-----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, Ftos1OL2FXpy6nQo7kUgLWUBxXFxI/NUPLopM5HrOAb3vJdZ65XZGgr5Y/dE12OC XlX3oZv0jdBzvAJTAqeuGQ== 0000950130-02-001788.txt : 20020415 0000950130-02-001788.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950130-02-001788 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020321 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-03305 FILM NUMBER: 02581673 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-K405 1 d10k405.txt FORM 10-K405 As filed with the Securities and Exchange Commission on March 21, 2002 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ________________ FORM 10-K (MARK ONE) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 2001 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. One Merck Drive Whitehouse Station, N. J. 08889-0100 (908) 423-1000 Incorporated in New Jersey I.R.S. Employer Identification No. 22-1109110 Securities Registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on which Registered ------------------- --------------------- Common Stock New York and Philadelphia Stock Exchanges ($0.01 par value) Number of shares of Common Stock ($0.01 par value) outstanding as of February 28, 2002: 2,271,094,459. Aggregate market value of Common Stock ($0.01 par value) held by non-affiliates on December 31, 2001 based on closing price on February 28, 2002: $139,327,000,000. 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Documents Incorporated by Reference: Document Part of Form 10-K -------- ----------------- Annual Report to stockholders for the fiscal year Parts I and II ended December 31, 2001 Proxy Statement for the Annual Meeting of Part III Stockholders to be held April 23, 2002 ================================================================================ PART I Item 1. Business. Merck & Co., Inc. (the "Company") is a global research-driven pharmaceutical company that discovers, develops, manufactures and markets a broad range of human and animal health products, directly and through its joint ventures, and provides pharmaceutical benefit services through Merck-Medco Managed Care, L.L.C. ("Merck-Medco"). The Company's operations are principally managed on a products and services basis and are comprised of two reportable segments: Merck Pharmaceutical, which includes products marketed either directly or through joint ventures, and Merck-Medco. Merck Pharmaceutical products consist of therapeutic and preventive agents, sold by prescription, for the treatment of human disorders. Merck-Medco revenues are derived from the filling and management of prescriptions and health management programs. The following table shows the sales of various categories of the Company's products and services:
($ in millions) 2001 2000 1999 --------------- ---- ---- ---- Atherosclerosis .............................. $ 7,179.6 $ 5,805.2 $ 5,093.2 Hypertension/heart failure ................... 4,255.6 4,629.1 4,563.8 Anti-inflammatory/analgesics ................. 2,630.5 2,251.7 578.5 Osteoporosis ................................. 1,759.2 1,275.3 1,043.1 Respiratory .................................. 1,375.7 862.2 501.8 Vaccines/biologicals ......................... 1,022.4 952.0 860.0 Anti-bacterial/anti-fungal ................... 795.4 783.3 772.3 Ophthalmologicals ............................ 672.2 656.2 670.0 Human immunodeficiency virus ("HIV") ......... 411.0 528.8 664.4 Anti-ulcerants ............................... 354.2 849.4 913.9 Other Merck products ......................... 891.2 1,629.7 1,820.6 Merck-Medco .................................. 26,368.7 20,140.3 15,232.4 -------- -------- -------- Total ................................... $47,715.7 $40,363.2 $32,714.0 ========= ========= =========
Human health products include therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. Among these are atherosclerosis products, which include Zocor (simvastatin) and Mevacor (lovastatin); hypertension/heart failure products, which include Cozaar (losartan potassium), Hyzaar (losartan potassium and hydrochlorothiazide), Prinivil (lisinopril), Vasotec (enalapril maleate) and Vaseretic (enalapril maleate and hydrochlorothiazide); anti-inflammatory/analgesics, of which Vioxx (rofecoxib), an agent that specifically inhibits COX-2, is the largest-selling; an osteoporosis product, Fosamax (alendronate sodium), for treatment and prevention of osteoporosis; a respiratory product, Singulair (montelukast sodium), a leukotriene receptor antagonist; vaccines/biologicals, of which M-M-R II (measles, mumps and rubella virus vaccine live), Varivax (varicella virus vaccine live), a live virus vaccine for the prevention of chickenpox, and Recombivax HB (hepatitis B vaccine [recombinant]) are the largest-selling; anti-bacterial/anti-fungal products, of which Primaxin (imipenem and cilastatin sodium), Noroxin (norfloxacin) and Cancidas (caspofungin acetate) are the largest-selling; ophthalmologicals, of which Timoptic (timolol maleate), Timoptic-XE (timolol maleate ophthalmic gel forming solution), Trusopt (dorzolamide hydrochloride ophthalmic solution) and Cosopt (dorzolamide hydrochloride and timolol maleate ophthalmic solution) are the largest selling; HIV products, which include Crixivan (indinavir sulfate), a protease inhibitor for the treatment of human immunodeficiency viral infection in adults; and anti-ulcerants, which include Pepcid (famotidine). Other Merck products include sales of Proscar (finasteride), which provides for the treatment of symptomatic benign prostatic hyperplasia in men with enlarged prostates, Maxalt (rizatriptan benzoate), an anti-migraine treatment, Propecia (finasteride), which treats male pattern hair loss and Aggrastat (tirofiban hydrochloride), a platelet blocker for treatment of acute coronary syndrome, and other human pharmaceuticals; continuing sales to divested businesses; pharmaceutical and animal health supply sales to the Company's joint ventures; and supply sales to AstraZeneca LP. Also included in this category are rebates and discounts on the Company's pharmaceutical products. Merck-Medco primarily includes Merck-Medco sales of non-Merck products and Merck-Medco pharmaceutical benefit services, principally sales of prescription drugs through managed prescription drug programs, as well as services provided through programs to manage patient health and drug utilization. 2 In January 2002, the Company announced plans to establish Merck-Medco as a separate, publicly-traded company. The Company plans an initial public offering of a portion of the new company by mid-2002, subject to market conditions. Alternatives for the distribution of the remaining shares in the new company are under evaluation. The full separation of Merck-Medco should be completed within 12 months of the initial public offering, subject to receipt of an Internal Revenue Service ruling that such an event would be tax-free to shareholders and to other customary conditions. On January 10, 2001, the Antiviral Advisory Committee of the U.S. Food and Drug Administration ("FDA") recommended that the FDA clear Cancidas, the Company's investigational intravenous anti-fungal medicine, for marketing. On January 26, 2001, the FDA cleared Cancidas for marketing in the United States for the treatment of invasive aspergillosis in patients who do not respond to or are intolerant of other anti-fungal therapies. In February 2001, the once-weekly formulation of Fosamax was approved for treatment to increase bone mass in men with osteoporosis. In November 2001, the FDA cleared Invanz (ertapenem sodium), a new once-a-day injectable antibiotic, for marketing in the United States for the treatment of adults with the following moderate to severe infections caused by susceptible strains of the designated organisms: complicated intra-abdominal infections, complicated skin and skin structure infections, community acquired pneumonia, complicated urinary tract infections, and acute pelvic infections. In June 2000, Merck-Medco commenced providing pharmaceutical benefit management services for the UnitedHealth Group, one of the largest managed care organizations in the United States. In November 2000, the Company formed a new subsidiary, Merck Capital Ventures, LLC, to invest up to $100 million in capital in private Internet and other emerging businesses that focus on areas related to the commercialization, distribution and delivery of pharmaceuticals and related health care services. Acquisitions -- In November 1999, the Company acquired SIBIA Neurosciences, Inc., a publicly-held California based biotechnology firm, which engages in the discovery and development of novel small molecule therapeutics for the treatment of neurodegenerative, neuropsychiatric and neurological disorders. In June 2000, Merck-Medco acquired ProVantage Health Services, Inc., a publicly-held Wisconsin based health care benefits management and health information company that provided pharmacy benefit services to approximately five million people. In July 2001, the Company acquired Rosetta Inpharmatics, Inc., a publicly-held Washington based informational genomics company that designs and develops unique technologies to efficiently analyze gene data to predict how medical compounds will interact with different kinds of cells in the body. Joint Ventures -- In 1982, the Company entered into an agreement with Astra AB ("Astra") to develop and market Astra products in the United States. In 1993, the Company's total sales of Astra products reached a level that triggered the first step in the establishment of a joint venture business carried on by Astra Merck Inc. ("AMI"), in which the Company and Astra each owned a 50% share. This joint venture, formed in November 1994, developed and marketed most of Astra's new prescription medicines in the United States including Prilosec (omeprazole), the first of a class of medications known as proton pump inhibitors, which slows the production of acid from the cells of the stomach lining. In 1998, the Company and Astra completed the restructuring of the ownership and operations of the joint venture whereby the Company acquired Astra's interest in AMI, renamed KBI Inc. ("KBI"), and contributed KBI's operating assets to a new U.S. limited partnership named Astra Pharmaceuticals, L.P. ("the Partnership"), in which the Company maintains a limited partner interest. The Partnership, renamed AstraZeneca LP, became the exclusive distributor of the products for which KBI retained rights. The Company earns certain Partnership returns as well as ongoing revenue based on sales of current and future KBI products. The Partnership returns include a priority return provided for in the Partnership Agreement, variable returns based, in part, upon sales of certain former Astra USA, Inc. products, and a preferential return representing the Company's share of undistributed Partnership GAAP earnings. In conjunction with the 1998 restructuring, for a payment of $443.0 million, Astra purchased an option to buy the Company's interest in the KBI products, excluding the Company's interest in the gastrointestinal medicines Prilosec and Nexium (esomeprazole magnesium). The Company also granted Astra an option ("the Shares Option") 3 to buy the Company's common stock interest in KBI, at an exercise price based on the net present value of estimated future net sales of Prilosec and Nexium. In April 1999, Astra merged with Zeneca Group Plc, forming AstraZeneca AB ("AstraZeneca"). As a result of the merger, Astra was required to make two one-time payments to the Company totaling approximately $1.8 billion for the relinquishment of certain rights, including rights to future Astra products with no existing or pending U.S. patents at the time of the merger. This merger also triggers a partial redemption of the Company's limited partner interest in 2008. Furthermore, as a result of the merger, AstraZeneca's option to buy the Company's interest in the KBI products is exercisable in 2010 and the Company has obtained the right to require AstraZeneca to purchase such interest in 2008. In addition, the Shares Option is exercisable two years after Astra's purchase of the Company's interest in the KBI products. In 1989, the Company formed a joint venture with Johnson & Johnson to develop, market and manufacture consumer health care products in the United States. In April 1995, the joint venture obtained FDA clearance in the United States for marketing Pepcid AC (famotidine), an over-the-counter form of the Company's ulcer medication Pepcid. This 50% owned joint venture was expanded into Europe in 1993, and into Canada in 1996. The European extension currently markets and sells over-the-counter pharmaceutical products in France, Germany, Italy, Spain and the United Kingdom. Effective April 1992, the Company, through the Merck Vaccine Division, and Connaught Laboratories, Inc. (now Aventis Pasteur), an affiliate of Aventis A.G., agreed to collaborate on the development and marketing of combination pediatric vaccines and to promote selected vaccines in the United States. The research and marketing collaboration enables the companies to pool their resources to expedite the development of vaccines combining several different antigens to protect children against a variety of diseases, including Haemophilus influenzae type b, hepatitis B, diphtheria, tetanus, pertussis and - ----------- ---------- poliomyelitis. In 1994, the Company, through the Merck Vaccine Division, and Pasteur Merieux Connaught (now Aventis Pasteur) formed a joint venture to market human vaccines in Europe and to collaborate in the development of combination vaccines for distribution in the European Union ("EU") and the European Free Trade Association. The Company and Aventis Pasteur contributed, among other things, their European vaccine businesses for equal shares in the joint venture, known as Pasteur Merieux MSD, S.N.C. (now Aventis Pasteur MSD, S.N.C.). The joint venture is subject to monitoring by the EU, to which the partners made certain undertakings in return for an exemption from European Competition Law, effective until December 2006. The joint venture is active, directly or through affiliates in Belgium, Denmark, Italy, Germany, Spain, France, Austria, Ireland and the United Kingdom, and through distributors in the rest of Europe. In 1997, the Company and Rhone-Poulenc S.A. combined their respective animal health and poultry genetics businesses to form Merial Limited ("Merial"), a fully-integrated animal health company, which is a stand-alone joint venture, equally owned by each party. Merial provides a comprehensive range of pharmaceuticals and vaccines to enhance the health, well-being and performance of a wide range of animal species. In December 1999, Rhone-Poulenc S.A.'s interest in Merial was acquired by Aventis S.A., a corporation formed by the merger of Rhone-Poulenc S.A. and Hoechst A.G. In May 2000, the Company and Schering-Plough Corporation ("Schering-Plough") entered into agreements to create separate partnerships to develop and market in the United States new prescription medicines in the cholesterol-management and respiratory therapeutic areas. These partnerships are pursuing the development and marketing of Zetia (ezetimibe), an investigational cholesterol absorption inhibitor discovered by Schering-Plough, as a once-daily monotherapy and in co-administration with statins; Zetia as a once-daily combination tablet with Zocor; and a once-daily combination tablet of Singulair and Claritin, Schering-Plough's nonsedating antihistamine, for the treatment of allergic rhinitis and asthma. In December 2001, the Company and Schering-Plough announced the worldwide expansion (excluding Japan) of the cholesterol-management partnership. Also in December 2001, an entity of the Merck/Schering-Plough Pharmaceuticals partnership submitted a New Drug Application ("NDA") to the FDA for Zetia tablets, to be administered alone or with statins for the reduction of elevated cholesterol levels. On February 28, 2002, the FDA accepted for standard review the NDA for Zetia tablets, to be administered alone or with a statin for the reduction of elevated cholesterol levels (hypercholesterolemia). 4 In February 2001, Merck-Medco, Advance PCS and Express Scripts, Inc. announced the signing of an agreement to form RxHub. RxHub will be an electronic exchange enabling physicians to link with participating pharmacies, prescription benefit managers and health plans. RxHub is designed to operate as a utility for the conduit of information among all parties engaging in electronic prescribing. Merck-Medco owns one-third of the equity in RxHub. Competition -- The markets in which the Company's pharmaceutical business is conducted are highly competitive and, in many cases, highly regulated. Such competition involves an intensive search for technological innovations and the ability to market these innovations effectively. With its long-standing emphasis on research and development, the Company is well prepared to compete in the search for technological innovations. Additional resources to meet competition include quality control, flexibility to meet exact customer specifications, an efficient distribution system and a strong technical information service. The Company is active in acquiring and marketing products through joint ventures and licenses and has been refining its sales and marketing efforts to further address changing industry conditions. However, the introduction of new products and processes by competitors may result in price reductions and product replacements, even for products protected by patents. For example, the number of compounds available to treat diseases typically increases over time and has resulted in slowing the growth in sales of certain of the Company's products. In addition, particularly in the area of human pharmaceutical products, legislation enacted in all states allows, encourages or, in a few instances, in the absence of specific instructions from the prescribing physician, mandates the use of "generic" products (those containing the same active chemical as an innovator's product) rather than "brand-name" products. Governmental and other pressures toward the dispensing of generic products have significantly reduced the sales of certain of the Company's products no longer protected by patents, such as Vasotec, Vaseretic, Pepcid and Mevacor, and slowed the growth of certain other products. Merck-Medco's pharmacy benefit management business is highly competitive. Merck-Medco competes with other pharmacy benefit managers, insurance companies and other providers of health care and/or administrators of health care programs. Merck-Medco competes primarily on the basis of its ability to design and administer innovative programs that help plan sponsors provide high-quality, affordable prescription drug care and health management services to health plan members. Merck-Medco dispenses prescription drugs from its national network of mail service pharmacies, manages prescriptions dispensed through a national network of participating retail pharmacies and implements health management programs to help its members with some chronic conditions better understand their conditions and comply with their prescribed drug therapies. Distribution -- The Company sells its human health products primarily to drug wholesalers and retailers, hospitals, clinics, government agencies and managed health care providers such as health maintenance organizations and other institutions. The Company's professional representatives communicate the effectiveness, safety and value of the Company's products to health care professionals in private practice, group practices and managed care organizations. Merck-Medco sells its pharmaceutical benefit management services to corporations, labor unions, insurance companies, Blue Cross/Blue Shield organizations, government agencies, federal and state employee plans, health maintenance and other similar organizations. Raw Materials -- Raw materials and supplies are normally available in quantities adequate to meet the needs of the Company's business. Government Regulation and Investigation -- The pharmaceutical industry is subject to global regulation by regional, country, state and local agencies. Of particular importance is the FDA in the United States, which administers requirements covering the testing, approval, safety, effectiveness, manufacturing, labeling and marketing of prescription pharmaceuticals. In many cases, the FDA requirements have increased the amount of time and money necessary to develop new products and bring them to market in the United States. In 1997, the Food and Drug Administration Modernization Act was passed and was the culmination of a comprehensive legislative reform effort designed to streamline regulatory procedures within the FDA and to improve the regulation of drugs, medical devices and food. The legislation was principally designed to ensure the timely availability of safe and effective drugs and biologics by expediting the premarket review process for new products. A key provision of the legislation is the re-authorization of the Prescription Drug User Fee Act of 1992, which permits the continued collection of user fees from prescription drug manufacturers to augment FDA resources earmarked for the review of human drug 5 applications. This helps provide the resources necessary to ensure the prompt approval of safe and effective new drugs. In recent years, an increasing number of legislative proposals have been introduced or proposed in Congress and in some state legislatures that would effect major changes in the health care system, either nationally or at the state level. Such legislative initiatives introduced in Congress include prescription drug benefit proposals for Medicare beneficiaries. Although a reform bill has not been enacted at the federal level, some states have passed reform legislation and further federal and state developments are expected. Although the Company is well positioned to respond to evolving market forces, it cannot predict the outcome or effect of legislation resulting from these reform efforts. For many years, the pharmaceutical industry and the pharmacy benefits management business have been under federal and state oversight with the new drug approval system, drug safety, advertising and promotion, drug purchasing and reimbursement programs and formularies variously under review. The Company believes that it will continue to be able to conduct its operations, including the introduction of new drugs to the market, in this regulatory environment. One type of federal initiative to contain federal health care spending is the prospective or "capitated" payment system, first implemented to reduce the rate of growth in Medicare reimbursement to hospitals. Such a system establishes in advance a flat rate for reimbursement for health care for those patients for whom the payer is fiscally responsible. This type of payment system and other cost containment systems are now widely used by public and private payers and have caused hospitals, health maintenance organizations and other customers of the Company to be more cost-conscious in their treatment decisions, including decisions regarding the medicines to be made available to their patients. The Company continues to work with private and federal employers to slow increases in health care costs. Further, the Company's efforts to demonstrate that its medicines can help save costs in other areas, and pricing flexibility across its product portfolio, have encouraged the use of the Company's medicines and have helped offset the effects of increasing cost pressures. Also, federal and state governments have pursued methods to directly reduce the cost of drugs for which they pay. For example, federal legislation requires the Company to pay a specified rebate for medicines reimbursed by Medicaid, and also to pay rebates similar to the Medicaid rebate for outpatient medicines purchased by certain Public Health Service entities and "disproportionate share" hospitals (hospitals meeting certain criteria), and minimum discounts of 24% off of a defined "non-federal average manufacturer price" for the Veterans' Administration, Federal Supply Schedule and certain other federal sector purchasers of medicines. Initiatives in some states seek rebates beyond the minimum required by Medicaid legislation, in some cases for patients beyond those who are eligible for Medicaid. Under the Federal Vaccines for Children entitlement program, the U.S. Centers for Disease Control and Prevention ("CDC") funds and purchases recommended pediatric vaccines at a public sector price for the immunization of Medicaid-eligible, uninsured, native American and certain underinsured children. The Company was awarded CDC contracts in 2001 for the supply of six pediatric vaccines for this program (and monovalent components of such vaccines). Outside the United States, the Company encounters similar regulatory and legislative issues in most of the countries where it does business. There, too, the primary thrust of governmental inquiry and action is toward determining drug safety and effectiveness, often with mechanisms for controlling the prices of prescription drugs and the profits of prescription drug companies. The EU has adopted directives concerning the classification, labeling, advertising, wholesale distribution and approval for marketing of medicinal products for human use. The Company's policies and procedures are already consistent with the substance of these directives; consequently, it is believed that they will not have any material effect on the Company's business. In addition, certain countries within the EU, recognizing the economic importance of the research-based pharmaceutical industry and the value of innovative medicines to society, are working with industry and the European Commission on proposals for market deregulation. The Company is subject to the jurisdiction of various regulatory agencies and is, therefore, subject to potential administrative actions. Such actions may include seizures of products and other civil and criminal sanctions. Under certain circumstances, the Company on its own may deem it advisable to initiate product recalls. Although it is difficult to predict the ultimate effect of these activities and legislative, administrative and regulatory 6 requirements and proposals, the Company believes that its development of new and improved products should enable it to compete effectively within this environment. There are extensive federal and state regulations applicable to the practice of pharmacy and the administration of managed health care programs. Each state in which Merck-Medco operates a pharmacy has laws and regulations governing its operation and the licensing of and standards of professional practice by its pharmacists. These regulations are issued by an administrative body in each state (typically, a pharmacy board), which is empowered to impose sanctions for noncompliance. The policies and procedures of the Company comply with these regulations. Patents, Trademarks and Licenses -- Patent protection is considered, in the aggregate, to be of material importance in the Company's marketing of human health products in the United States and in most major foreign markets. Patents may cover products per se, pharmaceutical formulations, processes for or intermediates useful in the manufacture of products or the uses of products. Protection for individual products extends for varying periods in accordance with the date of grant and the legal life of patents in the various countries. The protection afforded, which may also vary from country to country, depends upon the type of patent and its scope of coverage. Patent portfolios developed for products introduced by the Company normally provide market exclusivity. Basic patents are in effect for the following major products in the United States: Aggrastat, Cancidas, Chibroxin (norfloxacin), Cosopt, Cozaar, Crixivan, Fosamax, Hyzaar, Invanz, Maxalt, PedvaxHIB (Haemophilus b conjugate vaccine), Primaxin, Propecia, Proscar, Recombivax HB, Singulair, Trusopt, Vioxx and Zocor. In 2001, several U.S. product patents expired, including Mevacor, Prinivil, Prinzide (lisinopril and hydrochlorothiazide) and Vaseretic. The product patent for Prilosec (which is supplied exclusively to AstraZeneca LP) in the United States also expired in 2001. In the aggregate, domestic sales of these products, as well as Pepcid, for which market exclusivity expired in 2001, represent 10% of the Company's human health sales for 2001. The Company expects a significant decline in the sales of these products in 2002 as a result of the loss of market exclusivity. With the exception of Prilosec, for which the Company has U.S. rights only, a decline is also expected in the Company's European sales for these products in the years 2002 through 2005 upon the loss of market exclusivity in European countries throughout this period. European sales of these products represent 1% of the Company's human health sales for 2001. The Company filed a supplemental new drug application with the FDA for Prinivil, in accordance with the provisions of the FDA Modernization Act of 1997 (the "Modernization Act"). Pursuant to the Modernization Act, the FDA granted an additional six months of market exclusivity, commencing December 2001, in the United States to Prinivil and Prinzide for all their uses, based upon pediatric studies performed by the Company. The FDA also granted an additional six months of market exclusivity in the United States to Singulair from its February 2012 patent expiration until August 2012, and Zocor from its December 2005 basic patent expiration until June 2006, in response to supplemental new drug applications the Company filed on pediatric studies. The market exclusivity which commenced in the United States for product patents for Prilosec in April 2001, and Mevacor in July 2001, pursuant to the Modernization Act, expired in October 2001 and December 2001, respectively. Market exclusivity in the United States also expired for Pepcid in April 2001. The Modernization Act, which was passed in 1997, includes a Pediatric Exclusivity Provision that may provide an additional six months of market exclusivity in the United States for indications of new or currently marketed drugs, if certain agreed upon pediatric studies are completed by the applicant. These exclusivity provisions were reauthorized until October 1, 2007 by the "Best Pharmaceuticals for Children Act" passed in January 2002. While the expiration of a product patent normally results in a loss of market exclusivity for the covered product, commercial benefits may continue to be derived from: (i) later-granted patents on processes and intermediates related to the most economical method of manufacture of the active ingredient of such product; (ii) patents relating to the use of such product; (iii) patents relating to novel compositions and formulations; and (iv) in the United States, market exclusivity that may be available under federal law. The effect of product patent expiration also depends upon many other factors such as the nature of the market and the position of the product in it, the growth of the market, the complexities and economics of the process for manufacture of the active ingredient of the product and the requirements of new drug provisions of the Federal Food, Drug and Cosmetic Act or similar laws and regulations in other countries. 7 Additions to market exclusivity are sought in the United States and other countries through all relevant laws, including laws increasing patent life. Some of the benefits of increases in patent life have been partially offset by a general increase in the number of, incentives for and use of generic products. Additionally, improvements in intellectual property laws are sought in the United States and other countries through reform of patent and other relevant laws and implementation of international treaties. Worldwide, all of the Company's important products are sold under trademarks that are considered in the aggregate to be of material importance. Trademark protection continues in some countries as long as used; in other countries, as long as registered. Registration is for fixed terms and can be renewed indefinitely. Royalties received during 2001 on patent and know-how licenses and other rights amounted to $125.5 million. The Company also paid royalties amounting to $522.8 million in 2001 under patent and know-how licenses it holds. Research and Development The Company's business is characterized by the introduction of new products or new uses for existing products through a strong research and development program. Approximately 11,900 people are employed in the Company's research activities. Expenditures for the Company's research and development programs were $2.5 billion in 2001, $2.3 billion in 2000 and $2.1 billion in 1999 and will be approximately $2.9 billion in 2002. The Company maintains its ongoing commitment to research over a broad range of therapeutic areas and clinical development in support of new products. Total expenditures for the period 1992 through 2001 exceeded $16.7 billion with a compound annual growth rate of 10%. The Company maintains a number of long-term exploratory and fundamental research programs in biology and chemistry as well as research programs directed toward product development. Projects related to human health are being carried on in various fields such as bacterial and viral infections, cardiovascular functions, cancer, diabetes, pain and inflammation, kidney function, obesity, mental health, the nervous system, ophthalmic research, prostate therapy, the respiratory system, fungal diseases, bone diseases, endoparasitic and ectoparasitic diseases, companion animal diseases and production improvement. In the development of human health products, industry practice and government regulations in the United States and most foreign countries provide for the determination of effectiveness and safety of new chemical compounds through preclinical tests and controlled clinical evaluation. Before a new drug may be marketed in the United States, recorded data on preclinical and clinical experience are included in the NDA or the biological Product License Application to the FDA for the required approval. The development of certain other products is also subject to government regulations covering safety and efficacy in the United States and many foreign countries. There can be no assurance that a compound that is the result of any particular program will obtain the regulatory approvals necessary for it to be marketed. New product candidates resulting from this research and development program include Arcoxia (etoricoxib), a second COX-2 specific inhibitor potentially useful for the treatment of osteoarthritis, rheumatoid arthritis, acute pain, chronic pain and dysmenorrhea, for which the Company filed an NDA with the FDA on August 8, 2001. The Company plans to submit an expanded NDA for Arcoxia to the FDA in order to include new efficacy data that will better position the product to compete successfully in the coxib class, where there already are three entrants. Accordingly, on March 13, 2002, the Company withdrew the original U.S. NDA for the investigational medicine. The Company is submitting the additional efficacy data to support a new indication for ankylosing spondylitis, which is a chronic, inflammatory disorder primarily involving the spine. In addition to the indications listed above, the Company is seeking an indication for acute gouty arthritis. Timing of the expanded submission has not been determined. The regulatory process for Arcoxia outside the United States continues uninterrupted. Other products in development include an oral compound potentially useful for treatment of chemotherapy-induced emesis; an oral compound potentially useful for the treatment of depression and other neuropsychiatric diseases; a compound potentially useful for the treatment of diabetes and diabetic dyslipidemia; a compound potentially useful for the treatment of anxiety; a compound potentially useful for the treatment of Chronic Obstructive Pulmonary Disease and asthma; a compound potentially useful to treat AIDS; and certain new vaccines including a Human Papillomavirus vaccine ("HPV"), potentially useful to prevent HPV infection; a rotavirus vaccine potentially useful for the prevention of infant diarrhea and dehydration caused by rotavirus; and a vaccine potentially useful for the prevention and treatment of human immunodeficiency virus. All product or service marks appearing in type form different from that of the surrounding text are trademarks or service marks owned by or licensed to Merck & Co., Inc., its subsidiaries or affiliates (including Zetia, a trademark owned by an entity of the Merck/Schering-Plough Pharmaceuticals partnership). Cozaar and Hyzaar are registered trademarks of E.I. du Pont de Nemours and Company, Wilmington, DE. Claritin is a trademark of Schering Corporation and Prilosec and Nexium are trademarks of the AstraZeneca group. 8 Employees At the end of 2001, the Company had 78,100 employees worldwide, with 50,400 employed in the United States, including Puerto Rico. Approximately 30% of worldwide employees of the Merck Pharmaceutical and Merck-Medco segments are represented by various collective bargaining groups. Environmental Matters The Company believes that it is in compliance in all material respects with applicable environmental laws and regulations. In 2001, the Company incurred capital expenditures of approximately $197.5 million for environmental protection facilities. Capital expenditures for this purpose are forecasted to exceed $500.0 million for the years 2002 through 2006. In addition, the Company's operating and maintenance expenditures for environmental protection facilities were approximately $88.7 million in 2001. Expenditures for this purpose for the years 2002 through 2006 are forecasted to approximate $520.0 million. The Company is also remediating environmental contamination resulting from past industrial activity at certain of its sites. Expenditures for remediation and environmental liabilities were $34.2 million in 2001, and are estimated at $137.0 million for the years 2002 through 2006. These amounts do not consider potential recoveries from insurers or other parties. The Company has taken an active role in identifying and providing for these costs, and in management's opinion, the liabilities for all environmental matters which are probable and reasonably estimable have been accrued. Although it is not possible to predict with certainty the outcome of these environmental matters, or the ultimate costs of remediation, management does not believe that any reasonably possible expenditures that may be incurred in excess of those provided should result in a materially adverse effect on the Company's financial position, results of operations, liquidity or capital resources. Cautionary Factors that May Affect Future Results (Cautionary Statements Under the Private Securities Litigation Reform Act of 1995) 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 also identify them by the fact that they do not relate strictly to historical or current facts. These statements are likely to address the Company's growth strategy, financial results, product approvals and development programs, as well as the proposed initial public offering, and eventual divestiture of our Medco subsidiary. 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. Although it is not possible to predict or identify all such factors, they may include the following: . Generic competition as product patents for several products have recently expired in the United States and other countries, including product patents for Mevacor (U.S. - 2001), Prinivil and Prinzide (U.S. - 2001) and Vaseretic (U.S. - 2001). In addition, the product patent for Prilosec, which is supplied exclusively to AstraZeneca LP, also expired in 2001. . Increased "brand" competition in therapeutic areas important to the Company's long-term business performance. . The difficulties and uncertainties inherent in new product development. The outcome of the lengthy and complex process of new product development is inherently uncertain. A candidate can fail at any stage of the process and one or more late-stage product candidates could fail to receive regulatory approval. New product candidates may appear promising in development but fail to reach the market because of efficacy or safety concerns, the inability to obtain necessary regulatory approvals, the difficulty or excessive cost to manufacture and/or the infringement of patents or intellectual property rights of others. Furthermore, the sales of new products may prove to be disappointing and fail to reach anticipated levels. . Pricing pressures, both in the United States and abroad, including rules and practices of managed care groups, judicial decisions and governmental laws and regulations related to Medicare, Medicaid and health care reform, pharmaceutical reimbursement and pricing in general. 9 . Changes in government laws and regulations and the enforcement thereof affecting the Company's pharmaceutical, vaccine and/or pharmaceutical benefits management businesses. . Efficacy or safety concerns with respect to marketed products, whether or not scientifically justified, leading to product recalls, withdrawals or declining sales. . Legal factors, including product liability claims, antitrust litigation and governmental investigations, environmental concerns and patent disputes with branded and generic competitors, any of which could preclude commercialization of products or negatively affect the profitability of existing products. . Lost market opportunity resulting from delays and uncertainties in the approval process of the FDA and foreign regulatory authorities. . Increased focus on privacy issues in countries around the world, including the United States and the EU. In the United States, federal and state governments have pursued legislative and regulatory initiatives regarding patient privacy, including recently issued federal privacy regulations concerning health information, which could affect the Company's operations, particularly at Merck-Medco. . Changes in tax laws including changes related to the taxation of foreign earnings, as well as the impact of legislation capping and ultimately repealing Section 936 of the Internal Revenue Code (relating to earnings from the Company's Puerto Rican operations). . Changes in accounting standards promulgated by the American Institute of Certified Public Accountants, the Financial Accounting Standards Board or the Securities and Exchange Commission that are adverse to the Company. . The risk that the initial public offering of our Medco subsidiary may not be completed due to economic and stock market conditions generally and specifically as such conditions may impact the pharmacy benefit manager industry. Additionally, if the initial public offering is completed, the Company may not complete the divestiture of its remaining interest in Medco due to, among other reasons, the failure to obtain an Internal Revenue Service ruling that the divestiture to stockholders would be treated as a tax free distribution, or the failure to meet other customary conditions. . Economic factors over which the Company has no control, including changes in inflation, interest rates and foreign currency exchange rates. This list should not be considered an exhaustive statement of all potential risks and uncertainties. Geographic Area and Segment Information The Company's operations outside the United States are conducted primarily through subsidiaries. Sales of the Company's human health products by subsidiaries outside the United States were 37% of the Company's human health sales in 2001, and 36% and 40% in 2000 and 1999, respectively. The Company's worldwide business is subject to risks of currency fluctuations, governmental actions and other governmental proceedings abroad. The Company does not regard these risks as a deterrent to further expansion of its operations abroad. However, the Company closely reviews its methods of operations and adopts strategies responsive to changing economic and political conditions. In recent years, the Company has been expanding its operations in countries located in Latin America, the Middle East, Africa, Eastern Europe and Asia Pacific where changes in government policies and economic conditions are making it possible for the Company to earn fair returns. Business in these developing areas, while sometimes less stable, offers important opportunities for growth over time. Financial information about geographic areas and operating segments of the Company's business is incorporated by reference to page 37 of the Company's 2001 Annual Report to stockholders. 10 Item 2. Properties. The Company's corporate headquarters is located in Whitehouse Station, New Jersey. The Company's pharmaceutical business is conducted through divisional headquarters located in Rahway, New Jersey and West Point, Pennsylvania. Principal research facilities for human health products are located in Rahway and West Point. The Company also has production facilities for human health products at nine locations in the United States and Puerto Rico. Branch warehouses provide services throughout the country. Outside the United States, through subsidiaries, the Company owns or has an interest in manufacturing plants or other properties in Australia, Canada, countries in Western Europe, Central and South America, Africa and Asia. Merck-Medco operates its primary businesses through its headquarters located in Franklin Lakes, New Jersey, and through owned or leased facilities in various locations throughout the United States. Capital expenditures for 2001 were $2,724.7 million compared with $2,727.8 million for 2000. In the United States, these amounted to $2,128.6 million for 2001 and $2,139.6 million for 2000. Abroad, such expenditures amounted to $596.1 million for 2001 and $588.2 million for 2000. The Company and its subsidiaries own their principal facilities and manufacturing plants under titles which they consider to be satisfactory. The Company considers that its properties are in good operating condition and that its machinery and equipment have been well maintained. Plants for the manufacture of products are suitable for their intended purposes and have capacities and projected capacities adequate for current and projected needs for existing Company products. Some capacity of the plants is being converted, with any needed modification, to the requirements of newly introduced and future products. Item 3. Legal Proceedings. The Company, including Merck-Medco, is party to a number of antitrust suits, certain of which have been certified as class actions, instituted by most of the nation's retail pharmacies and consumers in several states, alleging conspiracies in restraint of trade and challenging the pricing and/or purchasing practices of the Company and Merck-Medco, respectively. A significant number of other pharmaceutical companies and wholesalers have also been sued in the same or similar litigation. These actions, except for several actions pending in state courts, have been consolidated for pre-trial purposes in the United States District Court for the Northern District of Illinois. In 1996, the Company and several other defendants finalized an agreement to settle the federal class action alleging conspiracy, which represents the single largest group of retail pharmacy claims. Since that time, the Company has entered into other settlements on satisfactory terms. In October 2001, the Judicial Panel on Multi-District Litigation ("Panel") determined that consolidated pretrial proceedings in federal district court in Chicago were substantially completed. The Panel ordered that all of the federal antitrust conspiracy cases, several of which have not been settled by the Company, be returned to the federal district courts in which each case was originally filed. The cases have now been returned to those courts for further proceedings. The Company has not engaged in any conspiracy and no admission of wrongdoing was made nor included in any settlement agreements. While it is not feasible to predict the final outcome of the remaining proceedings, in the opinion of the Company, such proceedings should not ultimately result in any liability which would have a materially adverse effect on the financial position, liquidity or results of operations of the Company. In June 2001, the Company received a notice from the Federal Trade Commission ("FTC") advising the Company that the FTC had closed its investigation into pricing practices, which commenced in 1996. The Company has been advised by the U.S. Department of Justice that it is investigating marketing and selling activities of the Company and other pharmaceutical manufacturers. The Company will be working with the government to respond appropriately to informational requests. In a continuing worldwide dispute between the Company and Pharmacia Corporation ("Pharmacia") over competing claims to the patent rights to the class of compounds that include rofecoxib, the active ingredient in Vioxx, the federal district court in Washington, D.C. recently dismissed a Pharmacia claim for damages for the Company's sale of Vioxx. Pharmacia may seek an appeal of this decision. The Company has also received favorable decisions regarding the patent status of Vioxx from courts in the United Kingdom, Holland and Spain, while receiving no adverse decisions in any country. In addition, in February 2002, the Board of Appeal at the European Patent Office revoked, in its entirety, the Pharmacia European patent that has been the basis of patent infringement suits involving 11 Vioxx in European countries. As a result, Merck will maintain exclusive patent rights in Europe for Vioxx. The Company also noted that a number of federal and state lawsuits, involving individual claims as well as purported class actions, have been filed against the Company with respect to Vioxx. Some of the lawsuits also name as defendants Pfizer Inc. and Pharmacia, which market a competing product. The lawsuits include allegations regarding gastrointestinal bleeding and cardiovascular events. The Company believes that these lawsuits are completely without merit and will vigorously defend them. From time to time, generic manufacturers of pharmaceutical products file Abbreviated New Drug Applications ("ANDAs") with the FDA seeking to market generic forms of Company products prior to the expiration of relevant patents owned by the Company. Generic pharmaceutical manufacturers have submitted ANDAs to the FDA seeking to market in the United States a generic form of Fosamax and Prilosec prior to the expiration of the Company's (and AstraZeneca's in the case of Prilosec) patents concerning these products. The generic companies' ANDAs include allegations of non-infringement, invalidity and unenforceability of the patents. One manufacturer has received FDA approval to market a generic form of Prilosec. The Company has filed patent infringement suits in federal court against companies filing ANDAs for generic alendronate, and AstraZeneca and the Company have filed patent infringement suits in federal court against companies filing ANDAs for generic omeprazole. In the case of alendronate, similar patent challenges exist in certain foreign jurisdictions. 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. A trial in the United States with respect to the alendronate daily product concluded in November 2001 and the Company is awaiting a ruling; no trial involving the alendronate weekly product is expected before 2003. In the case of omeprazole, a trial in the United States commenced in December 2001. As with any litigation, there can be no assurance of the outcomes, which, if adverse, could result in significantly shortened periods of exclusivity for these products. The Company is a party to a number of proceedings brought under the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund. These proceedings seek to require the operators of hazardous waste disposal facilities, transporters of waste to the sites and generators of hazardous waste disposed of at the sites to clean up the sites or to reimburse the government for cleanup costs. The Company has been made a party to these proceedings as an alleged generator of waste disposed of at the sites. In each case, the government alleges that the defendants are jointly and severally liable for the cleanup costs. Although joint and several liability is alleged, these proceedings are frequently resolved so that the allocation of cleanup costs among the parties more nearly reflects the relative contributions of the parties to the site situation. The Company's potential liability varies greatly from site to site. For some sites the potential liability is de minimis and for others the costs of cleanup have not yet been determined. While it is not feasible to predict the outcome of many of these proceedings brought by federal or state agencies or private litigants, in the opinion of the Company, such proceedings should not ultimately result in any liability which would have a materially adverse effect on the financial position, results of operations, liquidity or capital resources of the Company. The Company has taken an active role in identifying and providing for these costs and such amounts do not include any reduction for anticipated recoveries of cleanup costs from insurers, former site owners or operators or other recalcitrant potentially responsible parties. There are various other legal proceedings, principally product liability and intellectual property suits involving the Company, which are pending. While it is not feasible to predict the outcome of these proceedings, in the opinion of the Company, all such proceedings are either adequately covered by insurance or, if not so covered, should not ultimately result in any liability which would have a materially adverse effect on the financial position, liquidity or results of operations of the Company. Merck-Medco - ----------- Seven plaintiffs, from six pharmaceutical benefit plans for which Merck-Medco is the pharmaceutical benefit manager, have sued Merck-Medco and the Company in federal court. The suits, which are similar to claims against other pharmaceutical benefit managers in other pending cases, allege that Merck-Medco should be treated as a "fiduciary" under the provisions of the Employee Retirement Income Security Act ("ERISA"). Plaintiffs have not yet formally sought class-action status. The amended complaints in the lawsuits also allege that the Company and Merck-Medco have violated ERISA by using Merck-Medco to increase the Company's market share and by entering into certain "prohibited transactions" with each other that favor the Company's products. The plaintiffs have demanded that Merck-Medco 12 and the Company turn over any unlawfully obtained profits to a trust to be set up for the benefit plans. A motion for summary judgment filed by Merck-Medco has been withdrawn for procedural reasons without prejudice to being refiled. In addition, a complaint against Merck-Medco and the Company has recently been filed by one Northwest Airlines plan participant, purportedly on behalf of the plan and similarly-situated self-funded plans. Class action status has not yet been sought, and Northwest Airlines is not a party to the lawsuit. The complaint relies on many of the same theories as the litigation discussed above. Merck-Medco and the Company believe that these cases are without merit, Merck-Medco is not a "fiduciary" within the meaning of ERISA and the Company has not violated ERISA. Merck-Medco and the Company intend to vigorously defend these claims. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. _________________ 13 Executive Officers of the Registrant (as of March 15, 2002) RAYMOND V. GILMARTIN -- Age 61 June, 1994 -- Chairman of the Board (since November, 1994), President and Chief Executive Officer DAVID W. ANSTICE -- Age 53 March, 2001 -- President, The Americas and U.S. Human Health -- responsible for one of the two prescription drug divisions comprising U.S. Human Health, as well as the Company's prescription drug business in Canada and Latin America, and the Company's joint venture relationship with Schering-Plough January, 1997 -- President, Human Health-The Americas -- responsible for the Company's human health business in the United States, Canada and Latin America PAUL R. BELL -- Age 56 April, 1997 -- President, Human Health-Asia Pacific -- responsible for the Company's prescription drug business in the Far East, Australia, New Zealand and Japan March, 1994 -- Vice President, Merck Sharp & Dohme Australia and New Zealand RICHARD T. CLARK -- Age 56 January, 2000 -- President, Merck-Medco Managed Care, L.L.C. (Merck-Medco), a wholly-owned subsidiary of the Company June, 1997 -- Executive Vice President/Chief Operating Officer, Merck-Medco April, 1997 -- Senior Vice President, Quality and Commercial Affairs, Merck Manufacturing Division (MMD) May, 1996 -- Senior Vice President, North American Operations, MMD CELIA A. COLBERT -- Age 45 January, 1997 -- Vice President, Secretary (since September, 1993) and Assistant General Counsel (since November, 1993) CAROLINE DORSA -- Age 42 September, 1999 -- Vice President and Treasurer -- responsible for the Company's treasury and tax functions and for providing financial support for the Asia Pacific Division February, 1999 -- Vice President and Treasurer -- responsible for the Company's treasury and tax functions January, 1997 -- Vice President and Treasurer (since January, 1994) 14 KENNETH C. FRAZIER -- Age 47 December, 1999 -- Senior Vice President and General Counsel -- responsible for legal and public affairs functions and The Merck Company Foundation (a not-for-profit charitable organization affiliated with the Company) January, 1999 -- Vice President and Deputy General Counsel January, 1997 -- Vice President, Public Affairs (since April, 1994) and Assistant General Counsel -- responsible for public affairs, corporate legal activities and The Merck Company Foundation DOUGLAS A. GREENE -- Age 57 May, 2000 -- Executive Vice President, Clinical Sciences and Product Development, Merck Research Laboratories Prior to May, 2000, Dr. Greene served as Chief, Division of Endocrinology & Metabolism at the University of Michigan School of Medicine since 1991 and as Director, Center for Clinical Investigation and Therapeutics since 1998 RICHARD C. HENRIQUES JR. -- Age 46 November, 2000 -- Vice President, Controller -- responsible for the Corporate Controller's Group and providing financial support for U.S. Human Health, Canada and Latin America (The Americas) and the Merck Vaccine Division February, 1999 -- Vice President, Controller -- responsible for the Corporate Controller's Group and providing financial support for The Americas January, 1998 -- Vice President & Controller, The Americas January, 1997 -- Controller, The Americas BERNARD J. KELLEY -- Age 60 December, 1993 -- President, Merck Manufacturing Division PETER S. KIM -- Age 43 February, 2001 -- Executive Vice President, Research and Development, Merck Research Laboratories Prior to February, 2001, Dr. Kim served as Member of the Whitehead Institute (1985 - 2001), Professor of Biology at the Massachusetts Institute of Technology (1988 - 2001), and Investigator of the Howard Hughes Medical Institute (1990 - 2001) 15 JUDY C. LEWENT -- Age 53 February, 2001 -- Executive Vice President and Chief Financial Officer -- responsible for financial and corporate development functions, internal auditing, corporate licensing, the Company's joint venture relationships, and Merck Capital Ventures, LLC, a wholly-owned subsidiary of the Company November, 2000 -- Senior Vice President and Chief Financial Officer -- responsible for financial and corporate development functions, internal auditing, corporate licensing, the Company's joint venture relationships, and Merck Capital Ventures, LLC January, 1997 -- Senior Vice President (since January, 1993) and Chief Financial Officer (since April, 1990) -- responsible for financial and corporate development functions, internal auditing and the Company's joint venture relationships ADEL MAHMOUD -- Age 60 May, 1999 -- President, Merck Vaccines November, 1998 -- Executive Vice President, Merck Vaccines Prior to November, 1998, Dr. Mahmoud was the John H. Hord Professor and Chairman, Department of Medicine and Physician-in-Chief, Case Western Reserve University and University Hospitals of Cleveland (1987-1998) EDWARD M. SCOLNICK -- Age 61 December, 1999 -- Executive Vice President, Science and Technology and President, Merck Research Laboratories (MRL) -- responsible for worldwide research function, computer resources and corporate licensing September, 1994 -- Executive Vice President (since January, 1993), Science and Technology and President, MRL (since May, 1985) -- responsible for worldwide research function and activities of Merck Manufacturing Division (since December, 1993), computer resources (since January, 1993) and corporate licensing BRADLEY T. SHEARES -- Age 45 March, 2001 -- President, U.S. Human Health -- responsible for one of the two prescription drug divisions comprising U.S. Human Health (USHH) July, 1998 -- Vice President, Hospital Marketing and Sales, USHH May, 1996 -- Vice President, Anti-Infectives Therapeutic Business Group, USHH 16 JOAN E. WAINWRIGHT -- Age 41 January, 2001 -- Vice President, Public Affairs June, 2000 -- Vice President, Corporate Communications, Public Affairs Prior to June, 2000, Ms. Wainwright was Deputy Commissioner for Communications at the U.S. Social Security Administration (1994 - 2000) PER WOLD-OLSEN -- Age 54 January, 1997 -- President, Human Health-Europe, Middle East & Africa -- responsible for the Company's prescription drug business in Europe, the Middle East and Africa and worldwide human health marketing September, 1994 -- President, Human Health-Europe -- responsible for the Company's European prescription drug business WENDY L. YARNO -- Age 47 December, 1999 -- Senior Vice President, Human Resources June, 1999 -- Vice President, Human Resources January, 1999 -- Vice President, Worldwide Human Health Marketing November, 1997 to January, 1999, Ms. Yarno was Vice President, Women's Health Care, Johnson & Johnson, Ortho-McNeil Pharmaceutical (manufacturer of pharmaceuticals) January, 1995 to November, 1997 -- Vice President, Hypertension and Heart Failure Therapeutic Business Group, U.S. Human Health All officers listed above serve at the pleasure of the Board of Directors. None of these officers was elected pursuant to any arrangement or understanding between the officer and the Board. There are no family relationships among the officers listed above. 17 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The information required for this item is incorporated by reference to pages 23 and 40 of the Company's 2001 Annual Report to stockholders. Item 6. Selected Financial Data. The information required for this item is incorporated by reference to the data for the last five fiscal years of the Company included under Results for Year and Year-End Position in the Selected Financial Data table on page 40 of the Company's 2001 Annual Report to stockholders. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The information required for this item is incorporated by reference to pages 13 through 23 of the Company's 2001 Annual Report to stockholders. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. The information required for this item is incorporated by reference to pages 20 (under the caption "Analysis of Liquidity and Capital Resources") to 22 of the Company's 2001 Annual Report to stockholders. Item 8. Financial Statements and Supplementary Data. (a) Financial Statements The consolidated balance sheet of Merck & Co., Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, retained earnings, comprehensive income and cash flows for each of the three years in the period ended December 31, 2001 and the report dated January 22, 2002 of Arthur Andersen LLP, independent public accountants, are incorporated by reference to pages 24 through 37 and page 38, respectively, of the Company's 2001 Annual Report to stockholders. (b) Supplementary Data Selected quarterly financial data for 2001 and 2000 are incorporated by reference to the data contained in the Condensed Interim Financial Data table on page 23 of the Company's 2001 Annual Report to stockholders. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. On February 26, 2002, the Board of Directors of the Company and its Audit Committee dismissed Arthur Andersen LLP ("Arthur Andersen" or "AA") as the Company's independent public accountants and engaged PricewaterhouseCoopers LLP ("PwC") to serve as the Company's independent public accountants for the fiscal year 2002. The appointment of PwC is subject to stockholder ratification at the Company's 2002 Annual Meeting of Stockholders to be held in April. Arthur Andersen's reports on the Company's consolidated financial statements for each of the years ended 2001, 2000 and 1999 did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. During the years ended December 31, 2001, 2000 and 1999 and through March 21, 2002, there were no disagreements with Arthur Andersen on any matter of accounting principle or practice, financial statement disclosure, or auditing scope or procedure which, if not resolved to AA's satisfaction, would have caused them to make reference to the subject matter in connection with their report on the Company's consolidated financial statements for such years; and there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K. The Company provided Arthur Andersen with a copy of the foregoing disclosures. Attached as Exhibit 16 is a copy of AA's letter, dated March 21, 2002, stating its agreement with such statements. During the years ended December 31, 2001 and 2000 and through the date of the Board's decision, the Company did not consult PwC with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's consolidated financial statements, or any other matters or reportable events as set forth in Items 304(a)(2)(i)and (ii) of Regulation S-K. PART III Item 10. Directors and Executive Officers of the Registrant. The required information on directors and nominees is incorporated by reference to pages 7 (beginning with the caption "Election of Directors") through 10 of the Company's Proxy Statement for the Annual Meeting of Stockholders to be held April 23, 2002. Information on executive officers is set forth in Part I of this document on pages 14 through 17. The required information on compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to page 30 (under the caption "Section 16(a) Beneficial Ownership Reporting Compliance") of the Company's Proxy Statement for the Annual Meeting of Stockholders to be held April 23, 2002. Item 11. Executive Compensation. The information required for this item is incorporated by reference to page 13 (under the caption "Compensation of Directors"), and pages 15 (beginning with the caption "Compensation and Benefits Committee 18 Report on Executive Compensation") to 22 of the Company's Proxy Statement for the Annual Meeting of Stockholders to be held April 23, 2002. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required for this item is incorporated by reference to pages 14 (under the caption "Security Ownership of Directors and Executive Officers") to 15 of the Company's Proxy Statement for the Annual Meeting of Stockholders to be held April 23, 2002. Item 13. Certain Relationships and Related Transactions. The information required for this item is incorporated by reference to page 13 (under the caption "Relationships with Outside Firms") and pages 22 (under the caption "Indebtedness of Management") to 23 of the Company's Proxy Statement for the Annual Meeting of Stockholders to be held April 23, 2002. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) Documents filed as part of this Form 10-K 1. Financial Statements The following consolidated financial statements and report of independent public accountants are incorporated herein by reference to the Company's 2001 Annual Report to stockholders, as noted on page 18 of this document: Consolidated statement of income for the years ended December 31, 2001, 2000 and 1999 Consolidated statement of retained earnings for the years ended December 31, 2001, 2000 and 1999 Consolidated statement of comprehensive income for the years ended December 31, 2001, 2000 and 1999 Consolidated balance sheet as of December 31, 2001 and 2000 Consolidated statement of cash flows for the years ended December 31, 2001, 2000 and 1999 Notes to consolidated financial statements Report of independent public accountants 2. Financial Statement Schedules Schedules are omitted because they are either not required or not applicable. Financial statements of affiliates carried on the equity basis have been omitted because, considered individually or in the aggregate, such affiliates do not constitute a significant subsidiary. 3. Exhibits
Exhibit Number Description Method of Filing ------ ----------- --------------- 2.1 -- Master Restructuring Agreement dated as of * June 19, 1998 between Astra AB, Merck & Co., Inc., Astra Merck Inc., Astra USA, Inc., KB USA, L.P., Astra Merck Enterprises, Inc., KBI Sub Inc., Merck Holdings, Inc. and Astra Pharmaceuticals, L.P. (Portions of this Exhibit are subject to a request for confidential treatment filed with the Commission)
19
Exhibit Number Description Method of Filing ------ ----------- ---------------- 3(a) -- Restated Certificate of Incorporation of Incorporated by reference to Merck & Co., Inc. (September 1, 2000) Form 10-Q Quarterly Report for the period ended September 30, 2000 3(b) -- By-Laws of Merck & Co., Inc. (as amended Incorporated by reference to effective February 25, 1997) Form 10-Q Quarterly Report for the period ended March 31, 1997 10(a) -- Executive Incentive Plan (as amended Incorporated by reference to effective February 27, 1996) Form 10-K Annual Report for the fiscal year ended December 31, 1995 10(b) -- Base Salary Deferral Plan (as adopted on Incorporated by reference to October 22, 1996, effective January 1, Form 10-K Annual Report 1997) for the fiscal year ended December 31, 1996 10(c) -- 1991 Incentive Stock Plan (as amended Incorporated by reference to effective February 23, 1994) Form 10-K Annual Report for the fiscal year ended December 31, 1994 10(d) -- 1996 Incentive Stock Plan (as amended Incorporated by reference to November 24, 1998) Form 10-Q Quarterly Report for the period ended June 30, 1999 10(e) -- 2001 Incentive Stock Plan (as amended Filed with this document and restated February 26, 2002) 10(f) -- Non-Employee Directors Stock Option Plan Incorporated by reference to (as amended and restated February 24, 1998) Form 10-K Annual Report for the fiscal year ended December 31, 1997 10(g) -- 1996 Non-Employee Directors Stock Option Plan Incorporated by reference to (as amended April 27, 1999) Form 10-Q Quarterly Report for the period ended June 30, 1999 10(h) -- 2001 Non-Employee Directors Stock Option Plan Incorporated by reference to (adopted April 24, 2001) Form 10-Q Quarterly Report for the period ended June 30, 2001 10(i) -- Supplemental Retirement Plan (as amended Incorporated by reference to effective January 1, 1995) Form 10-K Annual Report for the fiscal year ended December 31, 1994 10(j) -- Retirement Plan for the Directors of Incorporated by reference to Merck & Co., Inc. (amended and Form 10-Q Quarterly Report restated June 21, 1996) for the period ended June 30, 1996 10(k) -- Plan for Deferred Payment of Directors' Filed with this document Compensation (amended and restated as of January 1, 2002)
20
Exhibit Number Description Method of Filing ------ ----------- ---------------- 10(l) -- Limited Liability Company Agreement of Incorporated by reference to Merck Capital Ventures, LLC (Dated as of Form 10-K Annual Report November 27, 2000) for the fiscal year ended December 31, 2000 10(m) -- Amended and Restated License and Option * Agreement dated as of July 1, 1998 between Astra AB and Astra Merck Inc. 10(n) -- KBI Shares Option Agreement dated as of * July 1, 1998 by and among Astra AB, Merck & Co., Inc. and Merck Holdings, Inc. 10(o) -- KBI-E Asset Option Agreement dated as of * July 1, 1998 by and among Astra AB, Merck & Co., Inc., Astra Merck Inc. and Astra Merck Enterprises Inc. 10(p) -- KBI Supply Agreement dated as of * July 1, 1998 between Astra Merck Inc. and Astra Pharmaceuticals, L.P. (Portions of this Exhibit are subject to a request for confidential treatment filed with the Commission) 10(q) -- Second Amended and Restated Manufacturing * Agreement dated as of July 1, 1998 among Merck & Co., Inc., Astra AB, Astra Merck Inc. and Astra USA, Inc. 10(r) -- Limited Partnership Agreement dated as of * July 1, 1998 between KB USA, L.P. and KBI Sub Inc. 10(s) -- Distribution Agreement dated as of July 1, 1998 * between Astra Merck Enterprises Inc. and Astra Pharmaceuticals, L.P. 10(t) -- Agreement to Incorporate Defined Terms dated * as of June 19, 1998 between Astra AB, Merck & Co., Inc., Astra Merck Inc., Astra USA, Inc., KB USA, L.P., Astra Merck Enterprises Inc., KBI Sub Inc., Merck Holdings, Inc. and Astra Pharmaceuticals, L.P. 12 -- Computation of Ratios of Earnings to Fixed Filed with this document Charges 13 -- 2001 Annual Report to stockholders (only Filed with this document those portions incorporated by reference in this document are deemed "filed") 16 -- Letter from Arthur Andersen LLP Incorporated by reference to to the Securities and Exchange Commission Form 8-K/A Amendment No.1 to dated March 21, 2002 Current Report on Form 8-K dated March 21, 2002 21 -- List of subsidiaries Filed with this document 23 -- Consent of Independent Public Accountants Contained on page 24 of this Report 24 -- Power of Attorney and Certified Resolution Filed with this document of Board of Directors 99 -- Letter from Registrant to the Filed with this document Securities and Exchange Commission relating to Arthur Anderson LLP
- ------------------------- * Incorporated by reference to Form 10-Q Quarterly Report for the period ended June 30, 1998 21 None of the instruments defining the rights of holders of long-term debt of the Company and its subsidiaries (Exhibit Number 4) are being filed since the total amount of securities authorized under any of such instruments taken individually does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to furnish a copy of such instruments to the Commission upon request. Copies of the exhibits may be obtained by stockholders upon written request directed to the Stockholder Services Department, Merck & Co., Inc., P.O. Box 100--WS 3AB-40, Whitehouse Station, New Jersey 08889-0100 accompanied by check in the amount of $5.00 payable to Merck & Co., Inc. to cover processing and mailing costs. (b) Reports on Form 8-K During the three-month period ended December 31, 2001, the Company furnished three Current Reports on Form 8-K under Item 9 -- Regulation FD Disclosure: (1) Report dated and furnished October 18, 2001, regarding earnings for third quarter and certain supplemental information. (2) Report dated and furnished October 24, 2001, regarding an updated presentation to investors. (3) Report dated December 11, 2001 and furnished December 12, 2001, regarding the Company's business briefing to analysts. 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Dated: March 21, 2002 By RAYMOND V. GILMARTIN (Chairman of the Board, President and Chief Executive Officer) By CELIA A. COLBERT Celia A. Colbert (Attorney-in-Fact) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures Title Date ---------- ----- ---- RAYMOND V. GILMARTIN Chairman of the Board, March 21, 2002 President and Chief Executive Officer; Principal Executive Officer; Director JUDY C. LEWENT Executive Vice President and Chief March 21, 2002 Financial Officer; Principal Financial Officer RICHARD C. HENRIQUES JR. Vice President, Controller; March 21, 2002 Principal Accounting Officer LAWRENCE A. BOSSIDY Director March 21, 2002 WILLIAM G. BOWEN Director March 21, 2002 JOHNNETTA B. COLE Director March 21, 2002 NIALL FITZGERALD Director March 21, 2002 WILLIAM N. KELLEY Director March 21, 2002 HEIDI G. MILLER Director March 21, 2002 EDWARD M. SCOLNICK Director March 21, 2002 THOMAS E. SHENK Director March 21, 2002 SAMUEL O. THIER Director March 21, 2002
Celia A. Colbert, by signing her name hereto, does hereby sign this document pursuant to powers of attorney duly executed by the persons named, filed with the Securities and Exchange Commission as an exhibit to this document, on behalf of such persons, all in the capacities and on the date stated, such persons including a majority of the directors of the Company. By CELIA A. COLBERT Celia A. Colbert (Attorney-in-Fact) 23 Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this Form 10-K of our report dated January 22, 2002 included in the Company's Annual Report to stockholders for the fiscal year ended December 31, 2001, into the Company's previously filed Registration Statements on Form S-8 (Nos. 33-21087, 33-21088, 33-36101, 33-40177, 33-51235, 33-53463, 33-64273, 33-64665, 333-23293, 333-23295, 333-91769, 333-30526, 333-31762, 333-40282, 333-52264, 333-53246, 333-56696, 333-72206 and 333-65796), on Form S-4 (Nos. 33-50667 and 333-61982) and on Form S-3 (Nos. 33-39349, 33-60322, 33-51785, 33-57421, 333-17045, 333-36383, 333-77569 and 333-72546). It should be noted that we have not audited any financial statements of the Company subsequent to December 31, 2001 or performed any audit procedures subsequent to the date of our report. ARTHUR ANDERSEN LLP New York, New York March 21, 2002 24 EXHIBIT INDEX -------------
Exhibit Number Description Method of Filing - ------ ----------- ---------------- 2.1 -- Master Restructuring Agreement dated as of * June 19, 1998 between Astra AB, Merck & Co., Inc., Astra Merck Inc., Astra USA, Inc., KB USA, L.P., Astra Merck Enterprises, Inc., KBI Sub Inc., Merck Holdings, Inc. and Astra Pharmaceuticals, L.P. (Portions of this Exhibit are subject to a request for confidential treatment filed with the Commission) 3(a) -- Restated Certificate of Incorporation of Incorporated by reference to Merck & Co., Inc. (September 1, 2000) Form 10-Q Quarterly Report for the period ended September 30, 2000 3(b) -- By-Laws of Merck & Co., Inc. (as amended Incorporated by reference to effective February 25, 1997) Form 10-Q Quarterly Report for the period ended March 31, 1997 10(a) -- Executive Incentive Plan (as amended Incorporated by reference to effective February 27, 1996) Form 10-K Annual Report for the fiscal year ended December 31, 1995 10(b) -- Base Salary Deferral Plan (as adopted on Incorporated by reference to October 22, 1996, effective January 1, Form 10-K Annual Report 1997) for the fiscal year ended December 31, 1996 10(c) -- 1991 Incentive Stock Plan (as amended Incorporated by reference to effective February 23, 1994) Form 10-K Annual Report for the fiscal year ended December 31, 1994 10(d) -- 1996 Incentive Stock Plan (as amended Incorporated by reference to November 24, 1998) Form 10-Q Quarterly Report for the period ended June 30, 1999 10(e) -- 2001 Incentive Stock Plan (as amended Filed with this document and restated February 26, 2002) 10(f) -- Non-Employee Directors Stock Option Plan Incorporated by reference to (as amended and restated February 24, 1998) Form 10-K Annual Report for the fiscal year ended December 31, 1997 10(g) -- 1996 Non-Employee Directors Stock Option Plan Incorporated by reference to (as amended April 27, 1999) Form 10-Q Quarterly Report for the period ended June 30, 1999 10(h) -- 2001 Non-Employee Directors Stock Option Plan Incorporated by reference to (adopted April 24, 2001) Form 10-Q Quarterly Report for the period ended June 30, 2001 10(i) -- Supplemental Retirement Plan (as amended Incorporated by reference to effective January 1, 1995) Form 10-K Annual Report for the fiscal year ended December 31, 1994
Exhibit Number Description Method of Filing - ------ ----------- ---------------- 10(j) -- Retirement Plan for the Directors of Incorporated by reference to Merck & Co., Inc. (amended and Form 10-Q Quarterly Report restated June 21, 1996) for the period ended June 30, 1996 10(k) -- Plan for Deferred Payment of Directors' Filed with this document Compensation (amended and restated as of January 1, 2002) 10(l) -- Limited Liability Company Agreement of Incorporated by reference to Merck Capital Ventures, LLC (Dated as of Form 10-K Annual Report November 27, 2000) for the fiscal year ended December 31, 2000 10(m) -- Amended and Restated License and Option * Agreement dated as of July 1, 1998 between Astra AB and Astra Merck Inc. 10(n) -- KBI Shares Option Agreement dated as of * July 1, 1998 by and among Astra AB, Merck & Co., Inc. and Merck Holdings, Inc. 10(o) -- KBI-E Asset Option Agreement dated as of * July 1, 1998 by and among Astra AB, Merck & Co., Inc., Astra Merck Inc. and Astra Merck Enterprises Inc. 10(p) -- KBI Supply Agreement dated as of * July 1, 1998 between Astra Merck Inc. and Astra Pharmaceuticals, L.P. (Portions of this Exhibit are subject to a request for confidential treatment filed with the Commission) 10(q) -- Second Amended and Restated Manufacturing * Agreement dated as of July 1, 1998 among Merck & Co., Inc., Astra AB, Astra Merck Inc. and Astra USA, Inc. 10(r) -- Limited Partnership Agreement dated as of * July 1, 1998 between KB USA, L.P. and KBI Sub Inc. 10(s) -- Distribution Agreement dated as of July 1, 1998 * between Astra Merck Enterprises Inc. and Astra Pharmaceuticals, L.P. 10(t) -- Agreement to Incorporate Defined Terms dated * as of June 19, 1998 between Astra AB, Merck & Co., Inc., Astra Merck Inc., Astra USA, Inc., KB USA, L.P., Astra Merck Enterprises Inc., KBI Sub Inc., Merck Holdings, Inc. and Astra Pharmaceuticals, L.P. 12 -- Computation of Ratios of Earnings to Fixed Filed with this document Charges 13 -- 2001 Annual Report to stockholders (only Filed with this document those portions incorporated by reference in this document are deemed "filed") 16 -- Letter from Arthur Andersen LLP Incorporated by reference to to the Securities and Exchange Commission Form 8-K/A Amendment No. 1 to dated March 21, 2002 Current Report on Form 8-K dated March 21, 2002 21 -- List of subsidiaries Filed with this document 23 -- Consent of Independent Public Accountants Contained on page 24 of this Report
Exhibit Number Description Method of Filing ------ ----------- ---------------- 24 -- Power of Attorney and Certified Resolution Filed with this document of Board of Directors 99 -- Letter from Registrant to the Filed with this document Securities and Exchange Commission relating to Arthur Andersen LLP
- ---------------- * Incorporated by reference to Form 10-Q Quarterly Report for the period ended June 30, 1998 None of the instruments defining the rights of holders of long-term debt of the Company and its subsidiaries (Exhibit Number 4) are being filed since the total amount of securities authorized under any of such instruments taken individually does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to furnish a copy of such instruments to the Commission upon request. EX-10.(E) 3 dex10e.txt 2001 INCENTIVE STOCK PLAN ================================================================================ Exhibit 10(e) MERCK & CO., INC. 2001 INCENTIVE STOCK PLAN (amended and restated February 26, 2002) ================================================================================ 2001 INCENTIVE STOCK PLAN The 2001 Incentive Stock Plan ("ISP"), effective January 1, 2001, is established to encourage employees of Merck & Co., Inc. (the "Company"), its subsidiaries, its affiliates and its joint ventures to acquire Common Stock in the Company ("Common Stock"). It is believed that the ISP will stimulate employees' efforts on the Company's behalf, will tend to maintain and strengthen their desire to remain with the Company, will be in the interest of the Company and its Stockholders and will encourage such employees to have a greater personal financial investment in the Company through ownership of its Common Stock. 1. Incentives Incentives under the ISP may be granted in any one or a combination of (a) Incentive Stock Options (or other statutory stock options); (b) Nonqualified Stock Options; (c) Stock Appreciation Rights; (d) Restricted Stock Grants and (e) Performance Shares (collectively "Incentives"). All Incentives shall be subject to the terms and conditions set forth herein and to such other terms and conditions as may be established by the Compensation and Benefits Committee of the Board of Directors (the "Committee"). 2. Eligibility Regular full-time and part-time employees of the Company, its subsidiaries, its affiliates and its joint ventures, including officers, whether or not directors of the Company, and employees of a joint venture partner or affiliate of the Company who provide services to the joint venture with such partner or affiliate, shall be eligible to participate in the ISP ("Eligible Employees") if designated by the Committee. Directors of the Company who are not regular employees are not eligible to participate in the ISP. 3. Administration The ISP shall be administered by the Committee. The Committee shall be responsible for the administration of the ISP including, without limitation, determining which Eligible Employees receive Incentives, what kind of Incentives are made under the ISP and for what number of shares, and the other terms and conditions of such Incentives. Determinations by the Committee under the ISP including, without limitation, determinations of the Eligible Employees, the form, amount and timing of Incentives, the terms and provisions of Incentives and the agreements evidencing Incentives, need not be uniform and may be made selectively among Eligible Employees who receive, or are eligible to receive, Incentives hereunder, whether or not such Eligible Employees are similarly situated. The Committee shall have the responsibility of construing and interpreting the ISP and of establishing and amending such rules and regulations as it may deem necessary or desirable for the proper administration of the ISP. Any decision or action taken or to be taken by the Committee, arising out of or in connection with the construction, administration, interpretation and effect of the ISP and of its rules and regulations, shall, to the maximum extent permitted by applicable law, be within its absolute discretion (except as otherwise specifically provided herein) and shall be conclusive and binding upon the Company, all Eligible Employees and any person claiming under or through any Eligible Employee. The Committee may delegate some or all of its power and authority hereunder to the Chief Executive Officer or other senior member of management as the Committee deems appropriate; provided, however, that the Committee may not delegate its authority with regard to any matter or action affecting an officer subject to Section 16 of the Securities Exchange Act of 1934. For the purpose of this section and all subsequent sections, the ISP shall be deemed to include this plan and any comparable sub-plans established by subsidiaries which, in the aggregate, shall constitute one plan governed by the terms set forth herein. 4. Shares Available for Incentives (a) Shares Subject to Issuance or Transfer. Subject to adjustment as provided in Section 4(c) hereof, there is hereby reserved for issuance under the ISP 95 million shares of Common Stock. The shares available for granting awards shall be increased by the number of shares as to which options or other benefits granted under the ISP have lapsed, expired, terminated or been canceled. In addition, any shares reserved for issuance under the Company's 1996 Incentive Stock Plan and 1991 Incentive Stock Plan ("Prior Plans") in excess of the number of shares as to which options or other benefits have been awarded thereunder, plus any such shares as to which options or other benefits granted under the Prior Plans may lapse, expire, terminate or be canceled, shall also be reserved and available for issuance or reissuance under the ISP. Shares under this ISP may be delivered by the Company from its authorized but unissued shares of Common Stock or from Common Stock held in the Treasury. (b) Limit on an Individual's Incentives. In any given year, no Eligible Employee may receive Incentives covering more than three (3) million shares of the Company's Common Stock (such number of shares shall be adjusted in accordance with Section 4(c)). (c) Adjustment of Shares. In the event of a reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation, rights offering, spin off, split off, split up or other event identified by the Committee, the Committee shall make such adjustments, if any, as it may deem appropriate in (i) the number and kind of shares authorized for issuance under the ISP, (ii) the number and kind of shares subject to outstanding Incentives, (iii) the option price of Stock Options and (iv) the fair market value of stock appreciation rights, provided that fractions of a share will be rounded down to the nearest whole share. 5. Stock Options The Committee may grant options qualifying as Incentive Stock Options under the Internal Revenue Code of 1986, as amended, or any successor code thereto (the "Code"), other statutory options under the Code and Nonqualified Options (collectively "Stock Options"). Such Stock Options shall be subject to the following terms and conditions and such other terms and conditions as the Committee may prescribe: (a) Option Price. The option price per share with respect to each Stock Option shall be determined by the Committee, but shall not be less than 100% of the fair market value of the Common Stock on the date the Stock Option is granted, as determined by the Committee. (b) Period of Option. The period of each Stock Option shall be fixed by the Committee, but shall not exceed ten (10) years. 2 (c) Payment. No shares shall be issued until full payment of the option price has been made. The option prices may be paid in cash or, if the Committee determines, in shares of Common Stock or a combination of cash and shares. If the Committee approves the use of shares of Common Stock as a payment method, the Committee shall establish such conditions as it deems appropriate for the use of Common Stock to exercise a stock option. Stock options awarded under the ISP shall be exercised through the Company's broker-assisted stock option exercise program, provided such program is available at the time of the option exercise, or by such other means as the Committee may determine from time to time. The Committee may establish rules and procedures to permit an optionholder to defer recognition of gain upon the exercise of a stock option. (d) Exercise of Option. The Committee shall determine how and when shares covered by a Stock Option may be purchased. The Committee may establish waiting periods, the dates on which options become exercisable or "vested" and exercise periods, provided that in no event (including those specified in paragraphs (e), (f) and (g) of this section) shall any Stock Option be exercisable after its specified expiration period. (e) Termination of Employment. Upon the termination of a Stock Option grantee's employment (for any reason other than retirement, death or termination for deliberate, willful or gross misconduct), Stock Option privileges shall be limited to the shares which were immediately exercisable at the date of such termination. The Committee, however, in its discretion, may provide that any Stock Options outstanding but not yet exercisable upon the termination of a Stock Option grantee's employment may become exercisable in accordance with a schedule as may be determined by the Committee. Such Stock Option privileges shall expire unless exercised or surrendered under a Stock Appreciation Right within such period of time after the date of termination of employment as may be established by the Committee, but in no event later than the expiration date of the Stock Option. (f) Retirement. Upon retirement of a Stock Option grantee, Stock Option privileges shall apply to those shares immediately exercisable at the date of retirement. The Committee, however, in its discretion, may provide that any Stock Options outstanding but not yet exercisable upon the retirement of a Stock Option grantee may become exercisable in accordance with a schedule as may be determined by the Committee. Stock Option privileges shall expire unless exercised within such period of time as may be established by the Committee, but in no event later than the expiration date of the Stock Option. (g) Death. Upon the death of a Stock Option grantee, Stock Option privileges shall apply to those shares which were immediately exercisable at the time of death. The Committee, however, in its discretion, may provide that any Stock Options outstanding but not yet exercisable upon the death of a Stock Option grantee may become exercisable in accordance with a schedule as may be determined by the Committee. Such privileges shall expire unless exercised by legal representative(s) within a period of time as determined by the Committee, but in no event later than the expiration date of the Stock Option. (h) Termination due to Misconduct. If a Stock Option grantee's employment is terminated for deliberate, willful or gross misconduct, as determined by the Company, all rights under the Stock Option shall expire upon receipt of the notice of such termination. (i) Limits on Incentive Stock Options. Except as may otherwise be permitted by the Code, the Committee shall not grant to an Eligible Employee Incentive Stock Options that, in the aggregate, are first exercisable during any one calendar year to the extent that the aggregate fair market value of the Common Stock, at the time the Incentive Stock Options are granted, exceeds $100,000, or such other amount as the Internal Revenue Service may decide from time to time. 3 6. Stock Appreciation Rights The Committee may, in its discretion, grant a right to receive the appreciation in the fair market value of shares of Common Stock ("Stock Appreciation Right") either singly or in combination with an underlying Stock Option granted hereunder or under the Prior Plans. Such Stock Appreciation Rights shall be subject to the following terms and conditions and such other terms and conditions as the Committee may prescribe: (a) Time and Period of Grant. If a Stock Appreciation Right is granted with respect to an underlying Stock Option, it may be granted at the time of the Stock Option grant or at any time thereafter but prior to the expiration of the Stock Option grant. If a Stock Appreciation Right is granted with respect to an underlying Stock Option, at the time the Stock Appreciation Right is granted the Committee may limit the exercise period for such Stock Appreciation Right, before and after which period no Stock Appreciation Right shall attach to the underlying Stock Option. In no event shall the exercise period for a Stock Appreciation Right granted with respect to an underlying Stock Option exceed the exercise period for such Stock Option. If a Stock Appreciation Right is granted without an underlying Stock Option, the period for exercise of the Stock Appreciation Right shall be set by the Committee. (b) Value of Stock Appreciation Right. If a Stock Appreciation Right is granted with respect to an underlying Stock Option, the grantee will be entitled to surrender the Stock Option which is then exercisable and receive in exchange therefor an amount equal to the excess of the fair market value of the Common Stock on the date the election to surrender is received by the Company over the Stock Option price multiplied by the number of shares covered by the Stock Option which is surrendered. If a Stock Appreciation Right is granted without an underlying Stock Option, the grantee will receive upon exercise of the Stock Appreciation Right an amount equal to the excess of the fair market value of the Common Stock on the date the election to surrender such Stock Appreciation Right is received by the Company over the fair market value of the Common Stock on the date of grant multiplied by the number of shares covered by the grant of the Stock Appreciation Right. (c) Payment of Stock Appreciation Right. Payment of a Stock Appreciation Right shall be in the form of shares of Common Stock, cash or any combination of shares and cash. The form of payment upon exercise of such a right shall be determined by the Committee either at the time of grant of the Stock Appreciation Right or at the time of exercise of the Stock Appreciation Right. 7. Performance Share Awards The Committee may grant awards under which payment may be made in shares of Common Stock, cash or any combination of shares and cash if the performance of the Company or any subsidiary, division, affiliate or joint venture of the Company selected by the Committee during the Award Period meets certain goals established by the Committee ("Performance Share Awards"). Such Performance Share Awards shall be subject to the following terms and conditions and such other terms and conditions as the Committee may prescribe: (a) Award Period and Performance Goals. The Committee shall determine and include in a Performance Share Award grant the period of time for which a Performance Share Award is made ("Award Period"). The Committee shall also establish performance objectives ("Performance Goals") to be met by the Company, subsidiary, division or joint venture during the Award Period as a condition to payment of the Performance Share Award. The Performance Goals may include earnings per share, return on stockholders' equity, return on assets, net income or any other financial or other measurement established by the Committee. The Performance Goals may include minimum and optimum objectives or a single set of objectives. 4 (b) Payment of Performance Share Awards. The Committee shall establish the method of calculating the amount of payment to be made under a Performance Share Award if the Performance Goals are met, including the fixing of a maximum payment. The Performance Share Award shall be expressed in terms of shares of Common Stock and referred to as "Performance Shares." After the completion of an Award Period, the performance of the Company, subsidiary, division or joint venture shall be measured against the Performance Goals, and the Committee shall determine whether all, none or any portion of a Performance Share Award shall be paid. The Committee, in its discretion, may elect to make payment in shares of Common Stock, cash or a combination of shares and cash. Any cash payment shall be based on the fair market value of Performance Shares on, or as soon as practicable prior to, the date of payment. (c) Revision of Performance Goals. At any time prior to the end of an Award Period, the Committee may revise the Performance Goals and the computation of payment if unforeseen events occur which have a substantial effect on the performance of the Company, subsidiary, division or joint venture and which, in the judgment of the Committee, make the application of the Performance Goals unfair unless a revision is made. (d) Requirement of Employment. A grantee of a Performance Share Award must remain in the employ of the Company until the completion of the Award Period in order to be entitled to payment under the Performance Share Award; provided that the Committee may, in its discretion, provide for a full or partial payment where such an exception is deemed equitable. (e) Dividends. The Committee may, in its discretion, at the time of the granting of a Performance Share Award, provide that any dividends declared on the Common Stock during the Award Period, and which would have been paid with respect to Performance Shares had they been owned by a grantee, be (i) paid to the grantee, or (ii) accumulated for the benefit of the grantee and used to increase the number of Performance Shares of the grantee. (f) Limit on Performance Share Awards. Incentives granted as Performance Share Awards under this section and Restricted Stock Grants under Section 8 shall not exceed, in the aggregate, six (6) million shares of Common Stock (such number of shares shall be adjusted in accordance with Section 4(c)). 8. Restricted Stock Grants The Committee may award shares of Common Stock to a grantee, which shares shall be subject to the following terms and conditions and such other terms and conditions as the Committee may prescribe ("Restricted Stock Grant"): (a) Requirement of Employment. A grantee of a Restricted Stock Grant must remain in the employment of the Company during a period designated by the Committee ("Restriction Period") in order to retain the shares under the Restricted Stock Grant. If the grantee leaves the employment of the Company prior to the end of the Restriction Period, the Restricted Stock Grant shall terminate and the shares of Common Stock shall be returned immediately to the Company provided that the Committee may, at the time of the grant, provide for the employment restriction to lapse with respect to a portion or portions of the Restricted Stock Grant at different times during the Restriction Period. The Committee may, in its discretion, also provide for such complete or partial exceptions to the employment restriction as it deems equitable. 5 (b) Restrictions on Transfer and Legend on Stock Certificates. During the Restriction Period, the grantee may not sell, assign, transfer, pledge or otherwise dispose of the shares of Common Stock. Each certificate for shares of Common Stock issued hereunder shall contain a legend giving appropriate notice of the restrictions in the grant. (c) Escrow Agreement. The Committee may require the grantee to enter into an escrow agreement providing that the certificates representing the Restricted Stock Grant will remain in the physical custody of an escrow holder until all restrictions are removed or expire. (d) Lapse of Restrictions. All restrictions imposed under the Restricted Stock Grant shall lapse upon the expiration of the Restriction Period if the conditions as to employment set forth above have been met. The grantee shall then be entitled to have the legend removed from the certificates. (e) Dividends. The Committee shall, in its discretion, at the time of the Restricted Stock Grant, provide that any dividends declared on the Common Stock during the Restriction Period shall either be (i) paid to the grantee, or (ii) accumulated for the benefit of the grantee and paid to the grantee only after the expiration of the Restriction Period. (f) Limit on Restricted Stock Grant. Incentives granted as Restricted Stock Grants under this section and Performance Share Awards under Section 7 shall not exceed, in the aggregate, six (6) million shares of Common Stock (such number of shares shall be adjusted in accordance with Section 4(c)). 9. Transferability Each Incentive Stock Option granted under the ISP shall not be transferable other than by will or the laws of descent and distribution; each other Incentive granted under the ISP will not be transferable or assignable by the recipient, and may not be made subject to execution, attachment or similar procedures, other than by will or the laws of descent and distribution or as determined by the Committee in accordance with regulations promulgated under the Securities Exchange Act of 1934, or any other applicable law or regulation. 10. Discontinuance or Amendment of the Plan The Board of Directors may discontinue the ISP at any time and may from time to time amend or revise the terms of the ISP as permitted by applicable statutes, except that it may not revoke or alter, in a manner unfavorable to the grantees of any Incentives hereunder, any Incentives then outstanding, nor may the Board amend the ISP without stockholder approval where the absence of such approval would cause the Plan to fail to comply with Rule 16b-3 under the Securities Exchange Act of 1934, or any other requirement of applicable law or regulation. Unless approved by the Company's stockholders, no adjustments or reduction of the exercise price of any outstanding Incentives shall be made by cancellation of outstanding Incentives and the subsequent regranting of Incentives at a lower price to the same individual. No Incentive shall be granted under the ISP after December 31, 2003, but Incentives granted theretofore may extend beyond that date. 11. No Right of Employment or Participation The ISP and the Incentives granted hereunder shall not confer upon any Eligible Employee the right to continued employment with the Company, its subsidiaries, its affiliates or its joint ventures or affect in any way the right of such entities to terminate the employment of an Eligible Employee at any time and for any reason. No individual shall have a right to be granted an Incentive, or having been granted an Incentive, to receive any future Incentives. 6 12. No Limitation on Compensation Nothing in the ISP shall be construed to limit the right of the Company to establish other plans or to pay compensation to its employees, in cash or property, in a manner which is not expressly authorized under the ISP. 13. No Impact on Benefits Except as may otherwise be specifically stated under any employee benefit plan, policy or program, no amount payable in respect of any Incentive shall be treated as compensation for purposes of calculating an employee's right under any such plan, policy or program. 14. No Constraint on Corporate Action Nothing in the ISP shall be construed (i) to limit, impair or otherwise affect the Company's right or power to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, or to merge or consolidate, or dissolve, liquidate, sell or transfer all or any part of its business or assets, or (ii) except as provided in Section 10, to limit the right or power of the Company or any subsidiary to take any action which such entity deems to be necessary or appropriate. 15. Withholding Taxes The Company shall be entitled to deduct from any payment under the ISP, regardless of the form of such payment, the amount of all applicable income and employment taxes required by law to be withheld with respect to such payment or may require the Eligible Employee to pay to it such tax prior to and as a condition of the making of such payment. In accordance with any applicable administrative guidelines it establishes, the Committee may allow an Eligible Employee to pay the amount of taxes required by law to be withheld from an Incentive by withholding from any payment of Common Stock due as a result of such Incentive, or by permitting the Eligible Employee to deliver to the Company, shares of Common Stock having a fair market value, as determined by the Committee, equal to the amount of such required withholding taxes. 16. Governing Law The ISP, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of New Jersey. 7 EX-10.(K) 4 dex10k.txt PLAN FOR DEFERRED PAYMENT /DIRECTORS' COMPENSATION ================================================================================ Exhibit 10(k) MERCK & CO., INC. PLAN FOR DEFERRED PAYMENT OF DIRECTORS' COMPENSATION (Amended and Restated as of January 1, 2002) ================================================================================ 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 5 Schedule A Measurement Methods 6
(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 Directors 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. 2 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 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. 3 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 Directors of the Board of Directors ("Committee on Directors"), 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 Directors 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 Directors 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 Directors. 4 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 Directors to change payment frequency, including a lump sum distribution, and the Committee on Directors 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 Directors 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 Directors 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 Directors 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 Directors in its sole discretion may determine. VII. PLAN AMENDMENT OR TERMINATION The Committee on Directors shall have the right to amend or terminate this Plan at any time for any reason. 5 SCHEDULE A MEASUREMENT METHODS (February 1, 2001 - December 31, 2001) Merck Common Stock Mutual Funds Acorn Fund American Century Emerging Markets Fund 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 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 Voyager A Putnam Vista A T. Rowe Price Blue Chip Growth Fund Vanguard Asset Allocation Vanguard U.S. Growth Portfolio 6 SCHEDULE A MEASUREMENT METHODS (January 1, 2002) Merck Common Stock Mutual Funds American Century Emerging Markets Fund 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 A Putnam International Voyager A Putnam Vista A T. Rowe Price Blue Chip Growth Fund Vanguard Asset Allocation 7 EX-12 5 dex12.txt COMPUTATION OF RATIOS OF EARNINGS Exhibit 12 MERCK & CO., INC. AND SUBSIDIARIES Computation Of Ratios Of Earnings To Fixed Charges -------------------------------------------------- (In millions except ratio data)
Years Ended December 31 ---------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 1996 ----------- ----------- ---------- ---------- ---------- ---------- Income Before Taxes $ 10,402.6 $ 9,824.1 $ 8,619.5 $ 8,133.1 $ 6,462.3 $ 5,540.8 Add: One-third of rents 77.7 67.0 66.7 56.0 47.0 41.0 Interest expense, net 369.7 361.9 236.4 150.6 98.2 103.2 Preferred stock dividends 199.6 205.2 120.7 62.1 49.6 70.0 ----------- ----------- ---------- ---------- ---------- ---------- Earnings $ 11,049.6 $ 10,458.2 $ 9,043.3 $ 8,401.8 $ 6,657.1 $ 5,755.0 =========== =========== ========== ========== ========== ========== One-third of rents $ 77.7 $ 67.0 $ 66.7 $ 56.0 $ 47.0 $ 41.0 Interest expense 464.7 484.4 316.9 205.6 129.5 138.6 Preferred stock dividends 199.6 205.2 120.7 62.1 49.6 70.0 ----------- ----------- ---------- ---------- ---------- ---------- Fixed Charges $ 742.0 $ 756.6 $ 504.3 $ 323.7 $ 226.1 $ 249.6 =========== =========== ========== ========== ========== ========== Ratio of Earnings to Fixed Charges 15 14 18 26 29 23 == == == == == ==
For purposes of computing these ratios, "earnings" consist of income 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, 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-13 6 dex13.txt 2001 ANNUAL REPORT TO STOCKHOLDERS Exhibit 13 Financial Section - -------------------------------------------------------------------------------- Contents Financial Review Description of Merck's Business ........................................ 13 Competition and the Health Care Environment ............................ 13 Business Strategies .................................................... 14 Joint Ventures ......................................................... 14 Foreign Operations ..................................................... 16 Operating Results ...................................................... 16 Environmental and Other Matters ........................................ 19 Capital Expenditures ................................................... 20 Analysis of Liquidity and Capital Resources ............................ 20 Recently Issued Accounting Standards ................................... 22 2002 Outlook ........................................................... 22 Use of Estimates and Cautionary Factors That May Affect Future Results ............................................ 23 Condensed Interim Financial Data ....................................... 23 Dividends Paid per Common Share ........................................ 23 Common Stock Market Prices ............................................. 23 Consolidated Statement of Income .......................................... 24 Consolidated Statement of Retained Earnings ............................... 24 Consolidated Statement of Comprehensive Income ............................ 24 Consolidated Balance Sheet ................................................ 25 Consolidated Statement of Cash Flows ...................................... 26 Notes to Consolidated Financial Statements ................................ 27 Management's Report ....................................................... 38 Report of Independent Public Accountants .................................. 38 Audit Committee's Report .................................................. 39 Compensation and Benefits Committee's Report .............................. 39 Selected Financial Data ................................................... 40 Financial Review - -------------------------------------------------------------------------------- Description of Merck's Business Merck is a global research-driven pharmaceutical company that discovers, develops, manufactures and markets a broad range of human and animal health products, directly and through its joint ventures, and provides pharmaceutical benefit services through Merck-Medco Managed Care (Merck-Medco). Sales - -------------------------------------------------------------------------------- ($ in millions) 2001 2000 1999 - -------------------------------------------------------------------------------- Atherosclerosis ................... $ 7,179.6 $ 5,805.2 $ 5,093.2 Hypertension/heart failure ........ 4,255.6 4,629.1 4,563.8 Anti-inflammatory/analgesics ...... 2,630.5 2,251.7 578.5 Osteoporosis ...................... 1,759.2 1,275.3 1,043.1 Respiratory ....................... 1,375.7 862.2 501.8 Vaccines/biologicals .............. 1,022.4 952.0 860.0 Anti-bacterial/anti-fungal ........ 795.4 783.3 772.3 Ophthalmologicals ................. 672.2 656.2 670.0 Human immunodeficiency virus (HIV) .................... 411.0 528.8 664.4 Anti-ulcerants .................... 354.2 849.4 913.9 Other Merck products .............. 891.2 1,629.7 1,820.6 Merck-Medco ....................... 26,368.7 20,140.3 15,232.4 - -------------------------------------------------------------------------------- $47,715.7 $40,363.2 $32,714.0 ================================================================================ Human health products include therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. Among these are atherosclerosis products, which include Zocor and Mevacor; hypertension/heart failure products which include Cozaar, Hyzaar, Prinivil, Vasotec and Vaseretic; anti-inflammatory/analgesics, of which Vioxx, an agent that specifically inhibits COX-2, is the largest-selling; an osteoporosis product, Fosamax, for treatment and prevention of osteoporosis; a respiratory product, Singulair, a leukotriene receptor antagonist; vaccines/biologicals, of which M-M-R II, a pediatric vaccine for measles, mumps and rubella, Varivax, a live virus vaccine for the prevention of chickenpox, and Recombivax HB (hepatitis B vaccine recombinant) are the largest-selling; anti-bacterial/anti-fungal, of which Primaxin, Noroxin and Cancidas are the largest-selling; ophthalmologicals, of which Timoptic, Timoptic-XE, Trusopt and Cosopt are the largest-selling; HIV products, which include Crixivan, a protease inhibitor for the treatment of human immunodeficiency viral infection in adults; and anti-ulcerants, which includes Pepcid. Other Merck products include sales of other human pharmaceuticals, continuing sales to divested businesses, pharmaceutical and animal health supply sales to the Company's joint ventures as well as supply sales to AstraZeneca LP (AZLP). Also included in this category are rebates and discounts on Merck pharmaceutical products. Merck-Medco primarily includes Merck-Medco sales of non-Merck products and Merck-Medco pharmaceutical benefit services, principally sales of prescription drugs through managed prescription drug programs, as well as services provided through programs to manage patient health and drug utilization. Merck sells its human health products primarily to drug wholesalers and retailers, hospitals, clinics, government agencies and managed health care providers such as health maintenance organizations and other institutions. The Company's professional representatives communicate the effectiveness, safety and value of our products to health care professionals in private practice, group practices and managed care organizations. Competition and the Health Care Environment The markets in which the Company conducts its business are highly competitive and often highly regulated. Global efforts toward health care cost containment continue to exert pressure on product pricing and access. In the United States, the Company has been working with private and government employers to slow the increase of health care costs. Demonstrating that the Company's medicines can help save costs in other areas and pricing flexibly across our product portfolio have encouraged growing use of our medicines and helped offset the effects of increasing cost pressures. Legislative bodies continue to work to expand health care access and reduce associated costs. Such initiatives include prescription drug benefit proposals for Medicare beneficiaries introduced in the U.S. Congress. Outside the United States, in difficult environments encumbered by government cost containment actions, the Company has worked with payers to help them allocate scarce resources to optimize health care outcomes, limiting the potentially detrimental effects of government actions on sales growth. In addition, countries within the European Union (EU), recognizing the economic importance of the research-based pharmaceutical industry and the value of innovative medicines to society, are working with industry representatives and the European Commission on proposals for market deregulation. Merck & Co., Inc. 2001 Annual Report Financial Section 13 There has been an increasing amount of focus on privacy issues in countries around the world, including the United States and the EU. In the United States, federal and state governments have pursued legislative and regulatory initiatives regarding patient privacy, including recently issued federal privacy regulations concerning health information, which could affect the Company's operations, particularly at Merck-Medco. Although no one can predict the outcome of these and other legislative, regulatory and advocacy initiatives, we are well positioned to respond to the evolving health care environment and market forces. Several products have recently faced expiration of product patents. U.S. product patents expired in 2001 for Prilosec, which is supplied exclusively to AZLP; Prinivil, for which co-marketing rights have been licensed to a third party; Mevacor; and Vaseretic. In the aggregate, domestic sales of these products, as well as Pepcid, for which market exclusivity expired in 2001, represented 10% of Merck human health sales for 2001. The Company expects a significant decline in the sales of these products in 2002 as a result of the loss of market exclusivity. With the exception of Prilosec, for which the Company has U.S. rights only, a decline is also expected in the Company's European sales for these products in the years 2002 through 2005 upon the loss of market exclusivity in European countries throughout this period. European sales of these products represented 1% of Merck human health sales for 2001. While the expiration of a product patent normally results in a loss of market exclusivity, commercial benefits may continue to be derived from other patents, for example, patents on processes, intermediates, compositions, uses and formulations related to the product, and, in the United States, additional market exclusivity that may be available under federal law. The additional six months of U.S. market exclusivity granted to Pepcid, Prilosec and Mevacor by the U.S. Food and Drug Administration (FDA) based upon pediatric use studies expired in April, October and December 2001, respectively. Prinivil was similarly granted U.S. market exclusivity based on pediatric use studies for six months, commencing December 2001. The Company and AstraZeneca have filed patent infringement suits in federal court against pharmaceutical manufacturers seeking to market a generic form of Prilosec (omeprazole) prior to the expiration of certain patents. A trial commenced in December 2001. We anticipate that the worldwide trend toward cost-containment will continue, resulting in ongoing pressures on health care budgets. As we continue to successfully launch new products, contribute to health care debates and monitor reforms, our new products, policies and strategies will enable us to maintain our strong position in the changing economic environment. Business Strategies The Company is discovering new innovative products and developing new indications for existing products - the result of its continuing commitment to research. The Company is also developing innovative sales, marketing and education techniques; establishing joint ventures, licensing arrangements and health care partnerships with large managed care organizations and other payers; and demonstrating to payers and providers the cost-effectiveness of Merck products. Additionally, achievement of productivity gains has become a permanent strategy. Productivity initiatives include, at the manufacturing level, optimizing plant utilization, implementing lowest-cost processes and improving technology transfer between research and manufacturing, and throughout the Company, reducing the cost of purchased materials and services, re-engineering core and administrative processes and streamlining the organization. At the manufacturing level, the Company expects that productivity gains will continue to substantially offset inflation. The Company is committed to improving access to medicines and enhancing the quality of life for people around the world. Merck's African Comprehensive HIV/AIDS Partnership in Botswana, in collaboration with the Government of Botswana and the Bill & Melinda Gates Foundation, is striving to develop a comprehensive and sustainable approach to HIV prevention, care and treatment. To help catalyze access to HIV medicines in developing world countries, in March 2001 the Company significantly lowered prices of its HIV antiretroviral drugs in countries in the low and medium categories of the United Nations Development Program's Human Development Index to help increase the accessibility of these products. In 1993, Merck acquired Medco Containment Services, Inc. (renamed Merck-Medco). Merck-Medco provides pharmaceutical benefit services in the United States. Merck-Medco manages prescription drug programs through its mail service and retail pharmacy networks, and offers a series of health management programs to help payers, providers and patients manage high-risk, high-cost diseases. Merck-Medco sells its pharmaceutical benefit management services to corporations, labor unions, insurance companies, Blue Cross/Blue Shield organizations, government agencies, federal and state employee plans, health maintenance and other similar organizations. In January 2002, the Company announced plans to establish Merck-Medco as a separate, publicly-traded company, with full separation completed within 12 months of an initial public offering, subject to market conditions and receipt of an Internal Revenue Service ruling that such an event would be tax-free to shareholders and to other customary conditions. Joint Ventures To expand its research base and realize synergies from combining capabilities, opportunities and assets, the Company has formed a number of joint ventures. In 1982, Merck entered into an agreement with Astra AB (Astra) to develop and market Astra's products under a royalty-bearing license. In 1993, the Company's total sales of Astra products reached a level that triggered the first step in the establishment of a joint venture business carried on by Astra Merck Inc. (AMI), in which Merck and Astra each owned a 50% share. This joint venture, formed in November 1994, developed and marketed most of Astra's new prescription medicines in the United States including Prilosec, the first of a class of medications known as proton pump inhibitors, which slows the production of acid from the cells of the stomach lining. In 1998, Merck and Astra completed the restructuring of the ownership and operations of the joint venture whereby the Company acquired Astra's interest in AMI, renamed KBI Inc. (KBI), and contributed KBI's operating assets to a new U.S. limited partnership, Astra Pharmaceuticals L.P. (the Partnership), in exchange for a 1% limited partner interest. Astra contributed the net assets of its wholly owned subsidiary, Astra USA, Inc., to the Partnership in exchange for a 99% general partner interest. The Partnership, renamed AstraZeneca LP (AZLP) upon Astra's 1999 merger with Zeneca Group Plc (the AstraZeneca merger), became the exclusive distributor of the products for which KBI retained rights. 14 Merck & Co., Inc. 2001 Annual Report Financial Section While maintaining a 1% limited partner interest in AZLP, Merck has consent and protective rights intended to preserve its business and economic interests, including restrictions on the power of the general partner to make certain distributions or dispositions. Furthermore, in limited events of default, additional rights will be granted to the Company, including powers to direct the actions of, or remove and replace, the Partnership's chief executive officer and chief financial officer. Merck earns certain Partnership returns as well as ongoing revenue based on sales of current and future KBI products. The Partnership returns include a priority return provided for in the Partnership Agreement, variable returns based, in part, upon sales of certain former Astra USA, Inc. products, and a preferential return representing Merck's share of undistributed AZLP GAAP earnings. These returns, which are recorded as Equity income from affiliates, aggregated $642.8 million, $637.5 million and $633.6 million in 2001, 2000 and 1999, respectively. The AstraZeneca merger triggers a partial redemption of Merck's limited partner interest in 2008. Upon this redemption, AZLP will distribute to KBI an amount based primarily on a multiple of Merck's annual revenue derived from sales of the former Astra USA, Inc. products for the three years prior to the redemption (the Limited Partner Share of Agreed Value). In conjunction with the 1998 restructuring, for a payment of $443.0 million, Astra purchased an option (the Asset Option) to buy Merck's interest in the KBI products, excluding the gastrointestinal medicines Prilosec and Nexium. The Asset Option is exercisable in 2010 at an exercise price equal to the net present value as of March 31, 2008 of projected future pretax revenue to be received by the Company from the KBI products (the Appraised Value). Merck also has the right to require Astra to purchase such interest in 2008 at the Appraised Value. In addition, the Company granted Astra an option to buy Merck's common stock interest in KBI at an exercise price based on the net present value of estimated future net sales of Prilosec and Nexium. This option is exercisable two years after Astra's purchase of Merck's interest in the KBI products. The 1999 AstraZeneca merger constituted a Trigger Event under the KBI restructuring agreements. As a result of the merger, Astra was required to make two one-time payments to Merck totaling approximately $1.8 billion. In exchange for Merck's relinquishment of rights to future Astra products with no existing or pending U.S. patents at the time of the merger, Astra paid $967.4 million (the Advance Payment), which is subject to a true-up calculation in 2008 that may require repayment of all or a portion of this amount. The True-Up Amount is directly dependent on the fair market value in 2008 of the Astra product rights retained by the Company. Accordingly, recognition of this contingent income has been deferred until the realizable amount, if any, is determinable, which is not anticipated prior to 2008. The Company was also entitled to receive a Lump Sum Payment in an amount that it estimated as $822.0 million. Astra paid $712.5 million of the Lump Sum Payment in 1999 and disputed its obligation to pay the remainder. One-half of the expected payment reduced goodwill by $411.0 million, less 50% of a reserve relating to disputed proceeds. The balance was recorded in Other (income) expense, net. In 2000, arbitration over the disputed proceeds concluded and the Company received $87.2 million plus interest. Under the provisions of the KBI restructuring agreements, because a Trigger Event has occurred, the sum of the Limited Partner Share of Agreed Value, the Appraised Value and the True-Up Amount is guaranteed to be a minimum of $4.7 billion. Distribution of the Limited Partner Share of Agreed Value and payment of the True-Up Amount will occur in 2008. Astra-Zeneca's purchase of Merck's interest in the KBI products is contingent upon the exercise of either Merck's option in 2008 or AstraZeneca's option in 2010 and, therefore, payment of the Appraised Value may or may not occur. In 1989, Merck formed a joint venture with Johnson & Johnson to develop and market a broad range of nonprescription medicines for U.S. consumers. This 50% owned joint venture was expanded into Europe in 1993, and into Canada in 1996. Sales of joint venture products were as follows: ($ in millions) 2001 2000 1999 - -------------------------------------------------------------------------------- Gastrointestinal products $293.5 $321.1 $332.8 Other products 101.5 108.0 118.6 - -------------------------------------------------------------------------------- $395.0 $429.1 $451.4 ================================================================================ In 1994, Merck and Pasteur Merieux Connaught (now Aventis Pasteur) established a 50% owned joint venture to market vaccines in Europe and to collaborate in the development of combination vaccines for distribution in Europe. Sales of joint venture products were as follows: ($ in millions) 2001 2000 1999 - -------------------------------------------------------------------------------- Hepatitis vaccines $ 88.0 $134.1 $159.6 Viral vaccines 40.5 48.5 68.6 Other vaccines 371.1 358.3 338.6 - -------------------------------------------------------------------------------- $499.6 $540.9 $566.8 ================================================================================ In 1997, Merck and Rhone-Poulenc (now Aventis) combined their animal health and poultry genetics businesses to form Merial Limited (Merial), a fully integrated animal health company, which is a stand-alone joint venture, equally owned by each party. Merial provides a comprehensive range of pharmaceuticals and vaccines to enhance the health, well-being and performance of a wide range of animal species. Sales of joint venture products were as follows: ($ in millions) 2001 2000 1999 - -------------------------------------------------------------------------------- Avermectin products $ 495.0 $ 531.7 $ 564.9 Fipronil products 409.7 345.7 316.0 Other products 754.8 730.4 799.2 - -------------------------------------------------------------------------------- $1,659.5 $1,607.8 $1,680.1 ================================================================================ In May 2000, the Company and Schering-Plough Corporation (Schering-Plough) entered into agreements to create separate partnerships to develop and market in the United States new prescription medicines in the cholesterol-management and respiratory therapeutic areas. These partnerships are pursuing the development and marketing of Zetia, an investigational cholesterol absorption inhibitor discovered by Schering-Plough, as a once-daily monotherapy and in co-administration with statins; Zetia as a once-daily combination tablet with Zocor; and a once-daily combination tablet of Singulair and Claritin, Schering-Plough's nonsedating antihistamine, for the treatment of allergic rhinitis and asthma. In December 2001, the Company and Schering-Plough announced the worldwide expansion (excluding Japan) of the cholesterol-management partnership. Merck & Co., Inc. 2001 Annual Report 15 Foreign Operations The Company's operations outside the United States are conducted primarily through subsidiaries. Sales of Merck human health products by subsidiaries outside the United States were 37% of Merck human health sales in 2001, and 36% and 40% in 2000 and 1999, respectively. Distribution of 2001 Foreign Human Health Sales [CHART] Western Europe 45% Asia/Pacific 28% Other Foreign 27% ---- Total 100% The Company's worldwide business is subject to risks of currency fluctuations and governmental actions. The Company does not regard these risks as a deterrent to further expansion of its operations abroad. However, the Company closely reviews its methods of operations and adopts strategies responsive to changing economic and political conditions. In recent years, Merck has been expanding its operations in countries located in Latin America, the Middle East, Africa, Eastern Europe and Asia Pacific where changes in government policies and economic conditions are making it possible for Merck to earn fair returns. Businesses in these developing areas, while sometimes less stable, offer important opportunities for growth over time. Operating Results Total sales for 2001 increased 18% in total and 14% on a volume basis from 2000. Foreign exchange had a one point unfavorable effect on 2001 sales growth. Total sales for 2000 increased 23% in total and 20% on a volume basis from 1999. Foreign exchange had a one point unfavorable effect on 2000 sales growth. Components of Human Health Sales Growth [CHART] Total Sales Sales Volume Net Pricing Foreign Growth Growth Actions Exchange Rates 1997 15.0% 17.6% 0.3% -2.9% 1998 10.9 14.1 -- -3.2 1999 15.3 16.1 -0.1 -0.7 2000 16.2 18.8 -0.9 -1.7 2001 5.7 7.9 0.3 -2.5 This chart illustrates the effects of price, volume and exchange on sales of Merck human health products. Growth for 1999 and 1998 includes a three and five point increase, respectively, attributable to the 1998 AMI restructuring. The human health business has grown through sales volume over the last five years. Price had essentially no effect on sales growth, while the effect of exchange had a varied unfavorable effect over the same period. In 2001, sales of Merck human health products grew 6%. Foreign exchange rates had approximately a three percentage point unfavorable effect on sales growth, while price changes had less than a half point favorable effect on growth. In measuring these effects, changes in the value of foreign currencies are calculated net of price increases in hyperinflationary countries, principally in Latin America. Domestic sales growth was 5%, while foreign sales grew 7% including a seven percentage point unfavorable effect from exchange. The unit volume growth from sales of Merck human health products was driven by five key products: Zocor, Vioxx, Cozaar/Hyzaar, Fosamax and Singulair. Also contributing to Merck's human health volume growth were Proscar, Maxalt and Cancidas, which was launched in 2001. Zocor, Merck's cholesterol-modifying medicine, continued its strong growth in 2001, based on the product's demonstrated ability to act favorably on all major lipid parameters with the lowering of "bad" (LDL) cholesterol and triglycerides while raising the levels of "good" (HDL) cholesterol. A five-year Heart Protection Study (HPS) conducted by Oxford University, the largest study ever on statins, demonstrated that Zocor 40 mg saved lives and significantly reduced the risk of stroke and heart attacks in a broad range of patients with or at high risk of heart disease including patients with average and below average cholesterol levels. In addition, preliminary results from the study, which were presented at the American Heart Association Meeting in November 2001, demonstrated that Zocor significantly reduced the risk of stroke and heart attacks for several distinct populations with and without elevated cholesterol, including diabetes patients, stroke victims and women with or at high risk of heart disease. Results from the HPS study also showed that Zocor 40 mg was well tolerated throughout the five-year study. Merck intends to file for regulatory approval to include this information on the prescribing label for Zocor. Also in 2001, the U.S. National Cholesterol Education Program significantly broadened its definition of those at highest risk from coronary heart disease and the patient population considered eligible for cholesterol control medicines. Vioxx, Merck's second largest-selling product, continued its strong growth in 2001 and was the product leader within the COX-2 class for new prescription volume growth in the United States. It exceeded the $2 billion sales mark faster than any other product in Merck's history. Pain relief and gastrointestinal safety continue to be the primary needs in the arthritis and pain market. Vioxx is now available in 68 markets around the world as a once-a-day treatment for osteoarthritis, acute pain and dysmenorrhea and, in some countries outside the United States, rheumatoid arthritis. Physicians are responding favorably to the Company's pain studies in which Vioxx 50 mg was compared to acetaminophen in combination with either codeine 60 mg or oxycodone 5 mg, which are commonly prescribed narcotics. In addition, an initiative with U.S. hospitals resulted in a favorable formulary status for Vioxx at more than 3,000 major hospitals. In November 2001, Vioxx was approved for symptomatic relief in the treatment of adult rheumatoid arthritis in all EU member states through the mutual recognition procedure. In December 2001, Vioxx, under the trade names Ceoxx or Vioxx Acute, was also approved for relief of acute pain and pain from dysmenorrhea in 13 member states of the EU. 16 Merck & Co., Inc. 2001 Annual Report Financial Section Cozaar, and its companion agent, Hyzaar (a combination of Cozaar and the diuretic hydrochlorothiazide), Merck's high-blood pressure medicines, continued their strong growth in 2001 and together are the global leaders in the angiotensin II antagonist (AIIA) class of anti-hypertensive drugs. In the RENAAL study, which was published in September in The New England Journal of Medicine, Cozaar delayed the progression of renal disease in Type 2 diabetics with nephropathy, including a significant reduction in End-stage Renal Disease (ESRD). The results have been submitted to the FDA for inclusion in the prescribing information for Cozaar. Merck continues to support the growth of Cozaar and Hyzaar with ongoing investment in two large outcomes studies, LIFE and OPTIMAAL. Results from the LIFE study will be presented at the American College of Cardiology meeting in early 2002. Beginning in 2001, Merck and E.I. du Pont de Nemours and Company (DuPont) began sharing equally the operating profits from Cozaar and Hyzaar in North America, under terms of the license agreement established between the parties in 1989. Financial terms outside of North America were not changed. Fosamax, Merck's nonhormonal medicine and the leading product worldwide for treatment and prevention of post-menopausal osteoporosis in women, continued its strong growth in 2001. In August 2001, Fosamax was launched in Japan, the world's second-largest prescription drug market. The largest study of osteoporosis, National Osteoporosis Risk Assessment, found that almost half of the more than 200,000 postmenopausal women assessed in the study had low bone mass, putting them at increased risk of bone fractures. The study, recently published in the Journal of the American Medical Association, suggests that millions of women age 50 and older who have not been assessed for osteoporosis may be at increased risk of fracturing a bone, underscoring the significant market opportunity for Fosamax. Fosamax Once Weekly, the first and only oral once-weekly treatment for osteoporosis, has received rapid physician and patient acceptance since its introduction in the U.S. in November 2000. Studies show that nine out of ten women preferred the once-weekly dosing regimen and in many markets almost 80 percent switched to the once-weekly product. Launched in 30 markets worldwide, the once-weekly medicine has accelerated the growth of the Fosamax brand, extending Merck's leadership in several markets, including the United States. While osteoporosis basically affects women, an estimated 3 million men also have the condition and the FDA recently approved the once-weekly version of Fosamax for men. Singulair, Merck's once-a-day tablet for the treatment of chronic asthma in adults and children age 2 and older, continued its growth in 2001. It remains the No. 1 prescribed asthma controller in the United States and is the most widely used medicine of its kind. In August 2001, Singulair was launched in Japan, the world's second-largest national market for asthma medicines. Singulair is being investigated for potential use in the treatment of allergic rhinitis, more commonly known as hay fever. Singulair operates with an entirely different mechanism of action from the steroids and sedating antihistamines for the treatment of this condition and the Company plans to file for regulatory approval in early 2002. Proscar, for the treatment of symptomatic benign prostatic hyperplasia in men with enlarged prostates, reported strong growth in 2001. With long-term clinical studies in over 13,000 men, Proscar is supported by a wealth of clinical data on its proven efficacy and safety, and is the only product approved to reduce the risk of acute urinary retention and the risk of benign prostatic hyperplasia (BPH) related surgery. Proscar provides durable symptom improvements for many men with symptomatic BPH and enlarged prostates. Since its introduction in 1992, Proscar has been prescribed to millions of men and is currently marketed in over 100 countries. Maxalt, Merck's treatment for acute migraine headaches in adults, continued its impressive growth in 2001, growing nearly twice as fast as the oral triptan migraine market. Maxalt provides fast and effective relief of disabling headache pain and other symptoms such as nausea and sensitivity to light and noise that often accompany a migraine attack. In a recently published independent analysis of clinical trials among migraine therapies, Maxalt 10 mg was shown to be the most effective therapy in eliminating headache pain after two hours when compared to other drugs in the triptan class. Maxalt is available in the United States in both conventional tablets and convenient, rapidly dissolving oral wafers which disintegrate within seconds on the tongue without liquids, thereby offering the convenience of being able to be taken anytime, anywhere. Growth in 2001 also benefited from the February launch of Cancidas, which is the first in a new class of anti-fungals, called echinocandins or glucan synthesis inhibitors, introduced in more than a decade. Cancidas is used to treat certain life-threatening fungal infections that are becoming more prevalent as the number of people with compromised immune systems increases. This new medicine is indicated for the treatment of invasive aspergillosis in patients who do not respond to or cannot tolerate other anti-fungal therapies, such as amphotericin B, lipid formulations of amphotericin B and/or itraconazole. Merck is studying Cancidas as a potential treatment for the fungal infection Candida. Other products contributing to growth include Prinivil, Cosopt and Propecia. Crixivan and older products, including Vasotec, Vaseretic, Pepcid and Mevacor, though still contributing to 2001 sales, declined in unit volume due to generic and therapeutic competition. In 2000, sales of Merck human health products grew 16%. Foreign exchange rates had a two percentage point unfavorable effect on sales growth, while price changes had a one point unfavorable effect on growth. Domestic sales growth was 24%, while foreign sales grew 5% including a four percentage point unfavorable effect from exchange. The unit volume growth from sales of Merck human health products was driven by five key products: Zocor, Vioxx, Cozaar/Hyzaar, Fosamax and Singulair. Also contributing to Merck's human health volume growth were newer products, including Maxalt and Aggrastat. Merck-Medco sales contributed significantly to 2001 and 2000 sales growth. By continuing to invest in the development of clinical programs, state of the art prescription fulfillment technology, enhanced information management systems, Internet initiatives, and growth in the business fueled from the UnitedHealth Group contract and the acquisition of ProVantage, Merck-Medco strengthened its leadership position in providing pharmaceutical benefit services. Merckmedco.com became the first Internet pharmacy to eclipse $1.0 billion in cumulative sales and is now filling more than 180,000 prescriptions a week. Merck-Medco recently commenced operations in its newest, largest and most advanced automated pharmacy located in Willingboro, New Jersey. The number of prescriptions managed by Merck-Medco grew to more than 537 million in 2001, up 19% from more than 450 million prescriptions in 2000. Merck & Co., Inc. 2001 Annual Report 17 Costs, Expenses and Other
- -------------------------------------------------------------------------------------- $ in millions) 2001 Change 2000 Change 1999 - -------------------------------------------------------------------------------------- Materials and production ........ $ 28,976.5 +29% $ 22,443.5 +28% $ 17,534.2 Marketing and administrative .... 6,224.4 + 1% 6,167.7 +19% 5,199.9 Research and development ....... 2,456.4 + 5% 2,343.8 +13% 2,068.3 Equity income from affiliates ... (685.9) -10% (764.9) - (762.0) Other (income) expense, net ...... 341.7 - 2% 349.0 * 54.1 - -------------------------------------------------------------------------------------- $ 37,313.1 +22% $ 30,539.1 +27% $ 24,094.5 ======================================================================================
* 100% or greater In 2001, materials and production costs increased 29% compared to an 18% sales growth rate. Excluding the effect of exchange and inflation, these costs increased 19%, five points higher than the unit sales volume growth in 2001. The higher growth rate in these costs over the sales volume growth is primarily attributable to the significant growth in Merck-Medco's historically lower-margin business. In 2000, materials and production costs increased 28%, compared to a 23% sales growth rate primarily attributable to growth in the lower-margin Merck-Medco business. Excluding the effect of exchange and inflation, these costs increased 20%, the same as the unit sales volume growth in 2000. Marketing and administrative expenses increased 1% in total and were essentially level with 2000 on a volume basis, including a one point decrease attributable to marketing expenses. Marketing expenses reflect the increased resource commitment to Merck's five key product growth drivers, including 1,000 new sales representatives added in the United States during 2001, and continued refinement of the promotion and direct selling spending mix to maximize product sales performance. The moderation in the growth of marketing and administrative expenses for 2001 also reflects the success of operational efficiency initiatives focused on the fundamental redesign of work processes as well as leveraging technology to reduce administrative expenses within the Company's overall cost structure. Marketing and administrative expenses increased 19% in total and on a volume basis in 2000, including a 12 point increase attributable to marketing expenses, primarily in support of the Company's five key product franchises. Marketing and administrative expenses as a percentage of sales were 13% in 2001, 15% in 2000 and 16% in 1999. The continuous improvement in the ratios over 1999 primarily reflects the lower growth of marketing and administrative costs relative to Merck-Medco's sales growth and operational efficiency initiatives implemented in 2001. Research and development expenses increased 5% in 2001 and continue to reflect Merck's ongoing commitment to scientific innovation. Excluding the effect of exchange and inflation, these expenses increased 3%. Research and development expenses increased 13% in 2000. Excluding the effects of exchange and inflation, these expenses increased 11%. Research and development in the pharmaceutical industry is inherently a long-term process. The following data show an unbroken trend of year-to-year increases in research and development spending. For the period 1992 to 2001, the compounded annual growth rate in research and development was 10%. Research and development expenses for 2002 are estimated to approximate $2.9 billion. R&D Expenditures ---------------- ($ in millions) [CHART] Year Total R&D Expenditures ---- ---------------------- 1992 $1,112 1993 1,173 1994 1,231 1995 1,331 1996 1,487 1997 1,684 1998 1,821 1999 2,068 2000 2,344 2001 2,456 Equity income from affiliates reflects the favorable performance of the Company's joint ventures and partnership returns from AZLP. In 2001, the decrease in equity income from affiliates primarily reflects the impact of the Company's share of research and development expenses associated with the partnerships formed in mid-2000 with Schering-Plough. In 2001, the decrease in other expense, net, was primarily attributable to higher interest income, lower minority interest expense and an increase in gains on security sales. This decrease was partially offset by lower exchange gains resulting from the translation of the Company's balance sheet and the effect of income recorded in 2000 from the settlement of disputed proceeds related to the AstraZeneca merger. In 2000, the increase in other expense, net, primarily reflects the effects of a number of items recorded in 1999: $411.0 million of income associated with the Lump Sum Payment from Astra, partially offset by a reserve related to disputed proceeds, and $77.9 million of income resulting from the reversal of a 1995 restructuring reserve, partially offset by $110.0 million of charges primarily for endowment of both The Merck Company Foundation and The Merck Genome Research Institute and provisions for the settlement of claims. Also contributing to the increase was higher net interest expense and minority interest expense in 2000, partially offset by income recorded from the aforementioned disputed proceeds settlement. 18 Merck & Co., Inc. 2001 Annual Report Financial Section Earnings - -------------------------------------------------------------------------------- ($ in millions except per share amounts) 2001 Change 2000 Change 1999 - -------------------------------------------------------------------------------- Net income ............. $7,281.8 +7% $6,821.7 +16% $5,890.5 As a % of sales ..... 15.3% 16.9% 18.0% As a % of average total assets ...... 17.3% 17.9% 17.4% Earnings per common share assuming dilution ... $ 3.14 +8% $ 2.90 +18% $ 2.45 ================================================================================ Net income was up 7% in 2001 and 16% in 2000. Net income as a percentage of sales was 15.3% in 2001 compared to 16.9% in 2000 and 18.0% in 1999. The decline in the ratio from 2000 is principally due to a higher growth rate in Merck-Medco's historically lower-margin business, offset in part by the lower growth in marketing and administrative expenses. Foreign currency exchange had a three percentage point unfavorable effect on the growth rate compared to a one percentage point unfavorable effect in 2000. The Company's effective income tax rate in 2001 was 30.0%, compared to 30.6% in 2000 and 31.7% in 1999. The higher effective tax rate in 1999 versus 2000 and 2001 primarily reflects the nondeductibility of the goodwill write-off recorded in 1999 resulting from the AstraZeneca merger. Net income as a percentage of average total assets was 17.3% in 2001, 17.9% in 2000 and 17.4% in 1999. Earnings per common share assuming dilution grew 8% in 2001, compared to 18% in 2000. In 2001 and 2000, earnings per common share assuming dilution increased at a faster rate than net income as a result of treasury stock purchases. Distribution of 2001 Sales and Equity Income [CHART] Raw Materials and Production Costs 60% Operating Expenses 19% Taxes and Net Interest 6% Dividends 7% Retained Earnings 8% ---- Total 100% Environmental and Other Matters The Company believes that it is in compliance in all material respects with applicable environmental laws and regulations. In 2001, the Company incurred capital expenditures of approximately $197.5 million for environmental protection facilities. Capital expenditures for this purpose are forecasted to exceed $500.0 million for the years 2002 through 2006. In addition, the Company's operating and maintenance expenditures for pollution control were approximately $88.7 million in 2001. Expenditures for this purpose for the years 2002 through 2006 are forecasted to approximate $520.0 million. The Company is a party to a number of proceedings brought under the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund, as well as under other federal and state statutes. The Company is also remediating environmental contamination resulting from past industrial activity at certain of its sites and has taken an active role in identifying and providing for these costs. In management's opinion, the liabilities for all environmental matters which are probable and reasonably estimable have been accrued. Expenditures for remediation and environmental liabilities were $34.2 million in 2001, and are estimated at $137.0 million for the years 2002 through 2006. These amounts do not consider potential recoveries from insurers or other parties. Although it is not possible to predict with certainty the outcome of these environmental matters, or the ultimate costs of remediation, management does not believe that any reasonably possible expenditures that may be incurred in excess of those provided should result in a materially adverse effect on the Company's financial position, results of operations, liquidity or capital resources for any year. (See Note 9 to the consolidated financial statements for further information.) In June 2001, the Company received a notice from the Federal Trade Commission (FTC) advising the Company that the FTC had closed its investigation into pricing practices, which commenced in 1996. Merck has been advised by the U.S. Department of Justice that it is investigating marketing and selling activities of Merck and other pharmaceutical manufacturers. Merck will be working with the government to respond appropriately to informational requests. In a continuing worldwide dispute between Merck and Pharmacia Corporation (Pharmacia) over competing claims to the patent rights to the class of compounds that include rofecoxib, the active ingredient in Vioxx, the federal district court in Washington, D.C., recently dismissed a Pharmacia claim for damages for Merck's sale of Vioxx. Pharmacia may seek an appeal of this decision. Merck has also received favorable decisions regarding the patent status of Vioxx from courts in the United Kingdom, Holland and Spain, while receiving no adverse decisions in any country. The Company also noted that a number of federal and state lawsuits, involving individual claims as well as purported class actions, have been filed against the Company with respect to Vioxx. Some of the lawsuits also name as defendants Pfizer Inc. and Pharmacia, which market a competing product. The lawsuits include allegations regarding gastrointestinal bleeding and cardiovascular events. The Company believes that these lawsuits are completely without merit and will vigorously defend them. From time to time, generic manufacturers of pharmaceutical products file Abbreviated New Drug Applications (ANDAs) with the FDA seeking to market generic forms of Company products prior to the expiration of relevant patents owned by the Company. Generic pharmaceutical manufacturers have submitted ANDAs to the FDA seeking to market in the U.S. a generic form of Fosamax (alendronate) and Prilosec (omeprazole) prior to the expiration of the Company's (and AstraZeneca's in the case of Prilosec) patents concerning these products. The generic companies' ANDAs include allegations of non-infringement, invalidity and unenforceability of the patents. One manufacturer has received FDA approval to market a generic form of Prilosec. The Company has filed patent infringement suits in federal court against companies filing ANDAs for generic alendronate, and AstraZeneca and the Company have filed patent infringement suits in federal court against companies filing ANDAs for Merck & Co., Inc. 2001 Annual Report 19 generic omeprazole. In the case of alendronate, similar patent challenges exist in certain foreign jurisdictions. 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. A trial in the U.S. with respect to the alendronate daily product concluded in November 2001 and the Company is awaiting a ruling; no trial involving the alendronate weekly product is expected before 2003. In the case of omeprazole, a trial commenced in December 2001. As with any litigation, there can be no assurance of the outcomes, which if adverse, could result in significantly shortened periods of exclusivity for these products. Seven plaintiffs, from six pharmaceutical benefit plans for which Merck-Medco is the pharmaceutical benefit manager, have sued Merck-Medco and the Company in federal court. The suits, which are similar to claims against other pharmaceutical benefit managers in other pending cases, allege that Merck-Medco should be treated as a "fiduciary" under the provisions of the Employee Retirement Income Security Act (ERISA). Plaintiffs have not yet formally sought class-action status. The amended complaints in the lawsuits also allege that the Company and Merck-Medco have violated ERISA by using Merck-Medco to increase the Company's market share and by entering into certain "prohibited transactions" with each other that favor the Company's products. The plaintiffs have demanded that Merck-Medco and the Company turn over any unlawfully obtained profits to a trust to be set up for the benefit plans. A motion for summary judgement filed by Merck-Medco is still pending. In addition, a complaint against Merck-Medco and the Company has recently been filed by one Northwest Airlines plan participant, purportedly on behalf of the plan and similarly-situated self-funded plans. Class action status has not yet been sought, and Northwest Airlines is not a party to the lawsuit. The complaint relies on many of the same theories as the litigation discussed above. Merck-Medco and the Company believe that these cases are without merit, Merck-Medco is not a "fiduciary" within the meaning of ERISA and the Company has not violated ERISA. Merck-Medco and the Company intend to vigorously defend these claims. Capital Expenditures Capital expenditures were $2.7 billion in 2001 and 2000. Expenditures in the United States were $2.1 billion in 2001 and 2000. Expenditures during 2001 included $1.0 billion for production facilities, $763.1 million for research and development facilities, $197.5 million for environmental projects, and $763.6 million for administrative, safety and general site projects. Capital expenditures approved but not yet spent at December 31, 2001 were $2.3 billion. Capital expenditures for 2002 are estimated to be $2.6 billion. Depreciation was $1.1 billion in 2001 and $905.5 million in 2000, of which $777.1 million and $653.9 million, respectively, applied to locations in the United States. Capital Expenditures -------------------- ($ in millions) [CHART] YEAR TOTAL CAPITAL EXPENDITURES ---- -------------------------- 1992 $1,067 1993 1,013 1994 1,009 1995 1,005 1996 1,197 1997 1,449 1998 1,973 1999 2,561 2000 2,728 2001 2,725 Analysis of Liquidity and Capital Resources Cash provided by operations continues to be the Company's primary source of funds to finance operating needs and capital expenditures. In 2001, cash flows from operations were $9.1 billion, reflecting the continued growth of the Company's earnings. This cash was used to fund capital expenditures of $2.7 billion, to pay Company dividends of $3.1 billion and to partially fund the purchase of treasury shares. At December 31, 2001, the total of worldwide cash and investments was $10.3 billion, including $3.3 billion of cash, cash equivalents and short-term investments, and $7.0 billion of long-term investments. The above totals include $1.1 billion in cash and investments held by Banyu Pharmaceutical Co., Ltd., in which the Company has a 50.87% ownership interest. Selected Data - -------------------------------------------------------------------------------- ($ in millions) 2001 2000 1999 - -------------------------------------------------------------------------------- Working capital ..................... $ 1,417.4 $ 3,643.8 $ 2,500.4 Total debt to total liabilities and equity ....................... 20.1% 17.2% 16.7% Cash provided by operations to total debt .................... 1.0:1 1.1:1 1.0:1 - -------------------------------------------------------------------------------- Working capital levels are more than adequate to meet the operating requirements of the Company. The ratio of total debt to total liabilities and equity was affected by incremental borrowings used to fund capital expenditures, treasury stock repurchases and other corporate initiatives. The ratio of cash provided by operations to total debt, although impacted by these incremental borrowings, reflects the ability of the Company to cover its debt obligations. In February 2000, the Board of Directors approved purchases of up to $10.0 billion of Merck shares. From 1999 to 2001, the Company purchased $4.7 billion of treasury shares under previously authorized completed programs, and $6.4 billion under the 2000 program. Total treasury stock purchased in 2001 was $3.9 billion. For the period 1992 to 2001, the Company has purchased 507.1 million shares at a total cost of $23.2 billion. 20 Merck & Co., Inc. 2001 Annual Report Financial Section Under its shelf registration statement, in both July and December 2001, the Company issued $500.0 million of medium-term notes, bearing coupons of 5.3% and 4.1%, respectively, payable semiannually. During the year, the Company also issued an additional $158.7 million of securities under the shelf. In the fourth quarter, the Company's $1.5 billion shelf registration statement filed with the Securities and Exchange Commission for the issuance of debt securities became effective. The remaining capacity under such filings is $1.9 billion at December 31, 2001. The Company's strong financial position, as evidenced by its triple-A credit ratings from Moody's and Standard & Poor's on outstanding debt issues, provides a high degree of flexibility in obtaining funds on competitive terms. The ability to finance ongoing operations primarily from internally generated funds is desirable because of the high risks inherent in research and development required to develop and market innovative new products and the highly competitive nature of the pharmaceutical industry. The Company does not participate in any off-balance sheet arrangements involving unconsolidated subsidiaries that provide a material source of financing or potentially expose the Company to material unrecorded financial obligations. A significant portion of the Company's cash flows are denominated in foreign currencies. Merck relies on sustained cash flows generated from foreign sources to support its long-term commitment to U.S. dollar-based research and development. To the extent the dollar value of cash flows is diminished as a result of a strengthening dollar, the Company's ability to fund research and other dollar-based strategic initiatives at a consistent level may be impaired. The Company has established revenue hedging and balance sheet risk management programs to protect against volatility of future foreign currency cash flows and changes in fair value caused by volatility in foreign exchange rates. The objective of the revenue hedging program is to reduce the potential for longer-term unfavorable changes in foreign exchange to decrease the U.S. dollar value of future cash flows derived from foreign currency denominated sales, primarily the euro and Japanese yen. To achieve this objective, the Company will partially hedge anticipated sales that are expected to occur over its planning cycle, typically no more than three years into the future. The Company will layer in hedges over time, increasing the portion of sales hedged as it gets closer to the expected date of the transaction. The portion of sales hedged is based on assessments of cost-benefit profiles that consider natural offsetting exposures, revenue and exchange rate volatilities and correlations, and the cost of hedging instruments. Merck manages its anticipated transaction exposure principally with purchased local currency put options which provide the Company with a right, but not an obligation, to sell foreign currencies in the future at a predetermined price. If the U.S. dollar strengthens relative to the currency of the hedged anticipated sales, total changes in the options' cash flows fully offset the decline in the expected future U.S. dollar cash flows of the hedged foreign currency sales. Conversely, if the U.S. dollar weakens, the options' value reduces to zero, but the Company benefits from the increase in the value of the anticipated foreign currency cash flows. While a weaker U.S. dollar would result in a net benefit, the market value of the Company's hedges would have declined by $11.9 million and $47.4 million, respectively, from a uniform 10% weakening of the U.S. dollar at December 31, 2001 and 2000. The market value was determined using a foreign exchange option pricing model and holding all factors except exchange rates constant. Because Merck uses purchased local currency put options, a uniform weakening of the U.S. dollar will yield the largest overall potential loss in the market value of these options. The December 31, 2001 measurement reflects reduced notional amounts compared to the prior year. The sensitivity measurement assumes that a change in one foreign currency relative to the U.S. dollar would not affect other foreign currencies relative to the U.S. dollar. Although not predictive in nature, the Company believes that a 10% threshold reflects reasonably possible near-term changes in Merck's major foreign currency exposures relative to the U.S. dollar. Over the last three years, the program has reduced the volatility of cash flows and mitigated the loss in value of cash flows during periods of relative strength in the U.S. dollar for the portion of revenues hedged. The cash flows from these contracts are reported as operating activities in the Consolidated Statement of Cash Flows. A primary objective of the balance sheet risk management program is to protect the U.S. dollar value of foreign currency denominated net monetary assets from the effects of volatility in foreign exchange that might occur prior to their conversion to U.S. dollars. Merck seeks to fully offset the effects of exchange on exposures denominated in developed country currencies, primarily the euro, Japanese yen and Canadian dollar, and will either partially offset or not offset at all exposures in developing countries where we consider the cost of derivative instruments to be uneconomic or when such instruments are unavailable at any cost. The Company will also minimize the effect of exchange on monetary assets and liabilities by managing operating activities and net asset positions at the local level. Merck principally utilizes forward exchange contracts which enable the Company to buy and sell foreign currencies in the future at fixed exchange rates and offset the consequences of changes in foreign exchange on the amount of U.S. dollar cash flows derived from the net assets. The Company also uses forward contracts to hedge the changes in fair value of certain foreign currency denominated available-for-sale securities attributable to fluctuations in foreign currency exchange rates. A sensitivity analysis to changes in the value of the U.S. dollar on foreign currency denominated derivatives, investments and monetary assets and liabilities indicated that if the U.S. dollar uniformly strengthened by 10% against all currency exposures of the Company at December 31, 2001, Income before taxes would have declined by $2.5 million. Because Merck is in a net long position relative to its major foreign currencies after consideration of forward contracts, a uniform strengthening of the U.S. dollar will yield the largest overall potential net loss in earnings due to exchange. At December 31, 2000, the Company was in a net short position after consideration of forward contracts. A uniform 10% weakening of the U.S. dollar would have reduced Income before taxes by $2.5 million. This measurement Merck & Co., Inc. 2001 Annual Report 21 assumes that a change in one foreign currency relative to the U.S. dollar would not affect other foreign currencies relative to the U.S. dollar. Although not predictive in nature, the Company believes that a 10% threshold reflects reasonably possible near-term changes in Merck's major foreign currency exposures relative to the U.S. dollar. The cash flows from these contracts are reported as operating activities in the Consolidated Statement of Cash Flows. In addition to the revenue hedging and balance sheet risk management programs, the Company may use interest rate swap contracts on certain investing and borrowing transactions to manage its net exposure to interest rate changes and to reduce its overall cost of borrowing. The Company does not use leveraged swaps and, in general, does not leverage any of its investment activities that would put principal capital at risk. In July 2001, the Company entered into a five-year $500.0 million notional amount pay-floating, receive-fixed interest rate swap contract designated as a hedge of the fair value changes in $500.0 million of five-year fixed rate notes attributable to changes in the benchmark London Interbank Offered Rate (LIBOR) swap rate. In December 2001, the Company entered into a similar three-year swap contract designated as a fair value hedge of $500.0 million of three-year fixed rate notes. The swaps effectively convert fixed rate obligations to floating rate instruments. The Company is also a party to a seven-year combined interest rate and currency swap contract entered into in 1997 which converts a variable rate foreign currency denominated investment to a variable rate U.S. dollar investment. The swap contract hedges the changes in the fair value of the investment attributable to fluctuations in exchange rates while allowing the Company to receive variable rate returns. The cash flows from these contracts are reported as operating activities in the Consolidated Statement of Cash Flows. The Company's investment portfolio includes cash equivalents and short-term investments, the market values of which are not significantly impacted by changes in interest rates. The market value of the Company's medium- to long-term fixed rate investments is modestly impacted by changes in U.S. interest rates. Changes in medium- to long-term U.S. interest rates would have a more significant impact on the market value of the Company's fixed-rate borrowings, which generally have longer maturities. A sensitivity analysis to measure potential changes in the market value of the Company's investments, debt and related swap contracts from a change in interest rates indicated that a one percentage point increase in interest rates at December 31, 2001 and 2000 would have positively impacted the net aggregate market value of these instruments by $26.3 million and $116.0 million, respectively. A one percentage point decrease at December 31, 2001 and 2000 would have negatively impacted the net aggregate market value by $89.1 million and $135.6 million, respectively. The reduced sensitivity of the Company's aggregate investment and debt portfolio at December 31, 2001 reflects an increase in the size and weighted average maturity of the Company's investments. The fair value of the Company's debt was determined using pricing models reflecting one percentage point shifts in the appropriate yield curves. The fair value of the Company's investments was determined using a combination of pricing and duration models. Whereas duration is a linear approximation that works well for modest changes in yields and generates a symmetrical result, pricing models reflecting the convexity of the price/yield relationship provide greater precision and reflect the asymmetry of price movements for interest rate changes in opposite directions. The impact of convexity is more pronounced in longer-term maturities and low interest rate environments. Recently Issued Accounting Standards In July 2001, the Financial Accounting Standards Board issued Statement No. 142, Goodwill and Other Intangible Assets (FAS 142), which is effective beginning January 1, 2002. FAS 142 addresses the recognition and measurement of goodwill and other intangible assets subsequent to a business combination. In accordance with FAS 142, goodwill will no longer be amortized, but rather assigned to reporting units within the Company's segments and evaluated for impairment on an annual basis using a fair value based test. The Company has identified the appropriate reporting units as defined by the new guidance and is currently assessing their fair value. Beginning January 1, 2002, annual amortization expense of approximately $130.0 million will no longer be recorded. 2002 Outlook In January 2002, the Company announced plans to establish Merck-Medco as a separate, publicly-traded company. The Company plans an initial public offering of a portion of the new company by mid-2002, subject to market conditions. Alternatives for the distribution of the remaining shares in the new company are under evaluation. The full separation of Merck-Medco should be completed within 12 months of the initial public offering, subject to receipt of an Internal Revenue Service ruling that such an event would be tax-free to shareholders and to other customary conditions. For 2002, the Company's outlook for the operating earnings of its core pharmaceutical business is unchanged as a result of this transaction. Growth of its key franchises, continued investments in research and development and marketing, and the benefits from operational efficiencies will contribute to operating income growth in the Company's core human health business. The impact of patent expiries, however, most importantly the anticipated impact of the patent expiry of Prilosec, will significantly dampen net income growth in 2002. As a result, 2002 will be a transition year and the Company anticipates that on an as-reported basis, earnings per share for 2002 will be at the same level as 2001 results. The 2002 as-reported earnings per share will also be affected by the benefit from the implementation of FAS 142 regarding goodwill amortization, most of which relates to Merck's 1993 acquisition of Merck-Medco, and the timing of the completion of the distribution of the remaining shares in the company. Going forward, the Company expects its core pharmaceutical business to deliver double-digit earnings-per-share growth in 2003, driven by accelerating top-line growth. 22 Merck & Co., Inc. 2001 Annual Report Financial Section Use of Estimates and Cautionary Factors That May Affect Future Results The consolidated financial statements include certain amounts that are based on management's best estimates and judgments. Estimates are used in determining such items as provisions for rebates, returns and allowances, depreciable/amortizable lives, pension and other postretirement benefit plan assumptions, and amounts recorded for contingencies, environmental liabilities and other reserves. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates. The Company is not aware of reasonably likely events or circumstances which would result in different amounts being reported that would have a material impact on results of operations or financial condition. This annual 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 also identify them by the fact that they do not relate strictly to historical or current facts. These statements are likely to address the Company's growth strategy, financial results, product 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, 2001, which will be filed in March 2002, 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. Prior to the filing of the Form 10-K for the year ended December 31, 2001, reference should be made to Item 1 of the Company's annual report on Form 10-K for the year ended December 31, 2000. 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.
Condensed Interim Financial Data - -------------------------------------------------------------------------------- ($ in millions except per share amounts) 4th Q 3rd Q 2nd Q 1st Q - -------------------------------------------------------------------------------- 2001 - -------------------------------------------------------------------------------- Sales ...................... $12,558.0 $11,919.6 $11,893.1 $11,345.1 Materials and production costs ..................... 7,642.4 7,082.8 7,204.8 7,046.5 Marketing and administrative expenses ... 1,555.4 1,525.3 1,637.4 1,506.2 Research and development expenses .................. 716.4 590.3 602.4 547.4 Equity income from affiliates ................ (128.2) (164.1) (215.0) (178.6) Other (income) expense, net ....................... 113.5 102.2 70.0 56.1 Income before taxes ........ 2,658.5 2,783.1 2,593.5 2,367.5 Net income ................. 1,860.9 1,948.2 1,815.4 1,657.3 Basic earnings per common share ..................... $.82 $.85 $.79 $.72 Earnings per common share assuming dilution ......... $.81 $.84 $.78 $.71 - -------------------------------------------------------------------------------- 2000 - -------------------------------------------------------------------------------- Sales ...................... $11,467.3 $10,567.5 $9,477.1 $8,851.4 Materials and production costs ..................... 6,570.6 5,987.4 5,052.1 4,833.4 Marketing and administrative expenses ... 1,774.1 1,452.1 1,524.3 1,417.2 Research and development expenses .................. 662.4 609.8 548.0 523.6 Equity income from affiliates ................ (145.5) (219.4) (211.8) (188.3) Other (income) expense, net ....................... 94.6 96.0 87.2 71.5 Income before taxes ........ 2,511.1 2,641.6 2,477.3 2,194.0 Net income ................. 1,764.4 1,835.9 1,721.7 1,499.6 Basic earnings per common share ..................... $.77 $.80 $.74 $.65 Earnings per common share assuming dilution ......... $.75 $.78 $.73 $.63 ================================================================================
Dividends Paid per Common Share - -------------------------------------------------------------------------------- Year 4th Q 3rd Q 2nd Q 1st Q - -------------------------------------------------------------------------------- 2001 ............. $1.37 $.35 $.34 $.34 $.34 2000 ............. 1.21 .34 .29 .29 .29 ================================================================================ Common Stock Market Prices - -------------------------------------------------------------------------------- 2001 4th Q 3rd Q 2nd Q 1st Q - -------------------------------------------------------------------------------- High .......................... $70.60 $71.50 $80.85 $95.25 Low ........................... 56.80 60.35 63.65 66.00 - -------------------------------------------------------------------------------- 2000 - -------------------------------------------------------------------------------- High .......................... $96.69 $77.38 $76.63 $79.00 Low ........................... 72.88 63.00 61.88 52.00 - -------------------------------------------------------------------------------- The principal market for trading of the common stock is the New York Stock Exchange under the symbol MRK. Merck & Co., Inc. 2001 Annual Report 23 Consolidated Statement of Income
- -------------------------------------------------------------------------------- Merck & Co., Inc. and Subsidiaries Years Ended December 31 ($ in millions except per share amounts) 2001 2000 1999 - -------------------------------------------------------------------------------- Sales .................................. $47,715.7 $40,363.2 $32,714.0 - -------------------------------------------------------------------------------- Costs, Expenses and Other Materials and production ............... 28,976.5 22,443.5 17,534.2 Marketing and administrative ........... 6,224.4 6,167.7 5,199.9 Research and development ............... 2,456.4 2,343.8 2,068.3 Equity income from affiliates .......... (685.9) (764.9) (762.0) Other (income) expense, net ............ 341.7 349.0 54.1 - -------------------------------------------------------------------------------- 37,313.1 30,539.1 24,094.5 - -------------------------------------------------------------------------------- Income Before Taxes .................... 10,402.6 9,824.1 8,619.5 Taxes on Income ........................ 3,120.8 3,002.4 2,729.0 - -------------------------------------------------------------------------------- Net Income ............................. $ 7,281.8 $ 6,821.7 $ 5,890.5 ================================================================================ Basic Earnings per Common Share ........ $ 3.18 $ 2.96 $ 2.51 ================================================================================ Earnings per Common Share Assuming Dilution ............................ $ 3.14 $ 2.90 $ 2.45 ================================================================================ Consolidated Statement of Retained Earnings - -------------------------------------------------------------------------------- Merck & Co., Inc. and Subsidiaries Years Ended December 31 ($ in millions) 2001 2000 1999 - -------------------------------------------------------------------------------- Balance, January 1 ................... $ 27,363.9 $ 23,447.9 $ 20,186.7 - -------------------------------------------------------------------------------- Net Income ........................... 7,281.8 6,821.7 5,890.5 Common Stock Dividends Declared ...... (3,156.1) (2,905.7) (2,629.3) - -------------------------------------------------------------------------------- Balance, December 31 ................. $ 31,489.6 $ 27,363.9 $ 23,447.9 ================================================================================ Consolidated Statement of Comprehensive Income - -------------------------------------------------------------------------------- Merck & Co., Inc. and Subsidiaries Years Ended December 31 ($ in millions) 2001 2000 1999 - -------------------------------------------------------------------------------- Net Income ............................ $ 7,281.8 $ 6,821.7 $ 5,890.5 - -------------------------------------------------------------------------------- Other Comprehensive Income (Loss) Net unrealized gain on derivatives, net of tax and net income realization ......................... 7.3 -- -- Net unrealized gain on investments, net of tax and net income realization ......................... 11.1 24.3 25.6 Minimum pension liability, net of tax ................................. (38.6) (1.6) 3.8 - -------------------------------------------------------------------------------- (20.2) 22.7 29.4 - -------------------------------------------------------------------------------- Comprehensive Income ................. $ 7,261.6 $ 6,844.4 $ 5,919.9 ================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 24 Merck & Co., Inc. 2001 Annual Report Financial Section Consolidated Balance Sheet - -------------------------------------------------------------------------------- Merck & Co., Inc. and Subsidiaries December 31 ($ in millions) 2001 2000 - -------------------------------------------------------------------------------- Assets - -------------------------------------------------------------------------------- Current Assets Cash and cash equivalents ........................... $ 2,144.0 $ 2,536.8 Short-term investments .............................. 1,142.6 1,717.8 Accounts receivable ................................. 5,215.4 5,262.4 Inventories ......................................... 3,579.3 3,021.5 Prepaid expenses and taxes .......................... 880.3 1,059.4 - -------------------------------------------------------------------------------- Total current assets ................................ 12,961.6 13,597.9 - -------------------------------------------------------------------------------- Investments ......................................... 6,983.5 4,947.8 - -------------------------------------------------------------------------------- Property, Plant and Equipment (at cost) Land ................................................ 315.2 311.6 Buildings ........................................... 6,653.9 5,514.2 Machinery, equipment and office furnishings ......... 9,807.0 8,576.5 Construction in progress ............................ 2,180.4 2,304.9 - -------------------------------------------------------------------------------- 18,956.5 16,707.2 Less allowance for depreciation ..................... 5,853.1 5,225.1 - -------------------------------------------------------------------------------- 13,103.4 11,482.1 - -------------------------------------------------------------------------------- Goodwill and Other Intangibles (net of accumulated amortization of $2,224.4 million in 2001 and $1,850.7 million in 2000) ..... 7,476.5 7,374.2 - -------------------------------------------------------------------------------- Other Assets ........................................ 3,481.7 2,752.9 - -------------------------------------------------------------------------------- $ 44,006.7 $ 40,154.9 ================================================================================ Liabilities and Stockholders' Equity - -------------------------------------------------------------------------------- Current Liabilities Accounts payable and accrued liabilities ............ $ 5,108.4 $ 4,605.8 Loans payable and current portion of long-term debt .............................................. 4,066.7 3,319.3 Income taxes payable ................................ 1,573.3 1,244.3 Dividends payable ................................... 795.8 784.7 - -------------------------------------------------------------------------------- Total current liabilities ........................... 11,544.2 9,954.1 - -------------------------------------------------------------------------------- Long-Term Debt ...................................... 4,798.6 3,600.7 - -------------------------------------------------------------------------------- Deferred Income Taxes and Noncurrent Liabilities .... 6,776.3 6,746.7 - -------------------------------------------------------------------------------- Minority Interests .................................. 4,837.5 5,021.0 - -------------------------------------------------------------------------------- Stockholders' Equity Common stock, one cent par value Authorized - 5,400,000,000 shares Issued - 2,976,129,820 shares - 2001 - 2,968,355,365 shares - 2000 ............... 29.8 29.7 Other paid-in capital ............................... 6,907.2 6,265.8 Retained earnings ................................... 31,489.6 27,363.9 Accumulated other comprehensive income .............. 10.6 30.8 - -------------------------------------------------------------------------------- 38,437.2 33,690.2 Less treasury stock, at cost 703,400,499 shares - 2001 660,756,186 shares - 2000 .......................... 22,387.1 18,857.8 - -------------------------------------------------------------------------------- Total stockholders' equity .......................... 16,050.1 14,832.4 - -------------------------------------------------------------------------------- $ 44,006.7 $ 40,154.9 ================================================================================ The accompanying notes are an integral part of this consolidated financial statement. Merck & Co., Inc. 2001 Annual Report 25 Consolidated Statement of Cash Flows - -------------------------------------------------------------------------------- Merck & Co., Inc. and Subsidiaries
Years Ended December 31 ($ in millions) 2001 2000 1999 - -------------------------------------------------------------------------------------- Cash Flows from Operating Activities Income before taxes ....................... $ 10,402.6 $ 9,824.1 $ 8,619.5 Adjustments to reconcile income before taxes to cash provided from operations before taxes: Depreciation and amortization ........... 1,463.8 1,277.3 1,144.8 Other ................................... (359.5) (222.8) (496.6) Net changes in assets and liabilities: Accounts receivable .................... (9.2) (885.8) (1,021.4) Inventories ............................ (557.5) (210.1) (223.0) Accounts payable and accrued liabilities .......................... 458.3 (37.7) 673.0 Noncurrent liabilities ................. (261.9) (94.3) (150.9) Other .................................. 246.6 204.3 69.9 - -------------------------------------------------------------------------------------- Cash Provided by Operating Activities Before Taxes ............................. 11,383.2 9,855.0 8,615.3 Income Taxes Paid ......................... (2,303.3) (2,167.7) (2,484.6) - -------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities .............................. 9,079.9 7,687.3 6,130.7 - -------------------------------------------------------------------------------------- Cash Flows from Investing Activities Capital expenditures ...................... (2,724.7) (2,727.8) (2,560.5) Purchase of securities, subsidiaries and other investments .................... (34,780.4) (28,637.1) (42,211.2) Proceeds from sale of securities, subsidiaries and other investments ....... 33,383.0 27,667.5 40,308.7 Proceeds from relinquishment of certain AstraZeneca product rights ............... - 92.6 1,679.9 Other ..................................... (190.2) (36.5) (33.9) - -------------------------------------------------------------------------------------- Net Cash Used by Investing Activities ..... (4,312.3) (3,641.3) (2,817.0) - -------------------------------------------------------------------------------------- Cash Flows from Financing Activities Net change in short-term borrowings ....... 259.8 905.6 2,137.9 Proceeds from issuance of debt ............ 1,694.4 442.1 11.6 Payments on debt .......................... (11.0) (443.2) (17.5) Proceeds from issuance of preferred units of subsidiary ............................ - 1,500.0 - Purchase of treasury stock ................ (3,890.8) (3,545.4) (3,582.1) Dividends paid to stockholders ............ (3,145.0) (2,798.0) (2,589.7) Proceeds from exercise of stock options ... 300.6 640.7 322.9 Other ..................................... (279.2) (149.2) (152.5) - -------------------------------------------------------------------------------------- Net Cash Used by Financing Activities ..... (5,071.2) (3,447.4) (3,869.4) - -------------------------------------------------------------------------------------- Effect of Exchange Rate Changes on Cash and Cash Equivalents ..................... (89.2) (83.7) (28.6) - -------------------------------------------------------------------------------------- Net (Decrease) Increase in Cash and Cash Equivalents .............................. (392.8) 514.9 (584.3) - -------------------------------------------------------------------------------------- Cash and Cash Equivalents at Beginning of Year ..................................... 2,536.8 2,021.9 2,606.2 - -------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year .. $ 2,144.0 $ 2,536.8 $ 2,021.9 ======================================================================================
The accompanying notes are an integral part of this consolidated financial statement. 26 Merck & Co., Inc. 2001 Annual Report Financial Section Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Merck & Co., Inc. and Subsidiaries ($ in millions except per share amounts) 1. Nature of Operations Merck is a global research-driven pharmaceutical company that discovers, develops, manufactures and markets a broad range of human and animal health products, directly and through its joint ventures, and provides pharmaceutical benefit services through Merck-Medco Managed Care (Merck-Medco). Human health products include therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. Pharmaceutical benefit services primarily include sales of prescription drugs through managed prescription drug programs as well as services provided through programs to manage patient health and drug utilization. Merck sells its human health products and provides pharmaceutical benefit services primarily to drug wholesalers and retailers, hospitals, clinics, government agencies, corporations, labor unions, retirement systems, insurance carriers, managed health care providers such as health maintenance organizations and other institutions. 2. Summary of Accounting Policies Principles of Consolidation - The consolidated financial statements include the accounts of the Company and all of its subsidiaries in which a controlling interest is maintained. For those consolidated subsidiaries where Merck ownership is less than 100%, the outside stockholders' interests are shown as Minority interests. Investments in affiliates over which the Company has significant influence but not a controlling interest are carried on the equity basis. Foreign Currency Translation - The U.S. dollar is the functional currency for the Company's foreign subsidiaries. Cash and Cash Equivalents - Cash equivalents are comprised of certain highly liquid investments with original maturities of less than three months. Inventories - The majority of domestic inventories are valued at the lower of last-in, first-out (LIFO) cost or market. Remaining inventories are valued at the lower of first-in, first-out (FIFO) cost or market. Revenue Recognition - Revenues from sales of Merck human health products are recognized upon shipment of product. Revenues generated by Merck-Medco's pharmaceutical benefit services, comprised principally of sales of prescription drugs, are recognized, net of certain rebates, upon dispensing of product. Specifically, revenues from plan member orders dispensed at Merck-Medco's mail service pharmacies are recognized when the product is shipped, while revenues from orders dispensed by retail network pharmacies are recognized when the prescription is filled. For the majority of the retail business, Merck-Medco assumes financial risk through having independent contractual arrangements to bill plan sponsors and pay the retail network pharmacy providers. In such cases, revenues are recognized based on the prescription drug price negotiated with the plan sponsor. When Merck-Medco acts solely as a liaison to reimburse retail pharmacies on the plan sponsor's behalf, no financial risk has been assumed, and therefore, revenues are recognized only for the amount of the administrative fee received from the plan sponsor. Merck-Medco has contracts with multiple pharmaceutical manufacturers that offer rebates on drugs included on Merck-Medco formularies. These rebates are recognized as a credit to cost of sales in the period earned based upon the dispensed volume of specific drugs stipulated in the contracts. Depreciation - Depreciation is provided over the estimated useful lives of the assets, principally using the straight-line method. For tax purposes, accelerated methods are used. The estimated useful lives primarily range from 10 to 50 years for Buildings, and from 3 to 15 years for Machinery, equipment and office furnishings. Goodwill and Other Intangibles - Goodwill of $4.1 billion in 2001 and $3.8 billion in 2000 (net of accumulated amortization) represents the excess of acquisition costs over the fair value of net assets of businesses purchased and is amortized on a straight-line basis over periods up to 40 years. Under Statement No. 142, Goodwill and Other Intangible Assets (FAS 142), goodwill associated with acquisitions subsequent to June 30, 2001 is not amortized. (See Note 3.) Effective January 1, 2002, goodwill existing at June 30, 2001 will no longer be amortized, but rather, evaluated for impairment on an annual basis using a fair value based test. Other acquired intangibles principally include customer relationships of $2.5 billion in 2001 and 2000 (net of accumulated amortization) that arose in connection with the acquisition of Medco Containment Services, Inc. (renamed Merck-Medco) and patent rights approximating $.6 billion in 2001 and $.7 billion in 2000 (net of accumulated amortization) acquired as part of the restructuring of Astra Merck Inc. (AMI). (See Note 4.) These acquired intangibles are recorded at cost and are amortized on a straight-line basis over their estimated useful lives of up to 40 years. The weighted average amortization period for other intangibles was 29 years at December 31, 2001 and 2000. The Company reviews other intangibles to assess recoverability from future operations using undiscounted cash flows derived from the lowest appropriate asset groupings, generally the subsidiary level. Impairments are recognized in operating results to the extent that carrying value exceeds fair value, which is determined based on the net present value of estimated future cash flows. Stock-Based Compensation - Employee stock-based compensation is recognized using the intrinsic value method. For disclosure purposes, pro forma net income and earnings per share impacts are provided as if the fair value method had been applied. Use of Estimates - The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States (GAAP) and, accordingly, include amounts that are based on management's best estimates and judgments. Estimates are used in determining such items as provisions for rebates, returns and allowances, depreciable/amortizable lives, pension and other postretirement benefit plan assumptions, and amounts recorded for contingencies, environmental liabilities and other reserves. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates. The Company is not aware of reasonably likely Merck & Co., Inc. 2001 Annual Report 27 events or circumstances which would result in different amounts being reported that would have a material impact on results of operations or financial condition. Reclassifications - Certain reclassifications have been made to prior year amounts to conform with current year presentation. 3. Acquisition On July 19, 2001, the Company completed its acquisition of Rosetta Inpharmatics, Inc. (Rosetta), a leading informational genomics company, in a tax-free reorganization. Rosetta has designed and developed several unique technologies to efficiently analyze gene data to predict how medical compounds will interact with different kinds of cells in the body, therefore allowing Merck scientists to more precisely select drug targets and potentially accelerate the development process. The acquisition was accounted for under the purchase method and, accordingly, Rosetta's results of operations have been included with the Company's since the acquisition date. Pro forma information is not provided as the transaction does not have material impact on the Company's results of operations or financial position. In accordance with the May 10, 2001 Agreement and Plan of Merger (the Agreement), each share of outstanding Rosetta stock was converted into .2352 shares of Merck stock, resulting in the issuance by the Company of approximately 7.7 million shares of common stock. The aggregate purchase price of the transaction approximated $633.7 million, including a $587.1 million common share value, $33.5 million representing employee stock options valued as of the Agreement date, and $13.1 million of estimated transaction fees. The preliminary allocation of the purchase price resulted in tangible assets of $188.5 million, consisting primarily of cash and short-term investments; other intangible assets of $44.1 million; liabilities assumed of $31.1 million, including deferred tax liabilities of $16.0 million associated with the other intangible assets; and goodwill totaling $432.2 million. Other intangibles, which have weighted average useful life approximating five years in aggregate and by major class, include $27.3 million of patent rights and $16.7 million of contractual agreements. In accordance with FAS 142, the goodwill associated with the Rosetta acquisition is not amortized. 4. Joint Ventures In 1982, Merck entered into an agreement with Astra AB (Astra) to develop and market Astra's products under a royalty-bearing license. In 1993, the Company's total sales of Astra products reached a level that triggered the first step in the establishment of a joint venture business carried on by AMI, in which Merck and Astra each owned a 50% share. This joint venture, formed in 1994, developed and marketed most of Astra's new prescription medicines in the United States including Prilosec, the first of a class of medications known as proton pump inhibitors, which slows the production of acid from the cells of the stomach lining. In 1998, Merck and Astra completed the restructuring of the ownership and operations of the joint venture whereby the Company acquired Astra's interest in AMI, renamed KBI Inc. (KBI), and contributed KBI's operating assets to a new U.S. limited partnership, Astra Pharmaceuticals L.P. (the Partnership), in exchange for a 1% limited partner interest. Astra contributed the net assets of its wholly owned subsidiary, Astra USA, Inc., to the Partnership in exchange for a 99% general partner interest. The Partnership, renamed AstraZeneca LP (AZLP) upon Astra's 1999 merger with Zeneca Group Plc (the AstraZeneca merger), became the exclusive distributor of the products for which KBI retained rights. While maintaining a 1% limited partner interest in AZLP, Merck has consent and protective rights intended to preserve its business and economic interests, including restrictions on the power of the general partner to make certain distributions or dispositions. Furthermore, in limited events of default, additional rights will be granted to the Company, including powers to direct the actions of, or remove and replace, the Partnership's chief executive officer and chief financial officer. Merck earns certain Partnership returns as well as ongoing revenue based on sales of current and future KBI products. The Partnership returns include a priority return provided for in the Partnership Agreement, variable returns based, in part, upon sales of certain former Astra USA, Inc. products, and a preferential return representing Merck's share of undistributed AZLP GAAP earnings. These returns, which are recorded as Equity income from affiliates, aggregated $642.8 million, $637.5 million and $633.6 million in 2001, 2000 and 1999, respectively. The AstraZeneca merger triggers a partial redemption of Merck's limited partnership interest in 2008. Upon this redemption, AZLP will distribute to KBI an amount based primarily on a multiple of Merck's annual revenue derived from sales of the former Astra USA, Inc. products for the three years prior to the redemption (the Limited Partner Share of Agreed Value). In conjunction with the 1998 restructuring, for a payment of $443.0 million, which was deferred, Astra purchased an option (the Asset Option) to buy Merck's interest in the KBI products, excluding the gastrointestinal medicines Prilosec and Nexium. The Asset Option is exercisable in 2010 at an exercise price equal to the net present value as of March 31, 2008 of projected future pretax revenue to be received by the Company from the KBI products (the Appraised Value). Merck also has the right to require Astra to purchase such interest in 2008 at the Appraised Value. In addition, the Company granted Astra an option to buy Merck's common stock interest in KBI at an exercise price based on the net present value of estimated future net sales of Prilosec and Nexium. This option is exercisable two years after Astra's purchase of Merck's interest in the KBI products. The 1999 AstraZeneca merger constituted a Trigger Event under the KBI restructuring agreements. As a result of the merger, Astra was required to make two one-time payments to Merck totaling approximately $1.8 billion. In exchange for Merck's relinquishment of rights to future Astra products with no existing or pending U.S. patents at the time of the merger, Astra paid $967.4 million (the Advance Payment), which is subject to a true-up calculation in 2008 that may require repayment of all or a portion of this amount. The True-Up Amount is directly dependent on the fair market value in 2008 of the Astra product rights retained by the Company. Accordingly, recognition of this contingent income has been deferred until the realizable amount, if any, is determinable, which is not anticipated prior to 2008. The Company was also entitled to receive a Lump Sum Payment in an amount that it estimated as $822.0 million. Astra paid $712.5 million of the Lump Sum 28 Merck & Co., Inc. 2001 Annual Report Financial Section Payment in 1999 and disputed its obligation to pay the remainder. One-half of the expected payment reduced goodwill by $411.0 million, less 50% of a reserve relating to disputed proceeds. The balance was recorded in Other (income) expense, net. In 2000, arbitration over the disputed proceeds concluded and the Company received $87.2 million plus interest. Under the provisions of the KBI restructuring agreements, because a Trigger Event has occurred, the sum of the Limited Partner Share of Agreed Value, the Appraised Value and the True-Up Amount is guaranteed to be a minimum of $4.7 billion. Distribution of the Limited Partner Share of Agreed Value and payment of the True-Up Amount will occur in 2008. AstraZeneca's purchase of Merck's interest in the KBI products is contingent upon the exercise of either Merck's option in 2008 or AstraZeneca's option in 2010 and, therefore, payment of the Appraised Value may or may not occur. In 1989, Merck formed a joint venture with Johnson & Johnson to develop and market a broad range of nonprescrip-tion medicines for U.S. consumers. This 50% owned venture was expanded into Europe in 1993, and into Canada in 1996. Sales of product marketed by the joint venture were $395.0 million for 2001, $429.1 million for 2000 and $451.4 million for 1999. In 1994, Merck and Pasteur Merieux Connaught (now Aventis Pasteur) established an equally owned joint venture to market vaccines in Europe and to collaborate in the development of combination vaccines for distribution in Europe. Joint venture vaccine sales were $499.6 million for 2001, $540.9 million for 2000 and $566.8 million for 1999. In 1997, Merck and Rhone-Poulenc (now Aventis) combined their animal health and poultry genetics businesses to form Merial Limited (Merial), a fully integrated animal health company, which is a stand-alone joint venture, equally owned by each party. Merial provides a comprehensive range of pharmaceuticals and vaccines to enhance the health, well-being and performance of a wide range of animal species. Merial sales were $1.7 billion for 2001, $1.6 billion for 2000 and $1.7 billion for 1999. In May 2000, the Company and Schering-Plough Corporation (Schering-Plough) entered into agreements to create separate partnerships to develop and market in the United States new prescription medicines in the cholesterol-management and respiratory therapeutic areas. These partnerships are pursuing the development and marketing of Zetia, an investigational cholesterol absorption inhibitor discovered by Schering-Plough, as a once-daily monotherapy and in co-administration with statins; Zetia as a once-daily combination tablet with Zocor; and a once-daily combination tablet of Singulair and Claritin, Schering-Plough's nonsedating antihistamine, for the treatment of allergic rhinitis and asthma. In December 2001, the Company and Schering-Plough announced the worldwide expansion (excluding Japan) of the cholesterol-management partnership. 5. Affiliates Accounted for Using the Equity Method Investments in affiliates accounted for using the equity method are included in Other assets and were $2.0 billion at December 31, 2001 and $1.7 billion at December 31, 2000. Dividends and distributions received from these affiliates were $572.2 million in 2001, $475.5 million in 2000 and $412.2 million in 1999. 6. Financial Instruments Effective January 1, 2001, the Company adopted the provisions of Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133), which establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at fair value and that changes in fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Upon adoption of FAS 133, the Company recorded a favorable cumulative effect of accounting change of $45.5 million after tax in Other comprehensive income (loss), representing the mark to fair value of purchased local currency put options. (See Note 17.) The cumulative effect of accounting change recorded in Net income was not significant. Foreign Currency Risk Management A significant portion of the Company's cash flows are denominated in foreign currencies. Merck relies on sustained cash flows generated from foreign sources to support its long-term commitment to U.S. dollar-based research and development. To the extent the dollar value of cash flows is diminished as a result of a strengthening dollar, the Company's ability to fund research and other dollar-based strategic initiatives at a consistent level may be impaired. The Company has established revenue hedging and balance sheet risk management programs to protect against volatility of future foreign currency cash flows and changes in fair value caused by volatility in foreign exchange rates. The objective of the revenue hedging program is to reduce the potential for longer-term unfavorable changes in foreign exchange to decrease the U.S. dollar value of future cash flows derived from foreign currency denominated sales, primarily the euro and Japanese yen. To achieve this objective, the Company will partially hedge anticipated sales that are expected to occur over its planning cycle, typically no more than three years into the future. The Company will layer in hedges over time, increasing the portion of sales hedged as it gets closer to the expected date of the transaction. The portion of sales hedged is based on assessments of cost-benefit profiles that consider natural offsetting exposures, revenue and exchange rate volatilities and correlations, and the cost of hedging instruments. Merck manages its anticipated transaction exposure principally with purchased local currency put options which provide the Company with a right, but not an obligation, to sell foreign currencies in the future at a predetermined price. If the U.S. dollar strengthens relative to the currency of the hedged anticipated sales, total changes in the options' cash flows fully offset the decline in the expected future U.S. dollar cash flows of the hedged foreign currency sales. Conversely, if the U.S. dollar weakens, the options' value reduces to zero, but the Company benefits from the increase in the value of the anticipated foreign currency cash flows. During the first four months of 2001, changes in the options' intrinsic value were deferred in Accumulated other comprehensive income (AOCI) until recognition of the hedged anticipated revenue. Amounts associated with option time value, which was excluded from the designated hedge relationship and marked to fair value through earnings, were not significant. Effective May 2001, as permitted by FAS 133 implementation guidance finalized in June 2001, the designated hedge relationship is based on total changes in the options' cash flows. Accordingly, the entire Merck & Co., Inc. 2001 Annual Report 29 fair value change in the options is deferred in AOCI and reclassified into Sales when the hedged anticipated revenue is recognized. No hedge ineffectiveness is recorded. The fair values of purchased currency options are reported in Accounts receivable or Other assets. A primary objective of the balance sheet risk management program is to protect the U.S. dollar value of foreign currency denominated net monetary assets from the effects of volatility in foreign exchange that might occur prior to their conversion to U.S. dollars. Merck seeks to fully offset the effects of exchange on exposures denominated in developed country currencies, primarily the euro, Japanese yen and Canadian dollar, and will either partially offset or not offset at all exposures in developing countries where we consider the cost of derivative instruments to be uneconomic or when such instruments are unavailable at any cost. The Company will also minimize the effect of exchange on monetary assets and liabilities by managing operating activities and net asset positions at the local level. Merck principally utilizes forward exchange contracts which enable the Company to buy and sell foreign currencies in the future at fixed exchange rates and offset the consequences of changes in foreign exchange on the amount of U.S. dollar cash flows derived from the net assets. Prior to conversion to U.S. dollars, monetary assets and liabilities are remeasured at spot rates in effect on the balance sheet date. The effects of changes in spot rates are reported in Other (income) expense, net. The forward contracts, which are not designated as hedges, are marked to market through Other (income) expense, net. Fair value changes in the forward contracts offset the changes in the value of the remeasured assets and liabilities attributable to changes in foreign currency exchange rates, except to the extent of the spot-forward differences. These differences are not significant due to the short-term nature of the contracts, which typically have average maturities at inception of less than one year. The Company also uses forward contracts to hedge the changes in fair value of certain foreign currency denominated available-for-sale securities attributable to fluctuations in foreign currency exchange rates. Changes in the fair value of the hedged securities due to fluctuations in spot rates are offset in Other (income) expense, net, by the fair value changes in the forward contracts attributable to spot rate fluctuations. Hedge ineffectiveness was not material during 2001. Changes in the contracts' fair value due to spot-forward differences are excluded from the designated hedge relationship and recognized in Other (income) expense, net. These amounts were not significant for the year ended December 31, 2001. The fair values of forward exchange contracts are reported in Accounts receivable, Other assets, Accounts payable and accrued liabilities or Deferred income taxes and noncurrent liabilities. Interest Rate Risk Management The Company may use interest rate swap contracts on certain investing and borrowing transactions to manage its net exposure to interest rate changes and to reduce its overall cost of borrowing. The Company does not use leveraged swaps and, in general, does not leverage any of its investment activities that would put principal capital at risk. In July 2001, the Company entered into a five-year $500.0 million notional amount pay-floating, receive-fixed interest rate swap contract designated as a hedge of the fair value changes in $500.0 million of five-year fixed rate notes attributable to changes in the benchmark London Interbank Offered Rate (LIBOR) swap rate. In December 2001, the Company entered into a similar three-year swap contract designated as a fair value hedge of $500.0 million of three-year fixed rate notes. The swaps effectively convert fixed rate obligations to floating rate instruments. The fair value changes in the notes are fully offset in interest expense by the fair value changes in the swap contracts. The Company is also a party to a seven-year combined interest rate and currency swap contract entered into in 1997 which converts a variable rate foreign currency denominated investment to a variable rate U.S. dollar investment. In 2000, a portion of this contract was terminated in conjunction with the sale of a portion of the related asset with an immaterial impact on net income. The interest rate component of the swap is not designated as a hedge. The currency swap component is designated as a hedge of the changes in fair value of the investment attributable to exchange. Accordingly, changes in the fair value of the investment due to fluctuations in spot rates are offset in Other (income) expense, net, by fair value changes in the currency swap. Hedge ineffectiveness was not significant during 2001. In 2000, a similar five-year swap contract matured and the related asset was sold with an immaterial impact on net income. The fair values of these contracts are reported in Accounts receivable, Other assets, Accounts payable and accrued liabilities or Deferred income taxes and noncurrent liabilities. Fair Value of Financial Instruments Summarized below are the carrying values and fair values of the Company's financial instruments at December 31, 2001 and 2000. Fair values were estimated based on market prices, where available, or dealer quotes. 2001 2000 ---------------------- ---------------------- Carrying Fair Carrying Fair Value Value Value Value - -------------------------------------------------------------------------------- Assets - -------------------------------------------------------------------------------- Cash and cash equivalents .............. $ 2,144.0 $ 2,144.0 $ 2,536.8 $ 2,536.8 Short-term investments .... 1,142.6 1,141.7 1,717.8 1,717.1 Long-term investments ..... 6,983.5 6,983.4 4,947.8 4,945.6 Purchased currency options .................. 17.6 17.6 43.8 120.7 Forward exchange contracts and currency swap ............ 195.4 195.4 99.3 99.3 Interest rate swaps ....... 11.3 11.3 - - - -------------------------------------------------------------------------------- Liabilities - -------------------------------------------------------------------------------- Loans payable and current portion of long-term debt ........... $ 4,066.7 $ 4,070.5 $ 3,319.3 $ 3,320.4 Long-term debt ............ 4,798.6 4,860.4 3,600.7 3,537.3 Forward exchange contracts ................ 35.9 35.9 42.1 42.1 ================================================================================ 30 Merck & Co., Inc. 2001 Annual Report Financial Section A summary of the carrying values and fair values of the Company's investments at December 31 is as follows: 2001 2000 ----------------------- --------------------- Carrying Fair Carrying Fair Value Value Value Value - -------------------------------------------------------------------------------- Available-for-sale Debt securities ........ $7,308.9 $7,308.9 $5,476.9 $5,476.9 Equity securities ...... 630.6 630.6 773.8 773.8 Held-to-maturity securities ............. 186.6 185.6 414.9 412.0 ================================================================================ A summary at December 31 of those gross unrealized gains and losses on the Company's available-for-sale investments, recorded net of tax and minority interests in AOCI, is as follows: 2001 2000 ------------------- ------------------- Gross Unrealized Gross Unrealized ------------------- ------------------- Gains Losses Gains Losses - ------------------------------------------------------------------------------- Debt securities ................ $144.7 $(19.5) $ 79.0 $(10.5) Equity securities .............. 32.6 (79.3) 126.3 (83.4) =============================================================================== Available-for-sale debt securities and held-to-maturity securities maturing within one year totaled $1.0 billion and $163.9 million, respectively, at December 31, 2001. Of the remaining debt securities, $5.2 billion mature within five years. At December 31, 2001 and 2000, $575.0 million of held-to-maturity securities maturing within two years set off $575.0 million of 5.0% non-transferable note obligations due by 2003 issued by the Company. Concentrations of Credit Risk As part of its ongoing control procedures, the Company monitors concentrations of credit risk associated with corporate issuers of securities and financial institutions with which it conducts business. Credit risk is minimal as credit exposure limits are established to avoid a concentration with any single issuer or institution. The Company also monitors the credit-worthiness of its customers to which it grants credit terms in the normal course of business. Concentrations of credit risk associated with these trade receivables are considered minimal due to the Company's diverse customer base. Bad debts have been minimal. The Company does not normally require collateral or other security to support credit sales. 7. Inventories Inventories at December 31 consisted of: 2001 2000 - -------------------------------------------------------------------------------- Finished goods .......................................... $2,155.7 $1,762.8 Raw materials and work in process ....................... 1,340.7 1,174.9 Supplies ................................................ 82.9 83.8 - -------------------------------------------------------------------------------- Total (approximates current cost) ....................... 3,579.3 3,021.5 Reduction to LIFO cost .................................. - - - -------------------------------------------------------------------------------- $3,579.3 $3,021.5 ================================================================================ Inventories valued under the LIFO method comprised approximately 41% and 42% of inventories at December 31, 2001 and 2000, respectively. 8. Loans Payable and Long-Term Debt Loans payable at December 31, 2001 and 2000 consisted primarily of $3.4 billion and $3.1 billion, respectively, of commercial paper borrowings. Loans payable at December 31, 2001 also included $500.0 million of notes with annual interest rate resets and a final maturity of ten years. On an annual basis, the notes will either be repurchased from the holders at the option of the remarketing agent and remarketed, or redeemed by the Company. Loans payable also reflected $113.0 million and $120.0 million of 5.8% notes at December 31, 2001 and 2000, respectively. These notes, due 2037, are subject to repayment at par at the option of the holders in May of each year. The remainder in both years was principally borrowings by foreign subsidiaries. The weighted average interest rate for these borrowings was 2.5% and 6.6% at December 31, 2001 and 2000, respectively. Long-term debt at December 31 consisted of: 2001 2000 - -------------------------------------------------------------------------------- 6.0% Astra note due 2008 ................................ $1,380.0 $1,380.0 5.3% notes due 2006 ..................................... 507.9 - 4.1% notes due 2005 ..................................... 501.4 - 6.8% euronotes due 2005 ................................. 499.5 499.4 6.4% debentures due 2028 ................................ 499.1 499.0 6.0% debentures due 2028 ................................ 496.3 496.1 Variable rate borrowings due 2004 ....................... 300.0 300.0 6.3% debentures due 2026 ................................ 247.2 247.0 Other ................................................... 367.2 179.2 - -------------------------------------------------------------------------------- $4,798.6 $3,600.7 ================================================================================ At December 31, 2001, the Company was a party to interest rate swap contracts which effectively convert the 5.3% and 4.1% fixed rate notes to floating rate instruments. (See Note 6.) Other at December 31, 2001 and 2000 consisted primarily of $332.6 million and $141.9 million of borrowings at variable rates averaging 1.6% and 5.7%, respectively. At December 31, 2001, $158.7 million and $106.0 million of these borrowings are subject to repayment at the option of the holders beginning in 2011 and 2010, respectively. In both years, Other also consisted of foreign borrowings at varying rates up to 9.0%. The aggregate maturities of long-term debt for each of the next five years are as follows: 2002, $12.2 million; 2003, $9.0 million; 2004, $307.5 million; 2005, $1.0 billion; 2006, $514.4 million. Merck & Co., Inc. 2001 Annual Report 31 9. Contingencies and Environmental Liabilities The Company is involved in various claims and legal proceedings of a nature considered normal to its business, principally product liability and intellectual property cases. Additionally, the Company, along with numerous other defendants, is a party in several antitrust actions brought by retail pharmacies and consumers, alleging conspiracies in restraint of trade and challenging pricing and/or purchasing practices, one of which has been certified as a federal class action and a number of which have been certified as state class actions. In 1996, the Company and several other defendants finalized an agreement to settle the federal class action alleging conspiracy, which represents the single largest group of retail pharmacy claims. Since that time, the Company has entered into other settlements on satisfactory terms. In October 2001, the Judicial Panel on Multi-District Litigation (Panel) determined that consolidated pretrial proceedings in federal district court in Chicago were substantially completed. The Panel ordered that all of the federal antitrust conspiracy cases, several of which have not been settled by the Company, be returned to the federal district courts in which each case was originally filed. The cases have now been returned to those courts for further proceedings. 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 or determine the final outcome of the remaining proceedings, management does not believe that they should result in a materially adverse effect on the Company's financial position, results of operations or liquidity. The Company is also a party to a number of proceedings brought under the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund, as well as under other federal and state statutes. When a legitimate claim for contribution is asserted, a liability is initially accrued based upon the estimated transaction costs to manage the site. Accruals are adjusted as feasibility studies and related cost assessments of remedial techniques are completed, and as the extent to which other potentially responsible parties (PRPs) who may be jointly and severally liable can be expected to contribute is determined. The Company is also remediating environmental contamination resulting from past industrial activity at certain of its sites and takes an active role in identifying and providing for these costs. A worldwide survey was initially performed to assess all sites for potential contamination resulting from past industrial activities. Where assessment indicated that physical investigation was warranted, such investigation was performed, providing a better evaluation of the need for remedial action. Where such need was identified, remedial action was then initiated. Estimates of the extent of contamination at each site were initially made at the pre-investigation stage and liabilities for the potential cost of remediation were accrued at that time. As more definitive information became available during the course of investigations and/or remedial efforts at each site, estimates were refined and accruals were adjusted accordingly. These estimates and related accruals continue to be refined annually. In management's opinion, the liabilities for all environmental matters which are probable and reasonably estimable have been accrued and totaled $217.8 million and $250.0 million at December 31, 2001 and 2000, respectively. These liabilities are undiscounted, do not consider potential recoveries from insurers or other parties and will be paid out over the periods of remediation for the applicable sites, which are expected to occur primarily over the next 15 years. Although it is not possible to predict with certainty the outcome of these matters, or the ultimate costs of remediation, management does not believe that any reasonably possible expenditures that may be incurred in excess of the liabilities accrued should exceed $120.0 million in the aggregate. Management also does not believe that these expenditures should result in a materially adverse effect on the Company's financial position, results of operations, liquidity or capital resources for any year. 10. Preferred Stock of Subsidiary Companies In March 2000, a wholly-owned subsidiary of the Company issued $1.5 billion par value of variable rate preferred units. The units are redeemable at par value plus accrued dividends at the option of the issuer at any time. They are also redeemable at the option of the holders in March 2010, and at the end of each five-year interval thereafter. In addition, certain provisions could lead the Company's subsidiary to decide to redeem the preferred units if the credit ratings on the Company's unsecured senior debt obligations fall below specified levels, the likelihood of which the Company believes is remote. Because the preferred securities are held at the subsidiary level, they are included in Minority interests in the consolidated financial statements. In connection with the 1998 restructuring of AMI (see Note 4), the Company assumed a $2.4 billion par value preferred stock obligation with a dividend rate of 5% per annum which is carried by KBI and included in Minority interests. While a small portion of the preferred stock carried by KBI is convertible into KBI common shares, none of the preferred securities are convertible into the Company's common shares and, therefore, they are not included as common shares issuable for purposes of computing Earnings per common share assuming dilution. (See Note 16.) 32 Merck & Co., Inc. 2001 Annual Report Financial Section 11. Stockholders' Equity Other paid-in capital increased by $641.4 million, $345.3 million and $306.0 million in 2001, 2000 and 1999, respectively. The increase in 2001 includes $615.3 million resulting from shares issued and equivalent employee stock options assumed in connection with the Rosetta acquisition. (See Note 3.) The remaining increases primarily reflect the impact of shares issued upon exercise of stock options and related income tax benefits. A summary of treasury stock transactions (shares in millions) is as follows:
2001 2000 1999 ------------------- ------------------ ------------------ Shares Cost Shares Cost Shares Cost - ------------------------------------------------------------------------------------- Balance, Jan. 1 ... 660.8 $18,857.8 638.9 $16,164.6 607.4 $13,007.8 Purchases ......... 54.5 3,890.8 52.5 3,545.4 50.0 3,582.1 Issuances/(1)/ .... (11.9) (361.5) (30.6) (852.2) (18.5) (425.3) - ------------------------------------------------------------------------------------- Balance, Dec. 31 .. 703.4 $22,387.1 660.8 $18,857.8 638.9 $16,164.6 ===================================================================================== /(1)/Issued primarily under stock option plans.
At December 31, 2001 and 2000, 10 million shares of preferred stock, without par value, were authorized; none were issued. 12. Stock Option Plans The Company has stock option plans under which employees, non-employee directors and employees of certain of the Company's equity method investees may be granted options to purchase shares of Company common stock at the fair market value at the time of the grant. Options generally vest in 5 years and expire in 10 years from the date of grant. The Company's stock option plan for employees also provides for the granting of performance-based stock awards. In connection with Merck's acquisitions of SIBIA Neurosciences, Inc. and Rosetta in 1999 and 2001, respectively, and Merck-Medco's 2000 acquisition of ProVantage Health Services, Inc., stock options outstanding on the acquisition dates were converted into options to purchase shares of Company common stock with equivalent value. Summarized information relative to the Company's stock option plans (shares in thousands) is as follows: Number Average of Shares Price/(1)/ - -------------------------------------------------------------------------------- Outstanding at December 31, 1998 ...................... 172,340.7 $34.20 Granted ............................................... 28,929.5 80.04 Exercised ............................................. (18,367.7) 17.59 Forfeited ............................................. (4,363.7) 51.08 Equivalent options assumed ............................ 153.8 40.55 - -------------------------------------------------------------------------------- Outstanding at December 31, 1999 ...................... 178,692.6 42.92 Granted ............................................... 32,947.5 66.97 Exercised ............................................. (30,638.4) 20.91 Forfeited ............................................. (4,774.7) 61.80 Equivalent options assumed ............................ 149.7 78.94 - -------------------------------------------------------------------------------- Outstanding at December 31, 2000 ...................... 176,376.7 50.75 Granted ............................................... 36,767.6 79.12 Exercised ............................................. (11,604.4) 25.90 Forfeited ............................................. (5,021.0) 68.78 Equivalent options assumed ............................ 681.8 30.78 - -------------------------------------------------------------------------------- Outstanding at December 31, 2001 ...................... 197,200.7 $56.98 ================================================================================ /(1)/Weighted average exercise price. The number of shares and average price of options exercisable at December 31, 2001, 2000 and 1999 were 55.1 million shares at $27.09, 42.5 million shares at $21.56 and 51.3 million shares at $19.14, respectively. At December 31, 2001 and 2000, 87.6 million shares and 28.9 million shares, respectively, were available for future grants under the terms of these plans. The Company accounts for stock-based compensation using the intrinsic value method. Accordingly, no compensation expense is recognized for its stock-based compensation plans other than for its employee performance-based awards and options granted to employees of certain equity method investees, the total of which is not significant. Had the fair value method of accounting, which requires recognition of compensation cost ratably over the vesting period of the underlying equity instruments, been applied to all of the Company's stock option plans, Net income would have been reduced by $401.1 million, or $.17 per share in 2001, $359.8 million, or $.15 per share in 2000 and $288.9 million, or $.12 per share in 1999. The average fair value of employee and non-employee director options granted during 2001, 2000 and 1999 was $25.42, $23.28 and $24.75, respectively. This fair value was estimated using the Black-Scholes option-pricing model based on the weighted average market price at grant date of $79.10 in 2001, $66.81 in 2000 and $80.04 in 1999 and the following weighted average assumptions: Years Ended December 31 2001 2000 1999 - -------------------------------------------------------------------------------- Dividend yield ................................ 1.7% 1.8% 1.4% Risk-free interest rate ....................... 4.8% 6.5% 5.1% Volatility .................................... 29% 28% 24% Expected life (years) ......................... 6.7 6.6 6.7 ================================================================================ Summarized information about stock options outstanding and exercisable at December 31, 2001 (shares in thousands) is as follows: Outstanding Exercisable Exercise ------------------------------------ ----------------------- Price Number Average Average Number Average Range of Shares Life/(1)/ Price/(2)/ of Shares Price/(2)/ - -------------------------------------------------------------------------------- Under $15 4,660.8 6.02 $12.92 4,660.8 $12.92 $15 to 25 26,853.5 2.54 18.78 26,754.8 18.77 $25 to 40 18,919.8 4.15 32.71 18,554.8 32.69 $40 to 50 23,577.6 5.10 48.60 1,007.5 46.25 $50 to 65 30,412.8 5.95 62.53 1,904.2 57.15 $65 to 80 65,743.9 8.32 72.93 1,924.5 72.80 Over $80 27,032.3 7.03 81.76 313.3 91.67 - -------------------------------------------------------------------------------- 197,200.7 55,119.9 ================================================================================ /(1)/Weighted average contractual life remaining in years. /(2)/Weighted average exercise price. Merck & Co., Inc. 2001 Annual Report 33 13. Pension and Other Postretirement Benefit Plans The net cost for the Company's pension plans consisted of the following components:
Years Ended December 31 2001 2000 1999 - -------------------------------------------------------------------------------- Service cost ................................. $ 190.4 $ 171.2 $ 159.4 Interest cost ................................ 217.4 199.7 179.0 Expected return on plan assets ............... (287.9) (266.6) (229.4) Net amortization ............................. 27.9 11.5 27.0 - -------------------------------------------------------------------------------- Net pension cost ............................. $ 147.8 $ 115.8 $ 136.0 ================================================================================
The net pension cost attributable to international plans included in the above table was $67.3 million in 2001, $73.3 million in 2000 and $66.9 million in 1999. The net cost of postretirement benefits other than pensions consisted of the following components:
Years Ended December 31 2001 2000 1999 - -------------------------------------------------------------------------------- Service cost ................................. $ 52.7 $ 36.5 $ 39.4 Interest cost ................................ 77.4 62.0 58.8 Expected return on plan assets ............... (84.6) (94.5) (73.2) Net amortization ............................. (11.4) (29.5) (18.7) - -------------------------------------------------------------------------------- Net postretirement benefit cost .............. $ 34.1 $(25.5) $ 6.3 ================================================================================
The cost of health care and life insurance benefits for active employees was $307.2 million in 2001, $263.0 million in 2000 and $212.7 million in 1999. Summarized information about the changes in plan assets and benefit obligation is as follows:
Other Postretirement Pension Benefits Benefits ----------------------- -------------------- 2001 2000 2001 2000 - -------------------------------------------------------------------------------- Fair value of plan assets at January 1 ............ $ 3,121.3 $ 3,368.9 $ 861.3 $ 948.6 Actual return on plan assets ............. (258.1) (195.8) (56.5) (80.8) Company contributions ...... 250.2 169.0 - - Benefits paid from plan assets ............. (255.0) (228.3) (7.9) (6.5) Other ...................... 6.1 7.5 - - - -------------------------------------------------------------------------------- Fair value of plan assets at December 31 .......... $ 2,864.5 $ 3,121.3 $ 796.9 $ 861.3 ================================================================================ Benefit obligation at January 1 ............ $ 3,166.8 $ 2,820.9 $ 909.8 $ 818.6 Service cost ............... 190.4 171.2 52.7 36.5 Interest cost .............. 217.4 199.7 77.4 62.0 Actuarial losses (gains) ... 283.0 220.5 177.1 36.4 Benefits paid .............. (272.5) (252.0) (50.9) (43.7) Plan amendments ............ 26.6 13.4 (11.5) - Other ...................... 0.1 (6.9) - - - -------------------------------------------------------------------------------- Benefit obligation at December 31 .......... $ 3,611.8 $ 3,166.8 $ 1,154.6 $ 909.8 ================================================================================
The fair value of international pension plan assets included in the preceding table was $879.7 million in 2001 and $959.0 million in 2000. The pension benefit obligation of international plans included in this table was $1.2 billion in 2001 and $1.1 billion in 2000. A reconciliation of the plans' funded status to the net asset (liability) recognized at December 31 is as follows:
Other Postretirement Pension Benefits Benefits ---------------------- ---------------------- 2001 2000 2001 2000 - -------------------------------------------------------------------------------- Plan assets less than benefit obligation ....... $ (747.3) $ (45.5) $ (357.7) $ (48.5) Unrecognized net loss (gain) .............. 1,331.2 538.3 215.6 (101.3) Unrecognized plan changes .................. 84.4 72.9 (100.7) (102.2) Unrecognized transitional net asset ................ (6.3) (15.8) - - - -------------------------------------------------------------------------------- Net asset (liability) ....... $ 662.0 $ 549.9 $ (242.8) $(252.0) - -------------------------------------------------------------------------------- Recognized as: Other assets ............. $ 853.2 $ 713.1 $ - $ - Accounts payable and accrued liabilities .... (17.1) (2.8) (24.9) (24.8) Deferred income taxes and noncurrent liabilities ............ (412.2) (280.4) (217.9) (227.2) Accumulated other comprehensive loss ..... 238.1 120.0 - - ================================================================================
For pension plans with benefit obligations in excess of plan assets at December 31, 2001 and 2000, the fair value of plan assets was $2.3 billion and $721.1 million, respectively, and the benefit obligation was $3.1 billion and $1.2 billion, respectively. For those plans with accumulated benefit obligations in excess of plan assets at December 31, 2001 and 2000, the fair value of plan assets was $387.7 million and $336.2 million, respectively, and the accumulated benefit obligation was $697.6 million and $537.4 million, respectively. 34 Merck & Co., Inc. 2001 Annual Report Financial Section Assumptions used in determining U.S. plan information are as follows: Pension and Other Postretirement Benefits ---------------------------------- December 31 2001 2000 1999 - -------------------------------------------------------------------------------- Discount rate .............................. 7.25% 7.50% 7.75% Expected rate of return on plan assets ........................... 10.0 10.0 10.0 Salary growth rate ......................... 4.5 4.5 4.5 ================================================================================ For the three years presented, international pension plan assumptions ranged from 2.0% to 8.0% for the discount rate, 5.5% to 9.0% for the expected rate of return on plan assets and 2.0% to 5.0% for the salary growth rate. Unrecognized net loss (gain) amounts, which reflect experience differentials, primarily relating to differences between expected and actual returns on plan assets as well as the effects of changes in actuarial assumptions, are amortized over the average remaining service period of employees. The health care cost trend rate for other postretirement benefit plans was 9.0% at December 31, 2001. The rate is expected to decline to 5.0% over a 7-year period. A one percentage point change in the health care cost trend rate would have had the following effects: One Percentage Point ----------------------- Increase Decrease - -------------------------------------------------------------------------------- Effect on total service and interest cost components ......................................... $ 26.0 $ (21.4) Effect on benefit obligation .......................... 186.8 (160.4) ================================================================================ 14. Other (Income) Expense, Net Years Ended December 31 2001 2000 1999 - -------------------------------------------------------------------------------- Interest income ...................... $ (490.1) $ (470.6) $ (364.7) Interest expense ..................... 464.7 484.4 316.9 Exchange gains ....................... (3.5) (34.4) (27.2) Minority interests ................... 290.6 308.7 222.3 Amortization of goodwill and other intangibles ............. 330.1 319.1 317.4 Other, net ........................... (250.1) (258.2) (410.6) - -------------------------------------------------------------------------------- $ 341.7 $ 349.0 $ 54.1 ================================================================================ Minority interests include third parties' share of exchange gains and losses arising from translation of the financial statements into U.S. dollars. The increase in minority interests in 2000 primarily reflects dividends on preferred units of a subsidiary issued in March 2000. (See Note 10.) In 1999, Other, net, includes $411.0 million of income associated with the Lump Sum Payment from Astra, partially offset by a reserve relating to disputed proceeds (see Note 4) and $110.0 million of charges primarily for endowment of both The Merck Company Foundation and The Merck Genome Research Institute. Other, net, also includes $77.9 million of income resulting from the reversal of a restructuring reserve established in 1995 for the anticipated 1999 closure of a manufacturing facility. Interest paid was $467.3 million in 2001, $450.5 million in 2000 and $276.8 million in 1999. 15. Taxes on Income A reconciliation between the Company's effective tax rate and the U.S. statutory rate is as follows:
Tax Rate 2001 --------------------------------- Amount 2001 2000 1999 - -------------------------------------------------------------------------------- U.S. statutory rate applied to pretax income ........... $ 3,640.9 35.0% 35.0% 35.0% Differential arising from: Foreign earnings ........... (526.9) (5.1) (4.7) (3.3) Tax exemption for Puerto Rico operations ... (93.8) (0.9) (1.1) (1.5) State taxes ................ 229.1 2.2 1.7 1.8 Other ...................... (128.5) (1.2) (.3) (.3) - -------------------------------------------------------------------------------- $ 3,120.8 30.0% 30.6% 31.7% ================================================================================
The higher effective tax rate in 1999 versus 2000 and 2001 primarily reflects the nondeductibility of the goodwill write-off recorded in 1999 resulting from the AstraZeneca merger. Domestic companies contributed approximately 52% in 2001, 54% in 2000 and 65% in 1999 to consolidated pretax income. Taxes on income consisted of:
Years Ended December 31 2001 2000 1999 - -------------------------------------------------------------------------------- Current provision Federal ........................... $ 1,692.4 $ 2,239.0 $ 2,674.9 Foreign ........................... 635.7 591.0 439.9 State ............................. 326.8 266.7 297.1 - -------------------------------------------------------------------------------- 2,654.9 3,096.7 3,411.9 - -------------------------------------------------------------------------------- Deferred provision Federal ........................... 332.3 (64.4) (718.9) Foreign ........................... 57.9 (34.9) 21.9 State ............................. 75.7 5.0 14.1 - -------------------------------------------------------------------------------- 465.9 (94.3) (682.9) - -------------------------------------------------------------------------------- $ 3,120.8 $ 3,002.4 $ 2,729.0 ================================================================================
Merck & Co., Inc. 2001 Annual Report 35 Deferred income taxes at December 31 consisted of: 2001 2000 --------------------- --------------------- Assets Liabilities Assets Liabilities - -------------------------------------------------------------------------------- Other intangibles ........... $ 133.0 $1,248.7 $ 158.1 $ 1,303.7 Inventory related ........... 594.1 300.9 716.0 209.1 Accelerated depreciation ............. - 905.4 - 700.9 Advance payment ............. 338.6 - 338.6 - Equity investments .......... 57.8 408.0 57.8 311.5 Pensions and OPEB ........... 165.0 240.4 146.6 221.5 Compensation related ........ 138.1 - 140.7 - Environmental related ....... 85.3 - 97.7 - Other ....................... 1,256.0 509.0 1,146.8 507.0 - -------------------------------------------------------------------------------- Subtotal .................... 2,767.9 3,612.4 2,802.3 3,253.7 Valuation allowance ......... (2.1) - (1.3) - - -------------------------------------------------------------------------------- Total deferred taxes ........ $2,765.8 $3,612.4 $ 2,801.0 $ 3,253.7 - -------------------------------------------------------------------------------- Net deferred tax liabilities .............. $ 846.6 $ 452.7 - -------------------------------------------------------------------------------- Recognized as: Prepaid expenses and taxes .............. $ (613.7) $ (812.5) Other assets ............. (65.2) (9.8) Income taxes payable ..... 12.9 30.0 Deferred income taxes and noncurrent liabilities ............ 1,512.6 1,245.0 ================================================================================ Income taxes paid in 2001, 2000 and 1999 were $2.3 billion, $2.2 billion and $2.5 billion, respectively. The higher amount in 1999 primarily reflects taxes paid on two one-time payments from Astra. Stock option exercises reduced income taxes paid in 2001, 2000 and 1999 by $153.0 million, $537.5 million and $423.1 million, respectively. At December 31, 2001, foreign earnings of $12.4 billion and domestic earnings of $880.9 million have been retained indefinitely by subsidiary companies for reinvestment. No provision is made for income taxes that would be payable upon the distribution of such earnings, and it is not practicable to determine the amount of the related unrecognized deferred income tax liability. These earnings include income from manufacturing operations in Ireland, which were tax-exempt through 1990 and are taxed at 10% thereafter. In addition, the Company has domestic subsidiaries operating in Puerto Rico under a tax incentive grant that expires in 2008. The Company's federal income tax returns have been audited through 1992. 16. Earnings per Share 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: Years Ended December 31 2001 2000 1999 - -------------------------------------------------------------------------------- Average common shares outstanding ............................ 2,288.3 2,306.9 2,349.0 Common shares issuable/(1)/ ............... 34.0 46.3 55.6 - -------------------------------------------------------------------------------- Average common shares outstanding assuming dilution .......... 2,322.3 2,353.2 2,404.6 ================================================================================ /(1)/ Issuable primarily under stock option plans. 17. Comprehensive Income Upon the adoption of FAS 133 on January 1, 2001, the Company recorded a favorable cumulative effect of accounting change of $45.5 million in Other comprehensive income (loss). This amount represented the mark to fair value of purchased local currency put options maturing throughout 2001 which hedged anticipated foreign currency denominated sales over that same period. At December 31, 2001, $7.3 million of deferred gain is associated with options maturing in the next 12 months which hedge anticipated foreign currency denominated sales over that same period. The components of Other comprehensive income (loss) are as follows:
After Pretax/(1)/ Tax Tax - -------------------------------------------------------------------------------- Year Ended December 31, 2001 - -------------------------------------------------------------------------------- Cumulative effect of accounting change ................... $ 76.9 $ (31.4) $ 45.5 Net unrealized gain on derivatives ......................... 49.7 (20.3) 29.4 Net income realization ................. (114.3) 46.7 (67.6) - -------------------------------------------------------------------------------- Derivatives ............................ 12.3 (5.0) 7.3 - -------------------------------------------------------------------------------- Net unrealized gain on investments ......................... 44.7 35.3 80.0 Net income realization ................. (73.7) 4.8 (68.9) - -------------------------------------------------------------------------------- Investments ............................ (29.0) 40.1 11.1 - -------------------------------------------------------------------------------- Minimum pension liability .............. (87.1) 48.5 (38.6) - -------------------------------------------------------------------------------- $ (103.8) $ 83.6 $ (20.2) - -------------------------------------------------------------------------------- Year Ended December 31, 2000 - -------------------------------------------------------------------------------- Net unrealized gain on investments ......................... $ .7 $ 28.5 $ 29.2 Net income realization ................. (1.4) (3.5) (4.9) - -------------------------------------------------------------------------------- Investments ............................ (.7) 25.0 24.3 Minimum pension liability .............. 5.3 (6.9) (1.6) - -------------------------------------------------------------------------------- $ 4.6 $ 18.1 $ 22.7 - -------------------------------------------------------------------------------- Year Ended December 31, 1999 - -------------------------------------------------------------------------------- Net unrealized gain on investments ......................... $ 91.0 $ (64.9) $ 26.1 Net income realization ................. (6.7) 6.2 (.5) - -------------------------------------------------------------------------------- Investments ............................ 84.3 (58.7) 25.6 Minimum pension liability .............. 9.7 (5.9) 3.8 - -------------------------------------------------------------------------------- $ 94.0 $ (64.6) $ 29.4 ================================================================================
/(1)/ Net of applicable minority interest. The components of Accumulated other comprehensive income are as follows:
December 31 2001 2000 - -------------------------------------------------------------------------------- Net unrealized gain on derivatives ..................................... $ 7.3 $ - Net unrealized gain on investments ..................................... 83.3 72.2 Minimum pension liability ............................. (80.0) (41.4) - -------------------------------------------------------------------------------- $ 10.6 $ 30.8 ================================================================================
36 Merck & Co., Inc. 2001 Annual Report Financial Section 18. Segment Reporting The Company's operations are principally managed on a products and services basis and are comprised of two reportable segments: Merck Pharmaceutical, which includes products marketed either directly or through joint ventures, and Merck-Medco. Merck Pharmaceutical products consist of therapeutic and preventive agents, sold by prescription, for the treatment of human disorders. Merck-Medco revenues are derived from the filling and management of prescriptions and health management programs. All Other includes non-reportable human and animal health segments. Revenues and profits for these segments are as follows:
Merck Pharm- Merck- All aceutical Medco Other Total - -------------------------------------------------------------------------------- Year Ended December 31, 2001 - -------------------------------------------------------------------------------- Segment revenues ............ $ 19,731.5 $ 29,693.4 $ 1,265.9 $ 50,690.8 Segment profits ............. 12,199.9 731.4 977.5 13,908.8 Included in segment profits: Equity income (loss) from affiliates ..... 203.2 (3.0) 190.7 390.9 Depreciation and amortization ........ (165.6) (141.6) (5.2) (312.4) - -------------------------------------------------------------------------------- Year Ended December 31, 2000 - -------------------------------------------------------------------------------- Segment revenues ............ $ 18,577.3 $ 23,319.6 $ 1,211.6 $ 43,108.5 Segment profits ............. 11,563.6 683.0 924.8 13,171.4 Included in segment profits: Equity income (loss) from affiliates ..... 307.1 - 188.4 495.5 Depreciation and amortization ........ (140.1) (107.1) (4.5) (251.7) - -------------------------------------------------------------------------------- Year Ended December 31, 1999 - -------------------------------------------------------------------------------- Segment revenues ............ $ 15,998.4 $ 18,109.0 $ 1,109.9 $ 35,217.3 Segment profits ............. 10,238.5 578.3 819.8 11,636.6 Included in segment profits: Equity income (loss) from affiliates ..... 312.0 - 169.4 481.4 Depreciation and amortization ........ (113.6) (84.8) (4.4) (202.8) ================================================================================
Segment profits are comprised of segment revenues less certain elements of materials and production costs and operating expenses, including components of equity income (loss) from affiliates and depreciation and amortization expenses. The Company does not internally allocate the vast majority of indirect production costs, research and development expenses and general and administrative expenses, all predominantly related to the Merck pharmaceutical business, 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 the marketing segment profits. The vast majority of goodwill and other intangibles amortization, predominantly related to the Merck-Medco business, as well as the cost of financing capital employed, also are not allocated internally and, therefore, are not included in the marketing segment profits. A reconciliation of total segment revenues to consolidated sales is as follows:
Years Ended December 31 2001 2000 1999 - -------------------------------------------------------------------------------- Segment revenues ................ $ 50,690.8 $ 43,108.5 $ 35,217.3 Other revenues .................. 349.6 434.0 373.4 Adjustments ..................... (3,324.7) (3,179.3) (2,876.7) - -------------------------------------------------------------------------------- $ 47,715.7 $ 40,363.2 $ 32,714.0 ================================================================================
Other revenues are primarily comprised of miscellaneous corporate revenues, sales related to divested products or businesses and other supply sales. Adjustments represent the elimination of receipts reported as revenues in the internal management system which are not reportable as revenues under GAAP. Consolidated sales included $39.9 billion, $33.0 billion and $25.7 billion of revenues derived from the United States and $7.8 billion, $7.4 billion and $7.0 billion of revenues derived from foreign operations in 2001, 2000 and 1999, respectively. A reconciliation of total segment profits to consolidated income before taxes is as follows:
Years Ended December 31 2001 2000 1999 - -------------------------------------------------------------------------------- Segment profits .................... $ 13,908.8 $ 13,171.4 $ 11,636.6 Other profits ...................... 267.7 339.1 218.9 Adjustments ........................ 395.3 545.5 252.1 Unallocated: Interest income ................. 490.1 470.6 364.7 Interest expense ................ (464.7) (484.4) (316.9) Equity income (loss) from affiliates ............... 295.0 269.4 280.6 Depreciation and amortization .................. (1,151.4) (1,025.6) (942.0) Research and development ................... (2,456.4) (2,343.8) (2,068.3) Other expenses, net ............. (881.8) (1,118.1) (806.2) - -------------------------------------------------------------------------------- $ 10,402.6 $ 9,824.1 $ 8,619.5 ================================================================================
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 (loss) 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. Net property, plant and equipment included $9.9 billion, $8.8 billion and $7.4 billion of assets located in the United States and $3.2 billion, $2.7 billion and $2.3 billion of assets located outside the United States in 2001, 2000 and 1999, respectively. The Company does not disaggregate assets on a products and services basis for internal management reporting and, therefore, such information is not presented. In January 2002, the Company announced plans to establish Merck-Medco as a separate, publicly-traded company. The Company plans an initial public offering of a portion of the new company by mid-2002, subject to market conditions. Alternatives for the distribution of the remaining shares in the new company are under evaluation. The full separation of Merck-Medco should be completed within 12 months of the initial public offering, subject to receipt of an Internal Revenue Service ruling that such an event would be tax-free to shareholders and to other customary conditions. Merck & Co., Inc. 2001 Annual Report 37 Management's Report - -------------------------------------------------------------------------------- Primary responsibility for the integrity and objectivity of the Company's financial statements rests with management. The financial statements report on management's stewardship of Company assets. These statements are prepared in conformity with generally accepted accounting principles and, accordingly, include amounts that are based on management's best estimates and judgments. Nonfinancial information included in the Annual Report has also been prepared by management and is consistent with the financial statements. To assure that financial information is reliable and assets are safeguarded, management maintains an effective system of internal controls and procedures, important elements of which include: careful selection, training and development of operating and financial managers; an organization that provides appropriate division of responsibility, and communications aimed at assuring that Company policies and procedures are understood throughout the organization. In establishing internal controls, management weighs the costs of such systems against the benefits it believes such systems will provide. A staff of internal auditors regularly monitors the adequacy and application of internal controls on a worldwide basis. To insure that personnel continue to understand the system of internal controls and procedures, and policies concerning good and prudent business practices, the Company periodically conducts the Management's Stewardship Program for key management and financial personnel. This program reinforces the importance and understanding of internal controls by reviewing key corporate policies, procedures and systems. In addition, an ethical business practices program has been implemented to reinforce the Company's long-standing commitment to high ethical standards in the conduct of its business. The independent public accountants have audited the Company's consolidated financial statements as described in their report. Although their audits were not designed for the purpose of forming an opinion on internal controls, the Company's accounting systems, procedures and internal controls were subject to testing and other auditing procedures sufficient to enable the independent public accountants to render their opinion on the Company's financial statements. The recommendations of the internal auditors and independent public accountants are reviewed by management. Control procedures have been implemented or revised as appropriate to respond to these recommendations. No material control weaknesses have been brought to the attention of management. In management's opinion, for the year ended December 31, 2001, the internal control system was strong and accomplished the objectives discussed herein. /s/ Raymond V. Gilmartin /s/ Judy C. Lewent Raymond V. Gilmartin Judy C. Lewent Chairman, President and Executive Vice President and Chief Executive Officer Chief Financial Officer Report of Independent Public Accountants - -------------------------------------------------------------------------------- To the Stockholders and Board of Directors of Merck & Co., Inc.: We have audited the accompanying consolidated balance sheet of Merck & Co., Inc. (a New Jersey corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, retained earnings, comprehensive income and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Merck & Co., Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP New York, New York ARTHUR ANDERSEN LLP January 22, 2002 38 Merck & Co., Inc. 2001 Annual Report Financial Section Audit Committee's Report - -------------------------------------------------------------------------------- The Audit Committee of the Board of Directors, comprised of four outside directors, held three meetings during 2001. The Audit Committee met with the independent public accountants, management and internal auditors to assure that all were carrying out their respective responsibilities. The Committee reviewed the performance and fees of the independent public accountants prior to recommending their appointment, and met with them to discuss the scope and results of their audit work, including the adequacy of internal controls and the quality of financial reporting. The Committee discussed with the independent public accountants their judgments regarding the quality and acceptability of the Company's accounting principles, the clarity of its disclosures and the degree of aggressiveness or conservatism of its accounting principles and underlying estimates. The Committee discussed with and received a letter from the independent public accountants confirming their independence. Both the independent public accountants and the internal auditors had full access to the Committee, including regular meetings without management present. Additionally, the Committee reviewed and discussed the audited financial statements with management and recommended to the Board of Directors that these financial statements be included in the Company's Form 10-K filing with the Securities and Exchange Commission. Heidi G. Miller William B. Harrison, Jr. Chairperson Thomas E. Shenk Samuel O. Thier Compensation and Benefits Committee's Report - -------------------------------------------------------------------------------- The Compensation and Benefits Committee, comprised of four outside directors, held three meetings during 2001. The Compensation and Benefits Committee's major responsibilities include providing for senior management succession and overseeing the Company's compensation and benefit programs. The Committee seeks to provide rewards which are highly leveraged to performance and clearly linked to Company and individual results. The objective is to ensure that compensation and benefits are at levels which enable Merck to attract and retain high-quality employees. The Committee views stock ownership as a vehicle to align the interests of employees with those of the stockholders. A long-term focus is essential for success in the pharmaceutical industry and is encouraged by making a high proportion of executive officer compensation dependent on long-term performance and on enhancing stockholder value. Lawrence A. Bossidy William G. Bowen Chairperson Johnnetta B. Cole William N. Kelley Merck & Co., Inc. 2001 Annual Report 39 - -------------------------------------------------------------------------------- Selected Financial Data/(1)/ Merck & Co., Inc. and Subsidiaries
($ in millions except per share amounts) 2001 2000 1999 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------ Results for Year: Sales .................... $47,715.7 $40,363.2 $32,714.0 $ 26,898.2 $ 23,636.9 $ 19,828.7 $ 16,681.1 $ 14,969.8 Materials and production costs .................. 28,976.5 22,443.5 17,534.2 13,925.4 11,790.3 9,319.2 7,456.3 5,962.7 Marketing and administrative expenses ............. 6,224.4 6,167.7 5,199.9 4,511.4 4,299.2 3,841.3 3,297.8 3,177.5 Research and development expenses ............. 2,456.4 2,343.8 2,068.3 1,821.1 1,683.7 1,487.3 1,331.4 1,230.6 Acquired research ........ -- -- -- 1,039.5 -- -- -- -- Equity (income) loss from affiliates ...... (685.9) (764.9) (762.0) (884.3) (727.9) (600.7) (346.3) (56.6) Gains on sales of businesses ............... -- -- -- (2,147.7) (213.4) -- (682.9) -- Restructuring charge ..... -- -- -- -- -- -- -- -- Other (income) expense, net .................... 341.7 349.0 54.1 499.7 342.7 240.8 827.6 240.4 Income before taxes ...... 10,402.6 9,824.1 8,619.5 8,133.1 6,462.3 5,540.8 4,797.2 4,415.2 Taxes on income .......... 3,120.8 3,002.4 2,729.0 2,884.9 1,848.2 1,659.5 1,462.0 1,418.2 Net income ............... 7,281.8 6,821.7 5,890.5 5,248.2 4,614.1 3,881.3 3,335.2 2,997.0 Basic earnings per common share ......... $ 3.18 $ 2.96 $ 2.51 $2.21 $1.92 $1.60 $1.35 $1.19 Earnings per common share assuming dilution .... $ 3.14 $ 2.90 $ 2.45 $2.15 $1.87 $1.56 $1.32 $1.17 Dividends declared ....... 3,156.1 2,905.7 2,629.3 2,353.0 2,094.8 1,793.4 1,578.0 1,463.1 Dividends paid per common share ......... $ 1.37 $ 1.21 $ 1.10 $ .95 $ .85 $ .71 $ .62 $ .57 Capital expenditures ..... 2,724.7 2,727.8 2,560.5 1,973.4 1,448.8 1,196.7 1,005.5 1,009.3 Depreciation ............. 1,080.4 905.5 771.2 700.0 602.4 521.7 463.3 475.6 - ------------------------------------------------------------------------------------------------------------------ Year-End Position: Working capital .......... $ 1,417.4 $ 3,643.8 $ 2,500.4 $ 4,159.7 $ 2,644.4 $ 2,897.4 $ 3,870.2 $ 2,291.4 Property, plant and equipment (net) ...... 13,103.4 11,482.1 9,676.7 7,843.8 6,609.4 5,926.7 5,269.1 5,296.3 Total assets ............. 44,006.7 40,154.9 35,933.7 31,853.4 25,735.9 24,266.9 23,831.8 21,856.6 Long-term debt ........... 4,798.6 3,600.7 3,143.9 3,220.8 1,346.5 1,155.9 1,372.8 1,145.9 Stockholders' equity ..... 16,050.1 14,832.4 13,241.6 12,801.8 12,594.6 11,964.0 11,735.7 11,139.0 - ------------------------------------------------------------------------------------------------------------------ Financial Ratios: Net income as a % of: Sales ................ 15.3% 16.9% 18.0% 19.5% 19.5% 19.6% 20.0% 20.0% Average total assets ............. 17.3% 17.9% 17.4% 18.2% 18.5% 16.1% 14.6% 14.3% - ------------------------------------------------------------------------------------------------------------------ Year-End Statistics: Average common shares outstanding (millions) ........... 2,288.3 2,306.9 2,349.0 2,378.8 2,409.0 2,427.2 2,472.3 2,514.3 Average common shares outstanding assuming dilution (millions) .. 2,322.3 2,353.2 2,404.6 2,441.1 2,469.5 2,489.6 2,527.3 2,557.7 Number of stockholders of record ............ 256,200 265,700 280,500 269,600 263,900 247,300 243,000 244,700 Number of employees ...... 78,100 69,300 62,300 57,300 53,800 49,100 45,200 47,500 ================================================================================================================== ($ in millions except per share amounts) 1993 1992/(2)/ 1991 - ---------------------------------------------------------------- Results for Year: Sales ...................... $10,498.2 $ 9,662.5 $8,602.7 Materials and production costs....................... 2,497.6 2,096.1 1,934.9 Marketing and administrative expenses ............... 2,913.9 2,963.3 2,570.3 Research and development expenses ............... 1,172.8 1,111.6 987.8 Acquired research .......... -- -- -- Equity (income) loss from affiliates ........ 26.1 (25.8) 21.1 Gains on sales of businesses ............. -- -- -- Restructuring charge ....... 775.0 -- -- Other (income) expense, net .................... 10.1 (46.3) (78.1) Income before taxes ........ 3,102.7 3,563.6 3,166.7 Taxes on income ............ 936.5 1,117.0 1,045.0 Net income ................. 2,166.2 2,446.6 2,121.7 Basic earnings per common share ........... $ .94 $1.06 $ .91 Earnings per common share assuming dilution ...... $ .93 $1.05 $ .91 Dividends declared ......... 1,239.0 1,106.9 920.3 Dividends paid per common share ........... $ .52 $ .46 $ .39 Capital expenditures ....... 1,012.7 1,066.6 1,041.5 Depreciation ............... 348.4 290.3 242.7 - ---------------------------------------------------------------- Year-End Position: Working capital ............ $ 541.6 $ 1,241.1 $1,496.5 Property, plant and equipment (net) ........ 4,894.6 4,271.1 3,504.5 Total assets ............... 19,927.5 11,086.0 9,498.5 Long-term debt ............. 1,120.8 495.7 493.7 Stockholders' equity ....... 10,021.7 5,002.9 4,916.2 - ---------------------------------------------------------------- Financial Ratios: Net income as a % of: Sales .................. 20.6% 25.3% 24.7% Average total assets ... 14.0% 24.1% 24.2% - ---------------------------------------------------------------- Year-End Statistics: Average common shares outstanding (millions) ............. 2,313.0 2,307.0 2,319.8 Average common shares outstanding assuming dilution (millions) .... 2,332.0 2,330.6 2,343.3 Number of stockholders of record .............. 231,300 161,200 91,100 Number of employees ........ 47,100/(3)/ 38,400 37,700 ================================================================
/(1)/ Amounts after 1992 include the impact of the Medco acquisition on November 18, 1993. /(2)/ Results of operations for 1992 exclude the cumulative effect of accounting changes. /(3)/ Increase in 1993 is due to the inclusion of 10,300 Merck-Medco employees. 40 Merck & Co., Inc. 2001 Annual Report Financial Section EX-21 7 dex21.txt LIST OF SUBSIDIARIES Exhibit 21 ] MERCK & CO., INC. SUBSIDIARIES as of 12/31/2001 Each of the subsidiaries set forth below does business under the name stated. A subsidiary of a subsidiary is indicated by indentation under the immediate parent. All voting securities of the subsidiaries named are owned directly or indirectly by the Company, except where otherwise indicated.
Country or State Name of Incorporation - ---- ---------------- Chibret A/S Denmark Hangzhou MSD Pharmaceutical Company Limited/1/ China Hawk and Falcon L.L.C. Delaware International Indemnity Ltd. Bermuda Johnson & Johnson - Merck Consumer Pharmaceuticals Company/1/ New Jersey Laboratorios Prosalud S.A. Peru MCM Vaccine Co./1/ Pennsylvania Merck and Company, Incorporated Delaware Merck SH Inc. Delaware Merial Limited/LLC/1/ Great Britain/ Delaware British United Turkeys Limited Great Britain Turkey Research & Development Limited Great Britain Merck Capital Investments, Inc. Delaware Merck Capital Resources, Inc. Delaware MSD Technology, L.P. Delaware Merck Finance Co., Inc. Delaware Merck Hamilton, Inc. California Merck Cardiovascular Health Company Nevada MSP Distribution Services (C) LLC/1/ Nevada MSP Marketing Services (C) LLC/1/ Nevada Merck Enterprises Canada, Ltd. Canada Merck Foreign Sales Corporation Ltd. Bermuda
Country or State Name of Incorporation - ---- ---------------- Merck Holdings, Inc. Delaware Chippewa Holdings LLC Delaware Algonquin SarL Luxembourg Frosst Laboratories, Inc. Delaware Frosst Portuguesa - Produtos Farmaceuticos, Lda. Portugal Istituto Gentili S.p.A./Inc. Italy/Delaware KBI Inc. Delaware KBI Sub Inc. Delaware KBI-E Inc. Delaware KBI-P Inc. Delaware Merck Borinquen Holdings, Inc. Delaware Merck Sharp & Dohme Quimica de Puerto Rico, Inc. Delaware Merck-Medco Holdings II Corp. Delaware Cloverleaf International Holdings S.A. Luxembourg BRC Ltd Bermuda Coordinated Patient Care Scandinavia AS Norway Infodoc AS/1/ Norway Infodoc International AS1/1/ Norway Medco Holdings S. de R.L. de C.V. Mexico Medco de Mexico Managed Care S. de R.L. de C.V. Mexico Medco Servicios de Mexico, S. de R.L. de C.V. Mexico Coordination Medicale et Pharmaceutique, S.A. France Farmacox-Companhia Farmaceutica, Lda Portugal Farmasix-Produtos Farmaceuticos, Lda Portugal Fontelabor-Produtos Farmaceuticos, Lda. Portugal Gestion Integrada De Salud, Analisis De Resultados Y Evidencia Medichip, S.L. Spain Merck Sharp & Dohme Asia Pacific Services Pte Ltd. Singapore Merck Sharp & Dohme (Australia) Pty. Limited Australia AMRAD Pharmaceuticals Pty. Ltd. Australia Merck Sharp & Dohme Finance Europe Limited Great Britain Merck Sharp & Dohme B.V. Netherlands Abello Farmacia, S.L./1/ Spain Financiere MSD S.A.S. France Aventis Pasteur MSD Gestion S.A./1/ France Aventis Pasteur MSD SNC/1/ France Aventis Pasteur MSD A/S Denmark Aventis Pasteur MSD GmbH Austria Aventis Pasteur MSD GmbH Germany Aventis Pasteur MSD Ltd. Great Britain Aventis Pasteur MSD Ltd. Ireland Aventis Pasteur MSD N.V./S.A. Belgium Aventis Pasteur MSD S.A. Spain Aventis Pasteur MSD S.p.A. Italy Pasteur Vaccins S.A. France Laboratoires Martin-Johnson & Johnson-MSD S.A.S./1/ France Laboratoires Merck Sharp & Dohme-Chibret SNC France
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Country or State Name of Incorporation - ---- ---------------- MSD (Nippon Holdings) BV Netherlands Banyu Pharmaceutical Company, Ltd./1/ Japan Banyu-A.S.C. Co., Ltd. Japan Nippon Merck-Banyu Co., Ltd. Japan Laboratorios Biopat, S.A. Spain Laboratorios Chibret, S.A. Spain Laboratorios Frosst, S.A. Spain Merck Sharp & Dohme GmbH Austria Merck Sharp & Dohme Holdings de Mexico, S.A. de C.V. Mexico Merck Sharp & Dohme de Mexico, S.A. de C.V. Mexico Merck Sharp & Dohme (Israel - 1996) Company Ltd. Israel Merck Sharp & Dohme (Italia) S.p.A. Italy Centra Medicamenta OTC SpA/1/ Italy Istituto Di Richerche Di Biologia Molecolare S.p.A./1/ Italy MSD (Proprietary) Limited South Africa MSD Sharp & Dohme GmbH Germany Chibret Pharmazeutische GmbH Germany Dieckmann Arzneimittel GmbH Germany Woelm Pharma GmbH & Co./1/ Germany MSD Chibropharm GmbH Germany MSD Unterstutzungskasse GmbH Germany Varipharm Arzneimittel GmbH Germany Sharp & Dohme, S.A. Spain Merck Sharp & Dohme Chibret A.G. Switzerland Merck Sharp & Dohme de Venezuela S.R.L. Venezuela Merck Sharp & Dohme (Holdings) Limited Great Britain Charles E. Frosst (U.K.) Limited Great Britain Merck Sharp & Dohme Limited Great Britain Johnson & Johnson-MSD Consumer Pharmaceuticals/1/ Great Britain Propecia Limited Great Britain The MSD Foundation Limited Great Britain Thomas Morson & Son Limited Great Britain Merck Sharp & Dohme IDEA, Inc. Switzerland Merck Sharp & Dohme (Sweden) A.B. Sweden Merck Sharp & Dohme Trading & Service Limited Liability Company Hungary MSD Ireland (Holdings) S.A. Luxembourg Fregenal Holdings S.A. Panama Frosst Iberica, S.A. Spain Laboratorios Abello, S.A. Spain Laboratorios Quimico-Farmaceuticos Chibret, Lda. Portugal Merck Sharp & Dohme de Espana, S.A. Spain Merck Sharp & Dohme, Limitada Portugal MSD Finance, B.V. Netherlands MSD Overseas Manufacturing Co. Bermuda Blue Jay Investments C.V. Netherlands MSD Ireland (Investment) Ltd. Bermuda
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Country or State Name of Incorporation - ---- ---------------- MSD Overseas Manufacturing Co. (Ireland) Ireland Tradewinds Manufacturing SRL Barbados MSD Technology Singapore Pte. Ltd. Singapore MSP Singapore Company, LLC/1/ Delaware MSP Singapore-Sub, LLC Delaware MSD Warwick (Manufacturing) Ltd. Bermuda MSD Somerset Ltd. Bermuda Crosswinds B.V. Netherlands Merck Sharp & Dohme (Ireland) Ltd. Bermuda MSD Pembroke Ltd. Bermuda Merck Sharp & Dohme (Puerto Rico) Ltd. Bermuda Merck Sharp & Dohme (Singapore) Ltd. Bermuda Neopharmed S.p.A. Italy MSD (Norge) A/S Norway MSD Ventures Singapore Pte. Ltd. Singapore Ruskin Limited Bermuda Suomen MSD Oy Finland Kiinteisto Oy Viistotie 11 Finland Merck Frosst Canada & Co. Canada Maple Leaf Holdings SRL Barbados Merck Sharp & Dohme (I.A.) Corp. Delaware Merck Sharp & Dohme (Argentina) Inc. Delaware MSD Korea Ltd. Korea/Delaware Merck Sharp Dohme Ilaclari Limited Sirketi Turkey Merck Sharp & Dohme Farmaceutica Ltda. Brazil Prodome Quimica e Farmaceutica Ltda./1/ Brazil Merck Sharp & Dohme (International) Limited Bermuda Merck Sharp & Dohme (Asia) Limited Hong Kong Merck Sharp & Dohme (China) Limited Hong Kong Merck Sharp & Dohme S.A. France Merck Sharp & Dohme International Services B.V. Netherlands Merck Sharp & Dohme - Lebanon S.A.L. Lebanon Merck Sharp & Dohme L.L.C. Russian Federation Merck Sharp & Dohme (Middle East) Limited Cyprus Merck Sharp & Dohme of Pakistan Limited Pakistan Merck Sharp & Dohme S.A.R.L. Morocco Merck Technology (U.S.) Company, Inc. Nevada MSP Technology (U.S.) Company, LLC/1/ Delaware Merck Ventures, Inc. Delaware MSD Lakemedel (Scandinavia) Aktiebolog Sweden Readington Holdings, Inc. New Jersey STELLARx, Inc. Nevada TELERx Marketing Inc. Pennsylvania Merck Institute for Vaccinology Delaware Merck Investment Co., Inc. Delaware
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Country or State Name of Incorporation - ---- ---------------- Merck Liability Management Company Delaware Merck LMC Cash Management (Bermuda) Ltd. Bermuda Merck LMC Cash Management, Inc. Delaware Merck-Medco Managed Care, L.L.C. Delaware CM Delaware Corporation Delaware DM-MG, L.L.C. Delaware Medco Containment Insurance Company of New Jersey New Jersey Medco Containment Insurance Company of New York New York Medco Containment Life Insurance Company Pennsylvania Merck Capital Ventures, LLC Delaware merckmedco.com, L.L.C. New Jersey Merck-Medco Managed Care of California, Inc. California Merck-Medco of Willingboro Urban Renewal, L.L.C. New Jersey Merck-Medco Rx Services of Florida No. 2, L.C. Florida Merck-Medco Rx Services of Florida No. 4, L.L.C. Delaware Merck-Medco Rx Services of Florida No. 5, L.C. Florida Merck-Medco Rx Services of Florida, L.C. Florida Merck-Medco Rx Services of Massachusetts, L.L.C. Massachusetts Merck-Medco Rx Services of Nevada, Inc. Nevada Merck-Medco Rx Services of New Jersey, L.L.C. New Jersey Merck-Medco Rx Services of New York, L.L.C. New York Merck-Medco Rx Services of Ohio, Ltd. Ohio Merck-Medco Rx Services of Ohio No. 2, Ltd. Ohio Merck-Medco Rx Services of Oklahoma, L.L.C. Oklahoma Merck-Medco Rx Services of Pennsylvania, L.L.C. Pennsylvania Merck-Medco Rx Services of Pennsylvania No. 2, L.L.C. Pennsylvania Merck-Medco Rx Services of Texas, L.L.C. Texas Merck-Medco Rx Services of Virginia, L.L.C. Virginia Merck-Medco Rx Services of Washington, Inc. Washington Merck-Medco Rx Services of Willingboro New Jersey, L.L.C. New Jersey Mergerco Delaware No. 4, L.L.C. Delaware MW Holdings, L.L.C. Delaware NJRE, L.L.C. New Jersey National Rx Services, Inc. of Missouri Missouri National Rx Services No. 3, Inc. of Ohio Ohio New York Independent Practice Association, L.L.C. New York NRx Federal Corp. Delaware Paid Direct, Inc. Delaware PAID Prescriptions, L.L.C. Nevada ProVantage Health Services, Inc. Delaware Bravell, Inc. Wisconsin PharMark Corporation Delaware ProVantage Mail Services, Inc. Minnesota PROVMED, LLC Wisconsin PVHS, Inc. Delaware Replacement Distribution Center, Inc. Ohio
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Country or State Name of Incorporation - ---- ---------------- RxHub, L.L.C. Delaware The Institute for Effectiveness Research, L.L.C. Delaware Systemed, L.L.C. Delaware Systemed Pharmacy of Iowa, L.L.C. Delaware Systemed Pharmacy of Ohio, Ltd. Ohio Xceleron Health, L.L.C. Delaware Merck Resource Management, Inc. Delaware Merck Respiratory Health Company Nevada MSP Distribution Services (R) LLC/1/ Nevada MSP Marketing Services (R) LLC/1/ Nevada Merck Sharp & Dohme (Europe) Inc. Delaware Merck Sharp & Dohme Industria Quimica e Veterinaria Limitada Brazil Merck Sharp & Dohme (New Zealand) Limited New Zealand Merck Sharp & Dohme Overseas Finance N.V. Neth. Antilles Merck Sharp & Dohme (Panama) S.A. Panama Merck Sharp & Dohme Peru SRL Peru Merck Sharp & Dohme (Philippines) Inc. Philippines MSD International Holdings, Inc. Delaware MSD (Japan) Co., Ltd. Japan Rosetta Inpharmatics, Inc. Delaware - ------------
/1/own less than 100% 6 EX-24 8 dex24.txt POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY ----------------- Each of the undersigned does hereby appoint CELIA A. COLBERT and KENNETH C. FRAZIER and each of them, severally, his/her true and lawful attorney or attorneys to execute on behalf of the undersigned (whether on behalf of the Company, or as an officer or director thereof, or by attesting the seal of the Company, or otherwise) the Form 10-K Annual Report of Merck & Co., Inc. for the fiscal year ended December 31, 2001 under the Securities Exchange Act of 1934, including amendments thereto and all exhibits and other documents in connection therewith. IN WITNESS WHEREOF, this instrument has been duly executed as of the 26th day of February, 2002. MERCK & CO., Inc. By /s/ Raymond V. Gilmartin --------------------------------- Raymond V. Gilmartin (Chairman of the Board, President and Chief Executive Officer) /s/ Raymond V. Gilmartin Chairman of the Board, President - ------------------------------------- and Chief Executive Officer Raymond V. Gilmartin (Principal Executive Officer; Director) /s/ Judy C. Lewent Executive Vice President and Chief Financial Officer - ------------------------------------- (Principal Financial Officer) Judy C. Lewent /s/ Richard C. Henriques, Jr. Vice President, Controller - ------------------------------------- (Principal Accounting Officer) Richard C. Henriques, Jr. DIRECTORS /s/ Lawrence A. Bossidy /s/ Heidi G. Miller - ------------------------------------- --------------------------------------- Lawrence A. Bossidy Heidi G. Miller /s/ William G. Bowen /s/ Edward M. Scolnick - ------------------------------------- --------------------------------------- William G. Bowen Edward M. Scolnick /s/ Johnnetta B. Cole /s/ Thomas E. Shenk - ------------------------------------- --------------------------------------- Johnnetta B. Cole Thomas E. Shenk /s/ Niall FitzGerald - ------------------------------------- --------------------------------------- Niall FitzGerald Anne M. Tatlock /s/ Samuel O. Thier - ------------------------------------- --------------------------------------- William B. Harrison, Jr. Samuel O. Thier /s/ William N. Kelley - ------------------------------------- William N. Kelley
I, Debra A. Bollwage, Assistant Secretary of MERCK & CO., Inc., a Corporation duly organized and existing under the laws of the State of New Jersey, do hereby certify that the following is a true copy of a resolution adopted at a meeting of the Directors of said Corporation held in New York City, New York, on February 26, 2002, duly called in accordance with the provisions of the By-Laws of said Corporation, and at which a quorum of Directors was present: "Special Resolution No. 10 - 2002 ------------------------------- RESOLVED, that the proposed form of Form 10-K Annual Report of the Company for the fiscal year ended December 31, 2001 presented to this meeting is hereby approved with such changes as the proper officers of the Company, with the advice of counsel, deem appropriate; and RESOLVED, that each officer and director who may be required to execute the aforesaid Form 10-K Annual Report or any amendments thereto (whether on behalf of the Company or as an officer or director thereof, or by attesting the seal of the Company, or otherwise) is hereby authorized to execute a power of attorney appointing Celia A. Colbert and Kenneth C. Frazier and each of them, severally, his/her true and lawful attorney or attorneys to execute in his/her name, place and stead (in any such capacity) such Form 10-K Annual Report and any and all amendments thereto and any and all exhibits and other documents necessary or incidental in connection therewith and to file the same with the Securities and Exchange Commission, each of said attorneys to have power to act with or without the others, and to have full power and authority to do and perform in the name and on behalf of each of said officers and directors, or both, as the case may be, every act whatsoever necessary or advisable to be done in the premises as fully and to all intents and purposes as any such officer or director might or could do in person." IN WITNESS WHEREOF, I have hereunto subscribed my signature and affixed the seal of the Corporation this 18th day of March, 2002. [Corporate Seal] /s/ Debra A. Bollwage --------------------------- Debra A. Bollwage Assistant Secretary EX-99 9 dex99.txt LETTER FROM REGISTRANT TO SEC Exhibit 99 Merck & Co., Inc. One Merck Drive P.O. Box 100 Whitehouse Station, NJ 08889-0100 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 March 21, 2002 Ladies and Gentlemen: This will confirm that Merck & Co., Inc. (the "Company") has received a letter from Arthur Andersen LLP ("Arthur Andersen") with respect to Arthur Andersen's audit of the Company's consolidated financial statements for the year ended December 31, 2001. Arthur Andersen's letter certifies that the audit was subject to Arthur Andersen's quality control system for the U.S. accounting and auditing practice to provide reasonable assurance that the engagement was conducted in compliance with professional standards, that there was appropriate continuity of Arthur Andersen personnel working on the audit, availability of national office consultation, and availability of personnel at foreign affiliates of Arthur Andersen to conduct the relevant portions of the audit. Very truly yours, Richard C. Henriques, Jr. Vice President, Controller -----END PRIVACY-ENHANCED MESSAGE-----