management of the Company, with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures. Based on their evaluation, as of the end of the period covered by this Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) are effective. There have been no significant changes in internal control over financial reporting, for the period covered by this report, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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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 subject to risks and uncertainties. One can identify these forward-looking statements by their use of words such as “expects,” “plans,” “will,” “estimates,” “forecasts,” “projects” and other words of similar meaning. One can 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 approvals and development programs. One must carefully consider any such statement and should understand that many factors could cause actual results to differ 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 described in the Company’s filings with the Securities and Exchange Commission, especially on Forms 10-K, 10-Q and 8-K (if any). In Item 1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, as filed on March 10, 2004, the Company discusses in more detail various important factors that could cause actual results to differ from expected or historic results. The Company notes these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. One should understand that it is not possible to predict or identify all such factors. Consequently, the reader should not consider any such list to be a complete statement of all potential risks or uncertainties.

PART II - Other Information

Item 1. Legal Proceedings

Information with respect to certain legal proceedings is incorporated by reference from Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part 1 of this report.

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Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

Issuer purchases of equity securities for the three month period ended June 30, 2004 is as follows:

ISSUER PURCHASES OF EQUITY SECURITIES


								($ in millions)
						Number of Shares		Approximate Dollar Value
		Total Number				Purchased as Part of		of Shares That May Yet
		of Shares		Average Price		Publicly Announced		Be Purchased Under the
Period	Purchased ⁽¹⁾			Paid Per Share		Plans or Programs⁽²⁾		Plans or Programs⁽²⁾
Apr 1–Apr 30, 2004			1,228,058	$	45.66		1,227,500	$	9,235.7
May 1– May 31, 2004			1,617,300	$	46.91		1,617,300	$	9,159.8
June 1–June 30, 2004			1,758,200	$	47.87		1,758,200	$	9,075.6

Total			4,603,558	$	46.94		4,603,000	$	9,075.6

(1) There were 558 shares purchased to meet the requirements of a restricted stock program, which was not part of a publicly announced repurchase program.

(2) All shares purchased during the period were made as part of a plan announced in July 2002 to purchase $10 billion in Merck shares.

Item 4. Submission of Matters to a Vote of Security Holders

The following matters were voted upon at the Annual Meeting of Stockholders held on April 27, 2004, and received the votes set forth below:

1. All of the following persons nominated were elected to serve as directors and received the number of votes set forth opposite their respective names:


	For		Withheld
William G. Bowen, Ph.D.		1,829,170,376		54,803,447
William M. Daley		1,828,064,855		55,908,968
Thomas E. Shenk, Ph.D.		1,813,084,495		70,889,328
Wendell P. Weeks		1,818,468,022		65,505,801
Peter C. Wendell		1,814,148,478		69,825,345

2. A proposal to ratify the appointment of independent auditors for 2004 received 1,823,849,901 votes FOR and 42,143,814 votes AGAINST, with 18,047,632 abstentions.

3. A proposal to amend the Restated Certificate of Incorporation received 1,819,528,332 votes FOR and 42,062,845 votes AGAINST, with 22,348,811 abstentions.

4. A stockholder proposal concerning management compensation received 102,377,162 votes FOR and 1,319,758,711 votes AGAINST, with 33,939,601 abstentions and 427,965,873 broker non-votes.

5. A stockholder proposal concerning extension of prescription drug patents received 104,400,639 votes FOR and 1,227,982,412 votes AGAINST, with 123,711,078 abstentions and 427,947,218 broker non-votes.

6. A stockholder proposal concerning ethical and social performance of the Company received 58,360,595 votes FOR and 1,284,975,896 votes AGAINST, with 112,742,741 abstentions and 427,962,115 broker non-votes.

7. A stockholder proposal concerning use of shareholder resources for political purposes received 135,947,894 votes FOR and 1,206,271,047 votes AGAINST, with 113,866,603 abstentions and 427,955,803 broker non-votes.

8. A stockholder proposal concerning a report related to the global HIV/AIDS pandemic received 181,807,418 votes FOR and 1,150,837,735 votes AGAINST, with 123,457,570 abstentions and 427,938,624 broker non-votes.

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Item 6. Exhibits and Report on Form 8-K

(a) Exhibits


Number		Description
3.1		Restated Certificate of Incorporation of Merck & Co., Inc. (September 1, 2000) – Incorporated by reference to Form 10-Q Quarterly Report for the period ended September 30, 2000

3.2		Certificate of Amendment of Restated Certificate of Incorporation of Merck & Co., Inc. (effective June 10, 2004) – Incorporated by reference to Registration Statement on Form S-8 (No. 333-117737)

3.3		By-Laws of Merck & Co., Inc. (as amended effective February 25, 1997) – Incorporated by reference to Form 10-Q Quarterly Report for the period ended March 31, 1997

10.1		Plan for Deferred Payment of Directors’ Compensation (amended and restated April 2, 2004)

10.2		Merck & Co., Inc. Deferral Program (amended and restated April 2, 2004)

12		Computation of Ratios of Earnings to Fixed Charges

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

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

32.1		Section 1350 Certification of Chief Executive Officer

32.2		Section 1350 Certification of Chief Financial Officer

(b) Reports on Form 8-K

During the three-month period ending June 30, 2004, the Company furnished one Current Report on Form 8-K pursuant to Item 9 – Regulation FD Disclosure and Item 12 – Results of Operations and Financial Condition: Report dated and furnished April 22, 2004, regarding earnings for first quarter 2004 and certain supplemental information.

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Signatures

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


		MERCK & CO., INC.

Date: August 6, 2004		/s/ Kenneth C. Frazier
		KENNETH C. FRAZIER
		Senior Vice President and General Counsel

Date: August 6, 2004		/s/ Richard C. Henriques
		RICHARD C. HENRIQUES
		Vice President, Controller

- 22 -

EXHIBIT INDEX


Number		Description
3.1		Restated Certificate of Incorporation of Merck & Co., Inc. (September 1, 2000) – Incorporated by reference to Form 10-Q Quarterly Report for the period ended September 30, 2000

3.2		Certificate of Amendment of Restated Certificate of Incorporation of Merck & Co., Inc. (effective June 10, 2004) – Incorporated by reference to Registration Statement on Form S-8 (No. 333-117737)

3.3		By-Laws of Merck & Co., Inc. (as amended effective February 25, 1997) – Incorporated by reference to Form 10-Q Quarterly Report for the period ended March 31, 1997

10.1		Plan for Deferred Payment of Directors’ Compensation (amended and restated April 2, 2004)

10.2		Merck & Co., Inc. Deferral Program (amended and restated April 2, 2004)

12		Computation of Ratios of Earnings to Fixed Charges

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

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

32.1		Section 1350 Certification of Chief Executive Officer

32.2		Section 1350 Certification of Chief Financial Officer

- 23 -

EX-10.1 2 y99716exv10w1.htm PLAN FOR DEFERRED PAYMENT OF DIRECTORS COMPENSATION EXHIBIT 10.1

Exhibit 10.1

MERCK & CO., INC.

PLAN FOR DEFERRED PAYMENT OF

DIRECTORS’ COMPENSATION

(Amended and Restated April 2, 2004)

TABLE OF CONTENTS


		Page
Article I	Purpose		1
Article II	Election of Deferral, Measurement Methods and Distribution Schedule		1
Article III	Valuation of Deferred Amounts		2
Article IV	Redesignation Within a Deferral Account		3
Article V	Payment of Deferred Amounts		4
Article VI	Designation of Beneficiary		5
Article VII	Plan Amendment or Termination		6
Schedule A	Measurement Methods		7

(i)

MERCK & CO., INC.
PLAN FOR DEFERRED PAYMENT OF
DIRECTORS’ COMPENSATION

I. PURPOSE

To provide an arrangement under which directors of Merck & Co., Inc. other than current employees may (i) elect to voluntarily defer payment of the annual retainer and meeting and committee fees until after termination of their service as a director, and (ii) value compensation mandatorily deferred on their behalf.

II. ELECTION OF DEFERRAL, MEASUREMENT METHODS AND DISTRIBUTION SCHEDULE

A. Election of Voluntary Deferral Amount

1. Prior to December 28 of each year, each director is entitled to make an irrevocable election to defer until termination of service as a director receipt of payment of (a) 50% or 100% of the retainer for the 12 months beginning April 1 of the next calendar year, (b) 50% or 100% of the Committee Chairperson retainer beginning April 1 of the next calendar year, and (c) 50% or 100% of the meeting and committee fees for the 12 months beginning April 1 of the next calendar year.

2. Prior to commencement of duties as a director, a director newly elected or appointed to the Board during a calendar year must make the election under this paragraph for the portion of the Voluntary Deferral Amount applicable to such director’s first year of service (or part thereof).

3. The Voluntary Deferral Amount shall be credited as follows: (1) Meeting and committee fees that are deferred are credited as of the day the director’s services are rendered; (2) if the Board retainer and/or Committee Chairperson retainer is deferred, a pro-rata share of the deferred retainer is credited on the last business day of each calendar quarter. The dates the Voluntary Deferral Amount, or parts thereof, are credited to the director’s deferred account are hereinafter referred to as the Voluntary Deferral Dates.

B. Mandatory Deferral Amount

1. On the Friday following the Company’s Annual Meeting of Stockholders (such Friday hereinafter referred to as the “Mandatory Deferral Date”), each director will be credited with an amount equivalent to one-third of the annual cash retainer for the 12 month period beginning on the April 1 preceding the Annual Meeting (the “Mandatory Deferral Amount”). The Mandatory Deferral Amount will be measured by the Merck Common Stock account.

2. A director newly elected or appointed to the Board after the Mandatory Deferral Date will be credited with a pro rata portion of the Mandatory Deferral Amount applicable to such director’s first year of service (or part thereof). Such pro rata portion shall be credited to the director’s account on the first day of such director’s service.

C. Election of Measurement Method

Each such annual election referred to in Section A shall include an election as to the measurement method or methods by which the value of amounts deferred will be measured in accordance with Article III, below. The available measurement methods are set forth on Schedule A hereto.

D. Election of Distribution Schedule

Each annual election referred to in Section A above shall also include an election to receive payment following termination of service as a director of all Voluntary Deferral Amounts and Mandatory Deferral Amounts in a lump sum either immediately or one year after such termination, or in quarterly or annual installments over five, ten or fifteen years.

III. VALUATION OF DEFERRED AMOUNTS

A. Common Stock

1. Initial Crediting. The annual Mandatory Deferral Amount shall be used to determine the number of full and partial shares of Merck Common Stock which such amount would purchase at the closing price of the Common Stock on the New York Stock Exchange on the Mandatory Deferral Date.

That portion of the Voluntary Deferral Amount allocated to Merck Common Stock shall be used to determine the number of full and partial shares of Merck Common Stock which such amount would purchase at the closing price of the Common Stock on the New York Stock Exchange on the applicable Voluntary Deferral Date.

However, should it be determined by the Committee on Corporate Governance of the Board of Directors that a measurement of Merck Common Stock on any Mandatory or Voluntary Deferral Date would not constitute fair market value, then the Committee shall decide on which date fair market value shall be determined using the valuation method set forth in this Article III, Section A.1.

At no time during the deferral period will any shares of Merck Common Stock be purchased or earmarked for such deferred amounts nor will any rights of a shareholder exist with respect to such amounts.

2. Dividends. Each director’s account will be credited with the additional number of full and partial shares of Merck Common Stock which would have been purchasable with the dividends on shares previously credited to the account at the closing price of the Common Stock on the New York Stock Exchange on the date each dividend was paid.

3. Distributions. Distribution from the Merck Common Stock account will be valued at the closing price of Merck Common Stock on the New York Stock Exchange on the distribution date.

B. Mutual Funds

1. Initial Crediting. The amount allocated to each Mutual Fund shall be used to determine the full and partial Mutual Fund shares which such amount would purchase at the closing net asset value of the Mutual Fund shares on the Mandatory or Voluntary Deferral Date, whichever is applicable. The director’s account will be credited with the number of full and partial Mutual Fund shares so determined.

At no time during the deferral period will any Mutual Fund shares be purchased or earmarked for such deferred amounts nor will any rights of a shareholder exist with respect to such amounts.

2. Dividends. Each director’s account will be credited with the additional number of full and partial Mutual Fund shares which would have been purchasable, at the closing net asset value of the Mutual Fund shares as of the date each dividend is paid on the Mutual Fund shares, with the dividends which would have been paid on the number of shares previously credited to such account (including pro rata dividends on any partial shares).

3. Distributions. Mutual Fund distributions will be valued based on the closing net asset value of the Mutual Fund shares on the distribution date.

C. Adjustments

In the event of a reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation, rights offering or any other change in the corporate structure or shares of the Company or a Mutual Fund, the number and kind of shares or units of such investment measurement method available under this Plan and credited to each director’s account shall be adjusted accordingly.

IV. REDESIGNATION WITHIN A DEFERRAL ACCOUNT

A. General

A director may request a change in the measurement methods used to value all or a portion of his/her account other than Merck Common Stock. Amounts deferred using the Merck Common Stock method and any earnings attributable to such deferrals may not be redesignated. The change will be effective on (i) the day when the redesignation request is received pursuant to administrative guidelines established by the Human Resources Financial Services area of the Treasury department, provided the request is received prior to the close of the New York Stock Exchange on such day or (ii) the next following business day if the request is received when the New York Stock Exchange is closed.

B. When Redesignation May Occur

1. During Active Service. There is no limit on the number of times a director may redesignate the portion of his/her deferred account permitted to be redesignated. Each such request shall be irrevocable and can be designated in whole percentages or as a dollar amount.

2. After Death. Following the death of a director, the legal representative or beneficiary of such director may redesignate subject to the same rules as for active directors set forth in Article IV, Section B.1.

C. Valuation of Amounts to be Redesignated

The portion of the director’s account to be redesignated will be valued at its cash equivalent and such cash equivalent will be converted into shares or units of the other measurement method(s). For purposes of such redesignations, the cash equivalent of the value of the Mutual Fund shares shall be the closing net asset value of such Mutual Fund on (i) the day when the redesignation request is received pursuant to administrative guidelines established by the Human Resources Financial Services area of the Treasury department, provided the request is received prior to the close of the New York Stock Exchange on such day or (ii) the next following business day if the request is received when the New York Stock Exchange is closed.

V. PAYMENT OF DEFERRED AMOUNTS

A. Payment

All payments to directors of amounts deferred will be in cash in accordance with the distribution schedule elected by the director pursuant to Article II, Section D. Distributions shall be pro rata by measurement method. Distributions shall be valued on the fifteenth day of the distribution month (or, if such day is not a business day, the next business day) and paid as soon thereafter as possible.

B. Changes to Distribution Schedule Prior to Termination

Upon the request of a director made at any time during the calendar year immediately preceding the calendar year in which service as a director is expected to terminate, the Committee on Corporate Governance of the Board of Directors (the “Committee”), in its sole discretion, may authorize: (a) an extension of a payment period beyond that originally elected by the director not to exceed that otherwise allowable under Article II, Section D, and/or (b) a payment frequency different from that originally elected by the director. Such request may not be made with regard to amounts deferred after December 31, 1990 using the Merck Common Stock method and to any earnings attributable to such deferrals. Deferrals into Merck Common Stock made after December 31, 1990 and any earnings thereon may only be distributed in accordance with the schedule elected by the director under Article II, Section D or determined by the Committee on Corporate Governance under Article VI.

C. Post-Termination Changes to Distribution Schedule

Following termination of service as a director, each director may make one request for a further extension of the period for distribution of his/her deferred compensation. Such request must be received by the Committee on Corporate Governance prior to the first distribution to the participant under his/her previously elected distribution schedule. Any revised distribution schedule may not exceed the deferral period otherwise allowable under Article II, Section C. This request may be granted and a new payment schedule determined in the sole discretion of the Committee on Corporate Governance.

Such request may not be made with regard to amounts deferred after December 31, 1990 using the Merck Common Stock Method and to any earnings attributable to such deferrals. Any retired director who is not subject to U.S. income tax may petition the Committee on Corporate Governance to change payment frequency, including a lump sum distribution, and the Committee on Corporate Governance may grant such petition if, in its discretion, it considers there to be reasonable justification therefor. Deferrals into Merck Common Stock made after December 30, 1990 and any earnings thereon may only be distributed in accordance with the schedule elected by the director under Article II, Section D or determined by the Committee on Corporate Governance under Article VI.

D. Forfeitures

A director’s deferred amount attributable to the Mandatory Deferral Amount and earnings thereon shall be forfeited upon his or her removal as a director or upon a determination by the Committee on Corporate Governance in its sole discretion, that a director has:

(i) joined the Board of, managed, operated, participated in a material way in, entered employment with, performed consulting (or any other) services for, or otherwise been connected in any material manner with a company, corporation, enterprise, firm, limited partnership, partnership, person, sole proprietorship or any other business entity determined by the Committee on Corporate Governance in its sole discretion to be competitive with the business of the Company, its subsidiaries or its affiliates (a “Competitor”);

(ii) directly or indirectly acquired an equity interest of five (5) percent or greater in a Competitor; or

(iii) disclosed any material trade secrets or other material confidential information, including customer lists, relating to the Company or to the business of the Company to others, including a Competitor.

VI. DESIGNATION OF BENEFICIARY

In the event of the death of a director, the deferred amount at the date of death shall be paid to the last named beneficiary or beneficiaries designated by the director, or, if no beneficiary has been designated, to the director’s legal representative, in one or more

installments as the Committee on Corporate Governance in its sole discretion may determine.

VII. PLAN AMENDMENT OR TERMINATION

The Committee on Corporate Governance shall have the right to amend or terminate this Plan at any time for any reason.

SCHEDULE A

MEASUREMENT METHODS

(January 1, 2002 – January 10, 2003)

Merck Common Stock

Mutual Funds


		American Century Emerging Markets Fund
		American Century Europacific Growth Fund
		Fidelity Destiny I
		Fidelity Dividend Growth
		Fidelity Equity Income Fund
		Fidelity Low-Priced Stock Fund
		Fidelity Retirement Money Market
		Fidelity Spartan Government Income
		Fidelity Spartan U.S. Equity Index
		Franklin Small-Mid Cap Growth A
		Janus Enterprise
		Janus Growth & Income
		Liberty Acorn Z
		PIMCO Foreign Bond Institutional
		PIMCO Long Term US Government Institutional
		PIMCO Total Return Institutional
		Putnam Global Equity Fund A*
		Putnam International Voyager A
		Putnam Vista A
		T. Rowe Price Blue Chip Growth Fund
		Vanguard Asset Allocation

*From September 20, 2002 — September 30, 2002, this investment was briefly named the Putnam Global Growth Fund A as a result of the merger, in September 2002, of Putnam Global Equity Fund A with Putnam Global Growth Fund A. The merged fund briefly retained the name “Putnam Global Growth Fund A.” Effective October 1, 2002, the merged fund changed its name to “Putnam Global Equity Fund A.”

SCHEDULE A

MEASUREMENT METHODS

(Effective January 11, 2003 to July 31, 2003)

Merck Common Stock

Mutual Funds


		American Century Emerging Markets Institutional
		American Funds EuroPacific Growth Fund
		Fidelity Destiny I
		Fidelity Dividend Growth
		Fidelity Equity-Income
		Fidelity Low-Priced Stock
		Fidelity Retirement Money Market
		Fidelity Spartan Government Income
		Fidelity Spartan U.S. Equity Index
		Franklin Small-Mid Cap Growth A
		Janus Enterprise
		Janus Growth & Income
		Liberty Acorn Class Z
		PIMCO Foreign Bond Institutional
		PIMCO Long Term US Government Institutional
		PIMCO Total Return Institutional
		Putnam Global Equity A
		Putnam International Capital Opportunities Fund A*
		Putnam Vista A
		T. Rowe Price Blue Chip Growth
		Vanguard Asset Allocation

* Prior to April 30, 2003, known as Putnam International Voyager Fund A.

Redesignation of Deferred Amounts measured by Putnam Vista A on July 31, 2003

Prior to 4 p.m. ET on July 31, 2003, each participant who has any part of his/her account measured by the Putnam Vista A measurement method may redesignate the amount in such measurement method in accordance with Article IV. If a participant does not redesignate the amount measured by the Putnam Vista A measurement method to any other remaining measurement method before 4 p.m. ET on July 31, 2003, then the amount in the Putnam Vista A account shall be redesignated as of 4 p.m. ET on July 31, 2003, to the Fidelity Mid-Cap Stock Fund.

SCHEDULE A

MEASUREMENT METHODS

(Effective July 31, 2003 – November 19, 2003)

Merck Common Stock

Mutual Funds


		American Century Emerging Markets Institutional
		American Funds EuroPacific Growth Fund
		Columbia Acorn Class Z*
		Fidelity Destiny I
		Fidelity Dividend Growth
		Fidelity Equity-Income
		Fidelity Low-Priced Stock
		Fidelity Mid-Cap Stock Fund
		Fidelity Retirement Money Market
		Fidelity Spartan Government Income
		Fidelity Spartan U.S. Equity Index
		Franklin Small-Mid Cap Growth A
		Janus Enterprise
		Janus Growth & Income
		PIMCO Foreign Bond Institutional
		PIMCO Long Term US Government Institutional
		PIMCO Total Return Institutional
		Putnam Global Equity A
		Putnam International Capital Opportunities Fund A**
		T. Rowe Price Blue Chip Growth
		Vanguard Asset Allocation

* Prior to October 2003, known as Liberty Acorn Class Z

** Prior to April 30, 2003, known as Putnam International Voyager Fund A

Redesignation of Deferred Amounts measured by Putnam Global Equity A and Putnam International Capital Opportunities Fund A (collectively, the “Putnam Funds”) on November 19, 2003

Prior to 4 p.m. ET on November 19, 2003, each participant who has any part of his/her Deferred Compensation Account measured by a Putnam Funds investment alternative may redesignate the amount in such investment alternative in accordance with Article IV. If a participant does not redesignate the amount measured by a Putnam Funds investment alternative to any other remaining investment alternative(s) before 4 p.m. ET on November 19, 2003, then the amount in the Putnam Funds investment alternative shall be redesignated as of 4 p.m. ET on November 19, 2003, to the Fidelity Retirement Money Market Portfolio.

SCHEDULE A

MEASUREMENT METHODS
(November 19, 2003 to April 2, 2004)

Merck Common Stock

Mutual Funds


		American Century Emerging Markets Institutional
		American Funds EuroPacific Growth Fund
		Columbia Acorn Class Z*
		Fidelity Destiny I
		Fidelity Dividend Growth
		Fidelity Equity-Income
		Fidelity Low-Priced Stock
		Fidelity Mid-Cap Stock Fund
		Fidelity Retirement Money Market
		Fidelity Spartan Government Income
		Fidelity Spartan U.S. Equity Index
		Franklin Small-Mid Cap Growth A
		Janus Enterprise
		Janus Growth & Income
		PIMCO Foreign Bond Institutional
		PIMCO Long Term US Government Institutional
		PIMCO Total Return Institutional
		T. Rowe Price Blue Chip Growth
		Vanguard Asset Allocation

* Prior to October 2003, known as Liberty Acorn Class Z.

SCHEDULE A

MEASUREMENT METHODS
(April 2, 2004)

Merck Common Stock

Mutual Funds


		American Century Emerging Markets Institutional
		American Funds EuroPacific Growth Fund
		Columbia Acorn Class Z*
		Fidelity Destiny I
		Fidelity Dividend Growth
		Fidelity Equity-Income
		Fidelity Low-Priced Stock
		Fidelity Mid-Cap Stock Fund
		Fidelity Retirement Money Market
		Fidelity Spartan Government Income
		Fidelity Spartan U.S. Equity Index
		Janus Enterprise
		Janus Growth & Income
		PIMCO Foreign Bond Institutional
		PIMCO Long Term US Government Institutional
		PIMCO Total Return Institutional
		T. Rowe Price Blue Chip Growth
		Vanguard Asset Allocation

* Prior to October 2003, known as Liberty Acorn Class Z.

EX-10.2 3 y99716exv10w2.htm MERCK & CO., INC. DEFERRAL PROGRAM EXHIBIT 10.2

Exhibit 10.2

MERCK & CO., INC.

DEFERRAL PROGRAM

(Amended and Restated April 2, 2004)

TABLE OF CONTENTS


		Page
Article I	Administration		1
Article II	Eligibility		1
Article III	Deferral Into a Deferred Compensation Account		1
Article IV	Valuation of Deferred Compensation Accounts		2
Article V	Redesignation Within a Deferred Compensation Account		4
Article VI	Distribution of Deferred Compensation Accounts		6
Article VII	Deductions from Distributions		8
Article VIII	Beneficiary Designations		8
Article IX	Amendments		8
Schedule I	Deferral Program Investment Alternatives		9
Schedule II	Special Provisions Applicable to Medco Health Employees		14

(i)

MERCK & CO., INC. DEFERRAL PROGRAM

The Deferral Program (“the Program”) is intended to permit a select group of management to defer income which would otherwise be immediately payable to them as annual base salary or under various incentive plans of Merck & Co., Inc. (“the Company”).

I. ADMINISTRATION

This Program is administered by the Compensation and Benefits Committee of the Company’s Board of Directors. This Committee is composed of non-employee directors only. The Committee shall have responsibility for determining which investments will be available under the Program, and those investments shall be listed on Schedule I hereto. The Committee shall review the investment selections at least once every five years. The Committee shall make all decisions affecting the timing, price or amount of any and all of the Deferred Compensation of participants subject to Section 16 of the Securities Exchange Act of 1934, as amended (“Section 16 Officers”), but may otherwise delegate any of its authority under this Program.

II. ELIGIBILITY

Eligibility to defer under this Program will be determined in accordance with the terms of the Company’s Base Salary Deferral Plan and various incentive plans. However, the Committee has the authority to refuse to permit an employee to participate in this Program, if the Committee determines that such participation would jeopardize the Program’s compliance with applicable law or the Program’s status as a top hat plan under the Employee Retirement Income Security Act.

III. DEFERRAL INTO A DEFERRED COMPENSATION ACCOUNT

A. Election to Defer

A participant’s decision to defer under the Program must be made, (i) for the Base Salary Deferral Plan, prior to the commencement of the pay period during which the base salary to be deferred will be earned, (ii) for annual incentive plans, prior to the commencement of the performance year during which the bonus monies to be deferred will be earned, and (iii) for long-term incentive plans, prior to the commencement of the last year of the award period during which the bonus monies to be deferred will be earned. For purposes of annual incentive plans only, a participant who is hired by the Company during a performance year may make an election, no later than the thirtieth (30^th) day from the participant’s date of hire, to defer bonus monies to be earned during such performance year. For the Base Salary Deferral Plan, only amounts equal to or in excess of five percent (5%) of Annual Base Salary (as defined in the Base Salary Deferral Plan) and less than or equal to the lesser of (1) fifty percent (50%) of Annual Base Salary or (2) the Participant’s Annual Base Salary in excess of the amount determined under Section 401(a)(17) of the Internal Revenue Code may be deferred. For the annual and long-term incentive plans, only amounts in excess of $3,000 may be deferred. Amounts so deferred are known as “Deferred Compensation” and will be credited to the participant’s “Deferred Compensation Account.” Deferred Compensation shall be held in one account regardless of the plan (Base Salary Deferral or incentive plan) under which it was deferred.

B. Election of Distribution Schedule

1. Timing of Election

The participant shall also elect a distribution schedule for his/her Deferred Compensation. A participant’s election of a distribution schedule in connection with a deferral election under annual and/or long-term incentive plans shall be made at the same time that the participant makes the election to defer. A participant’s initial election of a distribution schedule in connection with deferrals under the Base Salary Deferral Plan shall be made at the same time as the initial deferral election, shall be irrevocable during the calendar year for which it was made and shall apply to all deferrals of Annual Base Salary until a new distribution election becomes effective. Thereafter, an election of a different distribution schedule in connection with deferrals under the Base Salary Deferral Plan may be made at any time, provided, however, that such new distribution schedule shall only apply prospectively to deferrals of Annual Base Salary in the following calendar year.

2. Distribution Schedule

A participant may elect to have payments begin at the participant’s actual retirement date, subsequent to that date or prior thereto. A participant may elect a lump sum or a schedule of annual installments, up to a maximum of 15 annual installments. No installment, however, may be payable more than fifteen years after the participant’s termination of employment.

C. Election of Investment Alternatives

The participant shall designate, in accordance with procedures established by the Company for such designation, the portion (in multiples of 1%) of the Deferred Compensation to be allocated to any investment alternative available under this Program.

IV. VALUATION OF DEFERRED COMPENSATION ACCOUNTS

A. Common Stock

1. Initial Crediting

The amount allocated to Merck Common Stock shall be used to determine the number of full and partial shares of Merck Common Stock which such amount would purchase at the closing price of Merck Common Stock on the New York Stock Exchange on the date cash payments of base salary, for amounts deferred under the Base Salary Deferral Plan, or incentive awards, for amounts deferred under the various incentive plans, would otherwise be paid to the participant (“the Deferral Date”). Should the Committee determine that valuation on any Deferral Date would not constitute fair market value, then the Committee shall decide on which date fair market value shall be determined using the valuation method set forth in this paragraph. The Company shall credit the participant’s Deferred Compensation Account with the number of full and partial shares of Merck Common Stock so determined. However, at no time prior to the delivery of such shares shall any shares be purchased or earmarked for such Account and the participant shall not have any of the rights of a shareholder with respect to shares credited to his/her Deferred Compensation Account.

2. Dividends

The Company shall credit the Participant’s Deferred Compensation Account with the number of full and partial shares of Merck Common Stock purchasable at the closing price of Merck Common Stock on the New York Stock Exchange as of the date each dividend is paid on the Common Stock, with the dividends which would have been paid on the number of shares credited to such Account (including pro rata dividends on any partial share) had the shares so credited then been issued and outstanding.

3. Redesignations

The value of Merck Common Stock for purposes of redesignation shall be the closing price of Merck Common Stock on the New York Stock Exchange on (i) the day when the redesignation request is received pursuant to administrative guidelines established by the Human Resources Financial Services area of the Treasury department, provided the request is received prior to the close of the New York Stock Exchange on such day or (ii) the next following business day if the request is received when the New York Stock Exchange is closed.

4. Distributions

Distributions of Merck Common Stock will be valued at the closing price of Merck Common Stock on the New York Stock Exchange on the distribution date.

5. Limitations

Shares of Merck Common Stock to be delivered under the provisions of this Program may be delivered by the Company from its authorized but unissued shares of Common Stock or from Common Stock held in the treasury. The amount of shares available each year under this Program shall be one-tenth of one-percent of outstanding shares of Merck Common Stock on the last business day of the preceding calendar year plus any shares authorized under this Program in previous years but not used, minus any shares distributed under the Executive Incentive Plan after April 26, 1994.

6. Adjustments

In the event of a reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation, rights offering or any other change in the corporate structure or shares of the Company, the number and kind of shares of Merck Common Stock available under this Program or credited to participants’ Deferred Compensation Accounts shall be adjusted accordingly.

B. Mutual Funds

1. Initial Crediting

The amount allocated to each Mutual Fund shall be used to determine the number of full and partial Mutual Fund shares that such amount would purchase at the closing net asset value of the Mutual Fund shares on the Deferral Date. The Company shall credit the participant’s Deferred Compensation Account with the number of full and partial Mutual Fund shares so

determined. However, no Mutual Fund shares shall be purchased or earmarked for such Account, nor shall the participant have the rights of a shareholder with respect to such Mutual Fund shares.

2. Dividends

The Company shall credit the participant’s Deferred Compensation Account with the number of full and partial Mutual Fund shares purchasable, at the closing net asset value of the Mutual Fund shares as of the date each dividend is paid on the Mutual Fund shares, with the dividends which would have been paid on the number of shares credited to such Account (including pro rata dividends on any partial share) had the shares then been owned by the participant for purposes of the above computation.

3. Redesignations

The value of Mutual Fund shares for purposes of redesignation shall be the net asset value of such Mutual Fund at the close of business on (i) the day when the redesignation request is received pursuant to administrative guidelines established by the Human Resources Financial Services area of the Treasury department, provided the request is received prior to the close of the New York Stock Exchange on such day or (ii) the next following business day if the request is received when the New York Stock Exchange is closed.

4. Distributions

Mutual Fund distributions will be valued based on the closing net asset value of the Mutual Fund shares on the distribution date.

5. Adjustments

In the event of a reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation, rights offering or any other change in the corporate structure or shares of a Mutual Fund, the number and kind of shares of that Mutual Fund credited to participants’ Deferred Compensation Accounts shall be adjusted accordingly.

V. REDESIGNATION WITHIN A DEFERRED COMPENSATION ACCOUNT

A. Basic Redesignation Rules

A participant, or the beneficiary or legal representative of a deceased participant, may redesignate amounts credited to a Deferred Compensation Account among the investments available under this Program in accordance with the following rules:

(1) Eligible Participants - Active employees, separated employees and retired participants are eligible to redesignate; provided, however, that no such redesignation shall be made into Merck Common Stock.

(2) Frequency and Timing — Effective June 1, 1999, there is no limit on the number of times a participant may redesignate amounts measured by Mutual Funds, or, subject to Section B, below, Merck Common Stock. Redesignation shall take place on (i) the day when the redesignation request is received pursuant to administrative guidelines established by the Human Resources Financial Services area of the Treasury department, provided the request is received prior to the close of the New York Stock Exchange on such day or (ii) the next following business day if the request is received when the New York Stock Exchange is closed.

(3) Amount and Extent of Redesignation — Redesignation must be in 1% multiples of the investment from which redesignation is being made.

(4) Beneficiaries or Legal Representatives — The beneficiary or legal representative of a deceased participant may redesignate subject to the same rules as participants. However, the beneficiary or legal representative shall have one opportunity to redesignate any amount out of Merck Common Stock without regard to the rule set forth in Section B, below; thereafter, the beneficiary or legal representative shall be subject to the same redesignation rules as participants (including the limitation on redesignation out of Merck Common Stock).

B. Special Rules for Redesignation Out of Common Stock

1. Eligible Participants

No redesignation may be made out of Merck Common Stock unless the participant’s balance in Merck Common Stock exceeds three times such participant’s Annual Base Salary. For the purposes of this Section B, Annual Base Salary for an active participant shall be such participant’s monthly base salary at the date the redesignation is requested, and, for a retired participant, monthly base salary at the date of retirement, annualized.

2. Frequency and Timing

For Section 16 Officers, redesignations may only be made out of Merck Common Stock during any window period established by the Company from time-to-time.

3. Amount.

Redesignation of amounts in Merck Common Stock is restricted to amounts in excess of three times Annual Base Salary. For Section 16 Officers, redesignation of amounts in Merck Common Stock is also restricted to amounts held in Merck Common Stock for longer than six (6) months.

4. Material, Nonpublic Information

The Committee, in its sole discretion and with advice of counsel, at any time may rescind a redesignation out of Merck Common Stock if such redesignation was made by a participant who, a) at the time of the redesignation was in the possession of material, nonpublic information with respect to the Company; and b) in the Committee’s estimation benefited from such information in the timing of his/her redesignation. The Committee’s determination shall be final and binding. In the event of such rescission, the participant’s Deferred Compensation Account shall be returned to a status as though such redesignation had not occurred. Notwithstanding the above, the Committee shall not rescind a redesignation if the facts were reviewed by the participant with the

General Counsel of the Company or a designee prior to the redesignation and if the General Counsel or designee had concluded that such participant was not in possession of adverse material, nonpublic information.

C. Conversion of Common Stock Accounts

The Committee may, in its sole discretion, convert all of the shares of Merck Common Stock allocated to a participant’s Deferred Compensation Account in the manner provided below where a position which a terminated or retired participant has taken or wishes to take is, in the opinion of the Committee, such as would make uncertain the propriety of the participant’s having a continued interest in Merck Common Stock. The date of conversion shall be the date of commencement of such other employment or the date of the Committee’s action, whichever is later.

Conversion shall be from an expression of value in shares of Merck Common Stock in the participant’s Deferred Compensation Account to an expression of value in United States dollars in another available investment. The value of the Merck Common Stock shall be based upon its closing price on the New York Stock Exchange on the date of conversion or if no trading took place on such day, the next business day on which trading took place. Any conversion under this paragraph shall be irrevocable and absolute.

VI. DISTRIBUTION OF DEFERRED COMPENSATION ACCOUNTS

Distribution of Deferred Compensation Accounts shall be made in accordance with the participant’s distribution schedule pro rata by investment. Distributions from Merck Common Stock will be made in shares, with cash payable for any partial share, subject to the limitations set forth in Article IV, Section A.5. For Section 16 Officers, distribution of amounts in Merck Common Stock is also restricted to amounts held in Merck Common Stock for longer than six months. Distributions from Mutual Funds will be in cash. Distributions will be valued on the fifteenth day of the distribution month (or, if such day is not a business day, the next business day) and paid as soon thereafter as practicable.

A. Retirement

A participant’s retirement from active service will cause distributions of his/her Deferred Compensation Account to commence as soon as administratively feasible in accordance with the participant’s previously elected schedule.

If a participant retires from active service prior to age 65, the Committee may establish a different distribution schedule. The schedule chosen by the Committee, however, shall not be shorter than the participant’s previously elected schedule unless there has been or would be a significant change in the participant’s economic circumstances attributable to the participant’s early retirement. If the Committee decides to change the participant’s distribution schedule, the participant’s Deferred Compensation Account must be distributed ratably over no less than five years. However, if a participant has retired at the Company’s request, the limitation in the preceding sentence does not apply.

B. Death

In the event of a participant’s death, distributions under this Program will commence as soon as administratively feasible in accordance with his/her previously elected schedule. The participant’s beneficiary or legal representative, however, may request that the Committee change such distribution schedule.

C. Automatic Distribution

If a participant terminates employment for reasons other than death, divestiture or a separation due to reorganization, reduction in force, elimination of the participant’s job, or to take a position with a joint venture or other business entity defined in Section E, below, and is not eligible to retire from active service under one of the Company’s pension plans, then his/her Deferred Compensation Account will be automatically paid in a lump sum as soon as administratively feasible following his/her termination of employment. Furthermore, except as provided in Schedule II, any participant who dies, retires from active service, or whose employment terminates as a result of a divestiture, or a separation due to reorganization, reduction in force, or elimination of the participant’s job, but whose Deferred Compensation Account is valued at less than $125,000 on the date of his/her death, retirement, termination due to divestiture or separation will have his/her Deferred Compensation Account distributed in a lump sum as soon as administratively feasible following his/her death, retirement, or termination due to divestiture or separation.

D. Termination Due to Divestiture or Separation

If a participant is employed by a subsidiary of the Company that is sold, so that the subsidiary is no longer considered within the controlled group of the Company, that participant shall be considered to have terminated employment with the Company for purposes of this Program. If a participant’s employment terminates as a result of a divestiture of a division or subsidiary of the Company, or as a result of a separation due to a reorganization, reduction in force, or elimination of the participant’s job, distributions under this Program will commence as soon as administratively feasible after such termination of employment in accordance with his/her previously elected schedule or such schedule as the Committee, in its discretion, may approve in accordance with Section G, below.

E. Joint Venture Service

A participant’s termination of employment in order to take a position with a joint venture or other business entity in which the Company shall directly or indirectly own fifty percent or more of the outstanding voting or other ownership interest shall not be considered a termination of employment with the Company for purposes of distribution under this Program.

F. Hardship Distributions

The Committee, in its sole discretion, may accelerate the time of distribution of a participant’s Deferred Compensation Account, if the participant experiences severe financial hardship due to illness, accident or death in the immediate family, loss of or damage to property due to casualty, or other extraordinary and unforeseeable circumstances. Such participant should provide the Committee with a statement in reasonable detail as to the nature of such financial hardship together with a statement that such acceleration is necessary to alleviate such hardship.

G. Post-Retirement, Post-Divestiture and Post-Separation Modifications

A participant who has retired from active service or whose employment has terminated as a result of a divestiture or separation as described in Section D, above, may submit one petition to the Committee requesting an extension of the period of distribution of his/her Deferred Compensation Account. Such petition must be received by the Committee prior to the first distribution to the participant of his/her previously elected distribution schedule. Any revised distribution schedule may not exceed fifteen years from the date of actual retirement, or the divestiture or separation date and will be effective the beginning of the next calendar year. The Committee shall in no event grant a new schedule under which the participant would cumulatively receive a greater portion of his/her Deferred Compensation Account as measured at the end of each calendar year. Except as provided in Schedule II, a participant who is an active employee may not make a request under this paragraph.

VII. DEDUCTIONS FROM DISTRIBUTIONS

The Company will deduct from each distribution amounts required to be withheld for income, Social Security and other tax purposes. Such withholding will be done on a pro rata basis per investment. The Company may also deduct any amounts the participant owes the Company for any reason.

VIII. BENEFICIARY DESIGNATIONS

A participant under this program may designate a beneficiary to receive his/her Deferred Compensation Account upon the participant’s death. Should the beneficiary predecease the participant or should the participant not name a beneficiary, the participant’s Deferred Compensation Account will be distributed to the participant’s estate.

IX. AMENDMENTS

The Committee may amend this Program at any time. However, such amendment shall not materially adversely affect any right or obligation with respect to any Deferred Compensation made theretofore.

SCHEDULE I

DEFERRAL PROGRAM INVESTMENT ALTERNATIVES
(January 1, 2002 – January 10, 2003)

Merck Common Stock

Mutual Funds


		American Century Emerging Markets Fund
		American Funds EuroPacific Growth Fund
		Fidelity Destiny I
		Fidelity Dividend Growth
		Fidelity Equity-Income Fund
		Fidelity Low-Priced Stock Fund
		Fidelity Retirement Money Market
		Fidelity Spartan ® Government Income
		Fidelity Spartan ® U.S. Equity Index
		Franklin Small-Mid Cap Growth A
		Janus Enterprise
		Janus Growth & Income
		Liberty Acorn Fund-Class Z
		PIMCO Foreign Bond Institutional
		PIMCO Long Term US Government Institutional
		PIMCO Total Return Institutional
		Putnam Global Equity Fund A*
		Putnam International Voyager A
		Putnam Vista A
		T. Rowe Price Blue Chip Growth Fund
		Vanguard Asset Allocation

*From September 20, 2002 – September 30, 2002, this investment was briefly named the Putnam Global Growth Fund A as a result of the merger, in September 2002, of Putnam Global Equity Fund A with Putnam Global Growth Fund A. The merged fund briefly retained the name “Putnam Global Growth Fund A.” Effective October 1, 2002, the merged fund changed its name to “Putnam Global Equity Fund A.”

SCHEDULE I

DEFERRAL PROGRAM INVESTMENT ALTERNATIVES
(Effective January 11, 2003 to July 31, 2003)

Merck Common Stock

Mutual Funds


		American Century Emerging Markets Institutional
		American Funds EuroPacific Growth Fund
		Fidelity Destiny I
		Fidelity Dividend Growth
		Fidelity Equity-Income
		Fidelity Low-Priced Stock
		Fidelity Retirement Money Market
		Fidelity Spartan Government Income
		Fidelity Spartan U.S. Equity Index
		Franklin Small-Mid Cap Growth A
		Janus Enterprise
		Janus Growth & Income
		Liberty Acorn Class Z
		PIMCO Foreign Bond Institutional
		PIMCO Long Term US Government Institutional
		PIMCO Total Return Institutional
		Putnam Global Equity A
		Putnam International Capital Opportunities Fund A*
		Putnam Vista A
		T. Rowe Price Blue Chip Growth
		Vanguard Asset Allocation

*Prior to April 30, 2003, known as Putnam International Voyager Fund A.

Redesignation of Deferred Amounts measured by Putnam Vista A on July 31, 2003

Prior to 4 p.m. ET on July 31, 2003, each participant who has any part of his/her Deferred Compensation Account measured by the Putnam Vista A investment alternative may redesignate the amount in such investment alternative in accordance with Article V, Section A. If a participant does not redesignate the amount measured by the Putnam Vista A investment alternative to any other remaining investment alternatives before 4 p.m. ET on July 31, 2003, then the amount in the Putnam Vista A account shall be redesignated as of 4 p.m. ET on July 31, 2003, to the Fidelity Mid-Cap Stock Fund.

SCHEDULE I

DEFERRAL PROGRAM INVESTMENT ALTERNATIVES
(Effective July 31, 2003-November 19, 2003)

Merck Common Stock

Mutual Funds


		American Century Emerging Markets Institutional
		American Funds EuroPacific Growth Fund
		Columbia Acorn Fund Z*
		Fidelity Destiny I
		Fidelity Dividend Growth
		Fidelity Equity-Income
		Fidelity Low-Priced Stock
		Fidelity Mid-Cap Stock Fund
		Fidelity Retirement Money Market
		Fidelity Spartan Government Income
		Fidelity Spartan U.S. Equity Index
		Franklin Small-Mid Cap Growth A
		Janus Enterprise
		Janus Growth & Income
		PIMCO Foreign Bond Institutional
		PIMCO Long Term US Government Institutional
		PIMCO Total Return Institutional
		Putnam Global Equity A
		Putnam International Capital Opportunities Fund A**
		T. Rowe Price Blue Chip Growth
		Vanguard Asset Allocation

*Prior to October 2003, known as Liberty Acorn Class Z

**Prior to April 30, 2003, known as Putnam International Voyager Fund A.

Redesignation of Deferred Amounts measured by Putnam Global Equity A and Putnam International Capital Opportunities Fund A (collectively, the “Putnam Funds”) on November 19, 2003

Prior to 4 p.m. ET on November 19, 2003, each participant who has any part of his/her Deferred Compensation Account measured by a Putnam Funds investment alternative may redesignate the amount in such investment alternative in accordance with Article V, Section A. If a participant does not redesignate the amount measured by a Putnam Funds investment alternative to any other remaining investment
alternative(s) before 4 p.m. ET on November 19, 2003, then the amount in the Putnam Funds investment alternative shall be redesignated as of 4 p.m. ET on November 19, 2003, to the Fidelity Retirement Money Market portfolio.

SCHEDULE I

DEFERRAL PROGRAM INVESTMENT ALTERNATIVES
(November 19, 2003 to April 2, 2004)

Merck Common Stock

Mutual Funds


		American Century Emerging Markets Institutional
		American Funds EuroPacific Growth Fund
		Columbia Acorn Class Z*
		Fidelity Destiny I
		Fidelity Dividend Growth
		Fidelity Equity-Income
		Fidelity Low-Priced Stock
		Fidelity Mid-Cap Stock Fund
		Fidelity Retirement Money Market
		Fidelity Spartan Government Income
		Fidelity Spartan U.S. Equity Index
		Franklin Small-Mid Cap Growth A
		Janus Enterprise
		Janus Growth & Income
		PIMCO Foreign Bond Institutional
		PIMCO Long Term US Government Institutional
		PIMCO Total Return Institutional
		T. Rowe Price Blue Chip Growth
		Vanguard Asset Allocation

* Prior to October 2003, known as Liberty Acorn Class Z.

SCHEDULE I

DEFERRAL PROGRAM INVESTMENT ALTERNATIVES
(April 2, 2004)

Merck Common Stock

Mutual Funds


		American Century Emerging Markets Institutional
		American Funds EuroPacific Growth Fund
		Columbia Acorn Class Z*
		Fidelity Destiny I
		Fidelity Dividend Growth
		Fidelity Equity-Income
		Fidelity Low-Priced Stock
		Fidelity Mid-Cap Stock Fund
		Fidelity Retirement Money Market
		Fidelity Spartan Government Income
		Fidelity Spartan U.S. Equity Index
		Janus Enterprise
		Janus Growth & Income
		PIMCO Foreign Bond Institutional
		PIMCO Long Term US Government Institutional
		PIMCO Total Return Institutional
		T. Rowe Price Blue Chip Growth
		Vanguard Asset Allocation

* Prior to October 2003, known as Liberty Acorn Class Z.

SCHEDULE II

SPECIAL PROVISIONS APPLICABLE TO
MEDCO HEALTH EMPLOYEES
(approved July 23, 2002)

DEFINITIONS

Medco Health – Medco Health Solutions, Inc.

Medco Health Employee – A participant who is (i) employed by Medco Health prior to the Spin-Off or (ii) employed by Merck prior to the Spin-Off and expected to be employed by Medco Health prior to or as of the Spin-Off.

Separated Medco Health Employee – A participant in the Deferral Program who is employed by Medco Health as of the date of the Spin-Off and is considered to have terminated employment with the Company as a result of the Spin-Off.

Spin-Off – The distribution by Merck to its shareholders of the equity securities of Medco Health. The Spin-Off will be a divestiture for purposes of the Deferral Program.

SPECIAL PROVISIONS

Notwithstanding anything to the contrary in Article VI, Section C of the Deferral Program, the Deferred Compensation Account of each Separated Medco Health Employee shall be paid out in accordance with Article VI, Section D, without regard to the $125,000 threshold set forth in Section C.

Notwithstanding anything to the contrary in Article VI, Section G of the Deferral Program, each Medco Health Employee may submit the petition for an extension of the distribution schedule permitted under Section G either prior to the Spin-Off or once the Medco Health Employee has become a Separated Medco Health Employee; provided, however, that if a Medco Health Employee makes a request for a new distribution schedule prior to the Spin-Off and thereafter does not become a Separated Medco Health Employee, then such request shall not be effective.

EX-12 4 y99716exv12.htm COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES EXHIBIT 12

Exhibit 12

MERCK & CO., INC. AND SUBSIDIARIES

Computation Of Ratios Of Earnings To Fixed Charges

($ in millions except ratio data)


	Six Months
	Ended			Years Ended December 31
	June 30
	2004				2003			2002			2001			2000			1999
Income from Continuing Operations Before Taxes	$	4,781.7			$	9,051.6		$	9,651.7		$	9,948.1		$	9,362.3		$	8,370.1
Add (Subtract):
One-third of rents		40.0				75.6			67.2			64.2			55.9			55.0
Interest expense, gross		144.4				350.9			390.6			463.7			484.0			315.5
Interest capitalized, net of amortization		(8.1	)			(30.1	)		(36.9	)		(66.1	)		(99.0	)		(61.4	)
Equity (income) loss from affiliates, net of distributions		(124.5	)			79.2			(156.1	)		(113.7	)		(288.3	)		(352.7	)
Preferred stock dividends, net of tax		73.6				150.9			164.3			199.6			205.0			120.2

Earnings from Continuing Operations	$	4,907.1			$	9,678.1		$	10,080.8		$	10,495.8		$	9,719.9		$	8,446.7

One-third of rents	$	40.0			$	75.6		$	67.2		$	64.2		$	55.9		$	55.0
Interest expense, gross		144.4				350.9			390.6			463.7			484.0			315.5
Preferred stock dividends		105.1				215.6			234.7			285.1			292.9			171.7

Fixed Charges from Continuing Operations	$	289.5			$	642.1		$	692.5		$	813.0		$	832.8		$	542.2

Ratio of Earnings to Fixed Charges from Continuing Operations		17				15			15			13			12			16

For purposes of computing these ratios, “earnings” consist of income from continuing operations before taxes, one-third of rents (deemed by the Company to be representative of the interest factor inherent in rents), interest expense, net of amounts capitalized, equity (income) loss from affiliates, net of distributions, and dividends on preferred stock of subsidiary companies. “Fixed charges” consist of one-third of rents, interest expense as reported in the Company’s consolidated financial statements and dividends on preferred stock of subsidiary companies.

EX-31.1 5 y99716exv31w1.htm CERTIFICATION EXHIBIT 31.1

Exhibit 31.1

CERTIFICATION

I, Raymond V. Gilmartin, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Merck & Co., Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 6, 2004


By:		/s/ Raymond V. Gilmartin

		RAYMOND V. GILMARTIN
		Chairman, President and Chief Executive Officer

EX-31.2 6 y99716exv31w2.htm CERTIFICATION EXHIBIT 31.2

Exhibit 31.2

CERTIFICATION

I, Judy C. Lewent, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Merck & Co., Inc.;

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 6, 2004


By:		/s/ Judy C. Lewent

		JUDY C. LEWENT
		Executive Vice President & Chief Financial Officer
		President, Human Health Asia

EX-32.1 7 y99716exv32w1.htm CERTIFICATION EXHIBIT 32.1

Exhibit 32.1

Section 1350
Certification of Chief Executive Officer

Pursuant to 18 U.S.C. Section 1350, the undersigned officer of Merck & Co., Inc. (the “Company”), hereby certifies that the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


Dated: August 6, 2004		/s/ Raymond V. Gilmartin

	Name:	Raymond V. Gilmartin
	Title:	Chairman, President and Chief Executive Officer

EX-32.2 8 y99716exv32w2.htm CERTIFICATION EXHIBIT 32.2

Exhibit 32.2

Section 1350
Certification of Chief Financial Officer


Dated: August 6, 2004		/s/ Judy C. Lewent

	Name:	Judy C. Lewent
	Title:	Executive Vice President & Chief Financial Officer President, Human Health Asia

-----END PRIVACY-ENHANCED MESSAGE-----

Number of Shares Outstanding

Common Stock

2,218,705,689

3.		In February, Merck and H. Lundbeck A/S (Lundbeck) entered into an agreement for the exclusive U.S. development and commercialization of gaboxadol, a compound currently in Phase III development for the treatment of sleep disorders. Under the terms of the agreement, Merck made an initial payment of $70.0 million, recorded as Research and development expense in the first quarter and may pay up to $200.0 million in additional milestone payments in the future. Merck and Lundbeck will jointly complete the ongoing Phase III clinical program, with Merck funding the majority of the remaining development activities. In June, Merck and Lundbeck announced an extension of their agreement for the exclusive development and commercialization of gaboxadol to Japan.

4.		In March, the Company acquired Aton Pharma, Inc. (Aton), a privately held biotechnology company focusing on the development of novel treatments for cancer and other serious diseases. Aton’s clinical pipeline of histone deacetylase inhibitors represents a class of anti-tumor agents with potential for efficacy based on a novel mechanism of action. Aton’s lead product candidate, suberoylanilide hydroxamic acid, known as SAHA, has been extensively studied in Phase I clinical trials and is currently in Phase II clinical trials for the treatment of cutaneous T-cell lymphoma. Consideration for the acquisition consisted of an upfront payment and may include contingent payments based upon the regulatory filing, approval and sale of products. In connection with the transaction, the Company recorded a charge of $125.5 million for acquired research associated with products in development for which, at the acquisition date, technological feasibility had not been established and no alternative future use existed. This charge was recorded in Research and development expense in the first quarter and was determined based upon the present value of projected future cash flows utilizing an income approach reflecting the appropriate risk-adjusted discount rate based on the product candidate’s stage of completion and its probability of technical and marketing success. The remaining net assets acquired in this transaction were not material. Because Aton was a development stage company that had not commenced its planned principal operations, the transaction was accounted for as an acquisition of assets rather than as a business combination and, therefore, goodwill was not recorded. Aton’s results of operations have been included with the Company’s since the acquisition date.

5.		In March, Merck completed the sale of its 50-percent equity stake in Johnson & Johnson/MSD Europe, a non-prescription pharmaceuticals joint venture, to Johnson & Johnson for $244.0 million and recorded a $176.8 million gain as Other (income) expense, net in the first quarter. In addition to the sales proceeds, Merck will continue to benefit through royalties on certain products. Merck has also regained the rights to potential future products that switch from prescription to over-the-counter status in Europe. Johnson & Johnson/Merck Consumer Pharmaceuticals Co., a 50/50 joint venture between Johnson & Johnson and Merck that operates in the United States and Canada, is unaffected by this transaction.

6.		In April, Merck and Bristol-Myers Squibb Company entered into a global collaborative agreement for muraglitazar, Bristol-Myers Squibb’s dual PPAR (peroxisome proliferator-activated receptor) agonist, currently in Phase III clinical development for use in treating both blood glucose and lipid abnormalities in patients with type 2 diabetes. Under the terms of the agreement, Bristol-Myers Squibb received a $100.0 million upfront payment and may receive up to $275.0 million in additional payments based upon the achievement of certain regulatory milestones. The Company recorded the upfront payment as Research and development expense in the second quarter. The companies will jointly develop the clinical and marketing strategy for muraglitazar and share equally in future development and commercialization costs.

7.		In August 2003, Merck completed the spin-off of Medco Health Solutions, Inc. (Medco Health). Following the spin-off, the Company’s prior period Consolidated Statements of Income and Cash Flows and related disclosures have been restated to present the results of Medco Health separately as discontinued operations.

10.		In the first quarter of 2004, the Company issued $350.0 million of 2.5% three-year notes and $50.0 million of variable rate notes due in 2044 that are subject to repayment at the option of the holders on an annual basis. The Company also entered into an interest rate swap contract that effectively converts the 2.5% fixed rate notes to floating rate instruments. The interest rate swap is designated as a hedge 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 are fully offset in interest expense by the fair value changes in the swap contract.

11.		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 additional matters such as antitrust actions.

		Minority interests include third parties’ share of exchange gains and losses arising from translation of the financial statements into U.S. dollars.

		The change in Other, net for the three and six months ended June 30, 2004 reflects lower realized net gains on the Company’s investment portfolios compared with the respective periods ended June 30, 2003. In addition, the six month period ended June 30, 2004 reflects the gain on the divestiture of Merck’s 50-percent equity stake in Johnson & Johnson/MSD Europe.

		Interest paid for the six month periods ended June 30, 2004 and 2003 was $140.5 million and $175.8 million, respectively.

15.		The weighted average common shares used in the computations of basic earnings per common share and earnings per common share assuming dilution (shares in millions) are as follows:

⁽¹⁾		Issuable primarily under stock-based compensation programs, including unvested PSUs and RSUs.

16.		Comprehensive income for the three months ended June 30, 2004 and 2003, representing all changes in stockholders’ equity during the period other than changes resulting from the Company’s stock, was $1,638.1 million and $1,804.6 million, respectively. Comprehensive income for the six months ended June 30, 2004 and 2003 was $3,271.6 million and $3,504.8 million, respectively.

17.		The Company’s operations are principally managed on a products basis. The Merck Pharmaceutical segment includes products marketed either directly or through joint ventures. These products consist of therapeutic and preventive agents, sold by prescription, for the treatment of human disorders. All Other includes non-reportable human and animal health segments.

		Revenues and profits for these segments are as follows:

2.		A proposal to ratify the appointment of independent auditors for 2004 received 1,823,849,901 votes FOR and 42,143,814 votes AGAINST, with 18,047,632 abstentions.

3.		A proposal to amend the Restated Certificate of Incorporation received 1,819,528,332 votes FOR and 42,062,845 votes AGAINST, with 22,348,811 abstentions.

4.		A stockholder proposal concerning management compensation received 102,377,162 votes FOR and 1,319,758,711 votes AGAINST, with 33,939,601 abstentions and 427,965,873 broker non-votes.

5.		A stockholder proposal concerning extension of prescription drug patents received 104,400,639 votes FOR and 1,227,982,412 votes AGAINST, with 123,711,078 abstentions and 427,947,218 broker non-votes.

6.		A stockholder proposal concerning ethical and social performance of the Company received 58,360,595 votes FOR and 1,284,975,896 votes AGAINST, with 112,742,741 abstentions and 427,962,115 broker non-votes.

7.		A stockholder proposal concerning use of shareholder resources for political purposes received 135,947,894 votes FOR and 1,206,271,047 votes AGAINST, with 113,866,603 abstentions and 427,955,803 broker non-votes.

8.		A stockholder proposal concerning a report related to the global HIV/AIDS pandemic received 181,807,418 votes FOR and 1,150,837,735 votes AGAINST, with 123,457,570 abstentions and 427,938,624 broker non-votes.

I.		PURPOSE

		To provide an arrangement under which directors of Merck & Co., Inc. other than current employees may (i) elect to voluntarily defer payment of the annual retainer and meeting and committee fees until after termination of their service as a director, and (ii) value compensation mandatorily deferred on their behalf.

II.		ELECTION OF DEFERRAL, MEASUREMENT METHODS AND DISTRIBUTION SCHEDULE

	A.		Election of Voluntary Deferral Amount

	1.		Prior to December 28 of each year, each director is entitled to make an irrevocable election to defer until termination of service as a director receipt of payment of (a) 50% or 100% of the retainer for the 12 months beginning April 1 of the next calendar year, (b) 50% or 100% of the Committee Chairperson retainer beginning April 1 of the next calendar year, and (c) 50% or 100% of the meeting and committee fees for the 12 months beginning April 1 of the next calendar year.

	2.		Prior to commencement of duties as a director, a director newly elected or appointed to the Board during a calendar year must make the election under this paragraph for the portion of the Voluntary Deferral Amount applicable to such director’s first year of service (or part thereof).

	3.		The Voluntary Deferral Amount shall be credited as follows: (1) Meeting and committee fees that are deferred are credited as of the day the director’s services are rendered; (2) if the Board retainer and/or Committee Chairperson retainer is deferred, a pro-rata share of the deferred retainer is credited on the last business day of each calendar quarter. The dates the Voluntary Deferral Amount, or parts thereof, are credited to the director’s deferred account are hereinafter referred to as the Voluntary Deferral Dates.

	B.		Mandatory Deferral Amount

	1.		On the Friday following the Company’s Annual Meeting of Stockholders (such Friday hereinafter referred to as the “Mandatory Deferral Date”), each director will be credited with an amount equivalent to one-third of the annual cash retainer for the 12 month period beginning on the April 1 preceding the Annual Meeting (the “Mandatory Deferral Amount”). The Mandatory Deferral Amount will be measured by the Merck Common Stock account.

	2.		A director newly elected or appointed to the Board after the Mandatory Deferral Date will be credited with a pro rata portion of the Mandatory Deferral Amount applicable to such director’s first year of service (or part thereof). Such pro rata portion shall be credited to the director’s account on the first day of such director’s service.

	C.		Election of Measurement Method

			Each such annual election referred to in Section A shall include an election as to the measurement method or methods by which the value of amounts deferred will be measured in accordance with Article III, below. The available measurement methods are set forth on Schedule A hereto.

	D.		Election of Distribution Schedule

			Each annual election referred to in Section A above shall also include an election to receive payment following termination of service as a director of all Voluntary Deferral Amounts and Mandatory Deferral Amounts in a lump sum either immediately or one year after such termination, or in quarterly or annual installments over five, ten or fifteen years.

	A.		Common Stock

	1.		Initial Crediting. The annual Mandatory Deferral Amount shall be used to determine the number of full and partial shares of Merck Common Stock which such amount would purchase at the closing price of the Common Stock on the New York Stock Exchange on the Mandatory Deferral Date.

			That portion of the Voluntary Deferral Amount allocated to Merck Common Stock shall be used to determine the number of full and partial shares of Merck Common Stock which such amount would purchase at the closing price of the Common Stock on the New York Stock Exchange on the applicable Voluntary Deferral Date.

			However, should it be determined by the Committee on Corporate Governance of the Board of Directors that a measurement of Merck Common Stock on any Mandatory or Voluntary Deferral Date would not constitute fair market value, then the Committee shall decide on which date fair market value shall be determined using the valuation method set forth in this Article III, Section A.1.

			At no time during the deferral period will any shares of Merck Common Stock be purchased or earmarked for such deferred amounts nor will any rights of a shareholder exist with respect to such amounts.

	2.		Dividends. Each director’s account will be credited with the additional number of full and partial shares of Merck Common Stock which would have been purchasable with the dividends on shares previously credited to the account at the closing price of the Common Stock on the New York Stock Exchange on the date each dividend was paid.

	3.		Distributions. Distribution from the Merck Common Stock account will be valued at the closing price of Merck Common Stock on the New York Stock Exchange on the distribution date.

	B.		Mutual Funds

	1.		Initial Crediting. The amount allocated to each Mutual Fund shall be used to determine the full and partial Mutual Fund shares which such amount would purchase at the closing net asset value of the Mutual Fund shares on the Mandatory or Voluntary Deferral Date, whichever is applicable. The director’s account will be credited with the number of full and partial Mutual Fund shares so determined.

			At no time during the deferral period will any Mutual Fund shares be purchased or earmarked for such deferred amounts nor will any rights of a shareholder exist with respect to such amounts.

	2.		Dividends. Each director’s account will be credited with the additional number of full and partial Mutual Fund shares which would have been purchasable, at the closing net asset value of the Mutual Fund shares as of the date each dividend is paid on the Mutual Fund shares, with the dividends which would have been paid on the number of shares previously credited to such account (including pro rata dividends on any partial shares).

	3.		Distributions. Mutual Fund distributions will be valued based on the closing net asset value of the Mutual Fund shares on the distribution date.

	C.		Adjustments

			In the event of a reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation, rights offering or any other change in the corporate structure or shares of the Company or a Mutual Fund, the number and kind of shares or units of such investment measurement method available under this Plan and credited to each director’s account shall be adjusted accordingly.

	A.		General

			A director may request a change in the measurement methods used to value all or a portion of his/her account other than Merck Common Stock. Amounts deferred using the Merck Common Stock method and any earnings attributable to such deferrals may not be redesignated. The change will be effective on (i) the day when the redesignation request is received pursuant to administrative guidelines established by the Human Resources Financial Services area of the Treasury department, provided the request is received prior to the close of the New York Stock Exchange on such day or (ii) the next following business day if the request is received when the New York Stock Exchange is closed.

	B.		When Redesignation May Occur

	1.		During Active Service. There is no limit on the number of times a director may redesignate the portion of his/her deferred account permitted to be redesignated. Each such request shall be irrevocable and can be designated in whole percentages or as a dollar amount.

	2.		After Death. Following the death of a director, the legal representative or beneficiary of such director may redesignate subject to the same rules as for active directors set forth in Article IV, Section B.1.

	C.		Valuation of Amounts to be Redesignated

			The portion of the director’s account to be redesignated will be valued at its cash equivalent and such cash equivalent will be converted into shares or units of the other measurement method(s). For purposes of such redesignations, the cash equivalent of the value of the Mutual Fund shares shall be the closing net asset value of such Mutual Fund on (i) the day when the redesignation request is received pursuant to administrative guidelines established by the Human Resources Financial Services area of the Treasury department, provided the request is received prior to the close of the New York Stock Exchange on such day or (ii) the next following business day if the request is received when the New York Stock Exchange is closed.

	A.		Payment

			All payments to directors of amounts deferred will be in cash in accordance with the distribution schedule elected by the director pursuant to Article II, Section D. Distributions shall be pro rata by measurement method. Distributions shall be valued on the fifteenth day of the distribution month (or, if such day is not a business day, the next business day) and paid as soon thereafter as possible.

	B.		Changes to Distribution Schedule Prior to Termination

			Upon the request of a director made at any time during the calendar year immediately preceding the calendar year in which service as a director is expected to terminate, the Committee on Corporate Governance of the Board of Directors (the “Committee”), in its sole discretion, may authorize: (a) an extension of a payment period beyond that originally elected by the director not to exceed that otherwise allowable under Article II, Section D, and/or (b) a payment frequency different from that originally elected by the director. Such request may not be made with regard to amounts deferred after December 31, 1990 using the Merck Common Stock method and to any earnings attributable to such deferrals. Deferrals into Merck Common Stock made after December 31, 1990 and any earnings thereon may only be distributed in accordance with the schedule elected by the director under Article II, Section D or determined by the Committee on Corporate Governance under Article VI.

	C.		Post-Termination Changes to Distribution Schedule

			Following termination of service as a director, each director may make one request for a further extension of the period for distribution of his/her deferred compensation. Such request must be received by the Committee on Corporate Governance prior to the first distribution to the participant under his/her previously elected distribution schedule. Any revised distribution schedule may not exceed the deferral period otherwise allowable under Article II, Section C. This request may be granted and a new payment schedule determined in the sole discretion of the Committee on Corporate Governance.

			Such request may not be made with regard to amounts deferred after December 31, 1990 using the Merck Common Stock Method and to any earnings attributable to such deferrals. Any retired director who is not subject to U.S. income tax may petition the Committee on Corporate Governance to change payment frequency, including a lump sum distribution, and the Committee on Corporate Governance may grant such petition if, in its discretion, it considers there to be reasonable justification therefor. Deferrals into Merck Common Stock made after December 30, 1990 and any earnings thereon may only be distributed in accordance with the schedule elected by the director under Article II, Section D or determined by the Committee on Corporate Governance under Article VI.

	D.		Forfeitures

			A director’s deferred amount attributable to the Mandatory Deferral Amount and earnings thereon shall be forfeited upon his or her removal as a director or upon a determination by the Committee on Corporate Governance in its sole discretion, that a director has:

	(i)		joined the Board of, managed, operated, participated in a material way in, entered employment with, performed consulting (or any other) services for, or otherwise been connected in any material manner with a company, corporation, enterprise, firm, limited partnership, partnership, person, sole proprietorship or any other business entity determined by the Committee on Corporate Governance in its sole discretion to be competitive with the business of the Company, its subsidiaries or its affiliates (a “Competitor”);

	(ii)		directly or indirectly acquired an equity interest of five (5) percent or greater in a Competitor; or

	(iii)		disclosed any material trade secrets or other material confidential information, including customer lists, relating to the Company or to the business of the Company to others, including a Competitor.

VI.		DESIGNATION OF BENEFICIARY

		In the event of the death of a director, the deferred amount at the date of death shall be paid to the last named beneficiary or beneficiaries designated by the director, or, if no beneficiary has been designated, to the director’s legal representative, in one or more

		installments as the Committee on Corporate Governance in its sole discretion may determine.

VII.		PLAN AMENDMENT OR TERMINATION

		The Committee on Corporate Governance shall have the right to amend or terminate this Plan at any time for any reason.

	(2)		Frequency and Timing — Effective June 1, 1999, there is no limit on the number of times a participant may redesignate amounts measured by Mutual Funds, or, subject to Section B, below, Merck Common Stock. Redesignation shall take place on (i) the day when the redesignation request is received pursuant to administrative guidelines established by the Human Resources Financial Services area of the Treasury department, provided the request is received prior to the close of the New York Stock Exchange on such day or (ii) the next following business day if the request is received when the New York Stock Exchange is closed.

	(3)		Amount and Extent of Redesignation — Redesignation must be in 1% multiples of the investment from which redesignation is being made.

	(4)		Beneficiaries or Legal Representatives — The beneficiary or legal representative of a deceased participant may redesignate subject to the same rules as participants. However, the beneficiary or legal representative shall have one opportunity to redesignate any amount out of Merck Common Stock without regard to the rule set forth in Section B, below; thereafter, the beneficiary or legal representative shall be subject to the same redesignation rules as participants (including the limitation on redesignation out of Merck Common Stock).