-----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, RUb5iqTDoX7V5QzBxZHbrOVhC7f84tURf4x2ArO4Co/Ezds82A+F4oRcQV2CoWyy eCB9ieMTfCQpD4vpcOxA9g== 0000950130-98-001432.txt : 19980326 0000950130-98-001432.hdr.sgml : 19980326 ACCESSION NUMBER: 0000950130-98-001432 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980325 SROS: NYSE 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-K SEC ACT: SEC FILE NUMBER: 001-03305 FILM NUMBER: 98573116 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-K 1 FORM 10-K AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 25, 1998 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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, 1997 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:
TITLE OF EACH NAME OF EACH EXCHANGE CLASS ON WHICH REGISTERED ------------- --------------------- COMMON STOCK NEW YORK AND PHILADELPHIA STOCK EXCHANGES (NO PAR VALUE)
Number of shares of Common Stock (no par value) outstanding as of February 27, 1998: 1,195,985,267. Aggregate market value of Common Stock (no par value) held by non-affiliates on December 31, 1997 based on closing price on February 27, 1998: $152,194,000,000. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X. NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] DOCUMENTS INCORPORATED BY REFERENCE:
DOCUMENT PART OF FORM 10-K -------- ----------------- Annual Report to stockholders for the fiscal Parts I and II year ended December 31, 1997 Proxy Statement for the Annual Meeting of Part III Stockholders to be held April 28, 1998
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS. Merck & Co., Inc. (the "Company") is a global research-driven pharmaceutical company that discovers, develops, manufactures and markets a broad range of human and animal health products, directly and through its joint ventures, and provides pharmaceutical benefit services through Merck-Medco Managed Care, L.L.C. (formerly Medco Containment Services, Inc.) ("Merck-Medco"). The Company's industry segment is the Human and Animal Health Products and Services segment. The following table shows the sales of various categories of the Company's products and services:
($ in millions) 1997 1996 1995 --------- --------- --------- Elevated cholesterol........................ $ 4,672.3 $ 4,055.9 $ 3,211.1 Hypertension/heart failure.................. 3,918.2 3,512.4 3,021.3 Anti-ulcerants.............................. 1,329.6 1,143.6 1,019.8 Antibiotics................................. 774.9 822.3 848.3 Ophthalmologicals........................... 740.0 693.1 570.6 Vaccines/biologicals........................ 733.6 586.8 529.9 Human immunodeficiency virus ("HIV")........ 581.7 187.8 -- Osteoporosis................................ 532.1 281.8 45.2 Animal health/crop protection............... 550.0 1,044.1 1,041.9 Other Merck products........................ 364.2 342.9 675.8 Merck-Medco................................. 9,440.3 7,158.0 5,717.2 --------- --------- --------- Total..................................... $23,636.9 $19,828.7 $16,681.1 ========= ========= =========
Human health products include therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. Among these are elevated cholesterol products, which include Zocor (simvastatin) and Mevacor (lovastatin); hypertension/heart failure products which include Vasotec (enalapril maleate), the largest-selling product among this group, Cozaar (losartan potassium), Hyzaar (losartan potassium and hydrochlorothiazide), Prinivil (lisinopril) and Vaseretic (enalapril maleate and hydrochlorothiazide); anti-ulcerants, of which Pepcid (famotidine) is the largest-selling; antibiotics, of which Primaxin (imipenem and cilastatin sodium) and Noroxin (norfloxacin) are the largest-selling; ophthalmologicals, of which Timoptic (timolol maleate), Timoptic-XE (timolol maleate ophthalmic gel forming solution) and Trusopt (dorzolamide hydrochloride) are the largest- selling; vaccines/biologicals, of which Recombivax HB (hepatitis B vaccine [recombinant]), M-M-R II (measles, mumps and rubella virus vaccine live) and Varivax (varicella virus vaccine live [Oka/Merck]), a live virus vaccine for the prevention of chickenpox, are the largest-selling; human immunodeficiency virus, which is comprised of Crixivan (indinavir sulfate), a protease inhibitor for the treatment of human immunodeficiency viral infection in adults, which was launched in the United States in 1996; and osteoporosis, which is comprised of Fosamax (alendronate sodium), for treatment and prevention in postmenopausal women. Animal health products include medicinals used to control and alleviate disease in livestock, small animals and poultry. Crop protection includes products for the control of crop pests and fungal disease. In July 1997, the Company sold its crop protection business to Novartis. In August 1997, the Company and Rhone-Poulenc combined their animal health and poultry genetics businesses to form Merial Limited ("Merial"). Amounts for 1997 reflect sales for these businesses prior to the completion of these transactions. Other Merck products include sales of other human pharmaceuticals, continuing sales to divested businesses and, beginning in 1997, supply sales to the Merial joint venture. Also included in this category are rebates and discounts on Company pharmaceutical products. 2 Merck-Medco primarily includes Merck-Medco sales of non-Merck products and Merck-Medco pharmaceutical benefit services, principally managed prescription drug programs and programs to help manage patient health. In 1997, the U.S. Food and Drug Administration ("FDA") cleared Fosamax for two new indications in postmenopausal women: prevention of fractures in those with osteoporosis and prevention of osteoporosis in those at risk for the disease. In October 1997, the FDA approved an expanded indication for Zocor to include the lowering of triglycerides in patients with elevated cholesterol levels. In November 1997, Cozaar received regulatory approval for a new heart failure indication in Denmark and Finland, and approval of this indication is pending in other foreign countries. On December 19, 1997, the FDA cleared Propecia (finasteride) for marketing in the United States for treatment of male pattern hair loss, for use in men only. In January 1998, Mexico became the first country to grant marketing clearance to Maxalt (rizatriptan benzoate), a new oral anti- migraine treatment. On February 25, 1998, the Netherlands became the first European country to approve Maxalt, and other regulatory approvals are pending worldwide, including in the United States where the Company filed a New Drug Application ("NDA") with the FDA on June 30, 1997. On February 20, 1998, the FDA cleared Singulair (montelukast sodium), a once-a-day oral leukotriene D4 receptor antagonist, for marketing in the United States for the prevention and chronic treatment of asthma in adults and children aged six and above. On March 5, 1998, the FDA granted traditional approval for Crixivan in combination with antiretroviral agents for the treatment of HIV infection (in 1996, the FDA granted an accelerated approval for Crixivan for treatment of HIV Infection). In 1997, the Company acquired Istituto Gentili S.p.A., a privately-held Italian pharmaceutical company which owned the intellectual property rights for alendronate, which is marketed in the United States by the Company as Fosamax. Divestitures--In 1995, the Company completed the sale of its specialty chemicals businesses, with the sales of Calgon Vestal Laboratories to Bristol- Myers Squibb for $261.5 million and Kelco to Monsanto Company for $1.075 billion. In October 1995, the Company sold Medco Behavioral Care Corporation ("MBC"), a managed mental health care service business which was acquired as part of Merck-Medco, to MBC management and Kohlberg Kravis Roberts & Co. for $340.0 million. In July 1997, the Company sold its crop protection business to Novartis for $910.0 million. The decision to divest these businesses, which were not significant to the Company's financial position, liquidity or results of operations, reflects the Company's intention to focus its resources more fully on its core human health and pharmaceutical benefit services businesses. Strategic Alliances--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., in which the Company and Astra each own a 50% share. The joint venture, formed in November 1994, develops and markets most of Astra's new prescription medicines in the United States. Joint venture sales consist primarily of 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 December 1996, the FDA cleared Prilosec for use as initial therapy in the treatment of heartburn and other symptoms associated with gastroesophageal reflux disease. In 1989, the Company formed a joint venture with Johnson & Johnson to develop, market and manufacture consumer healthcare products in the United States. In April 1995, the joint venture obtained FDA clearance in the United States for marketing Pepcid AC Acid Controller (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 3 Canada in 1996. The European extension currently markets and sells over-the- counter pharmaceutical products in France, Germany, Italy, Spain and the United Kingdom. In 1991, the Company and E.I. du Pont de Nemours and Company ("DuPont") entered into a joint venture to form a worldwide pharmaceutical company for the research, marketing, manufacturing and sale of pharmaceutical and imaging agent products. DuPont contributed its entire worldwide pharmaceutical and radiopharmaceutical imaging agents businesses and is providing administrative services. The Company contributed cash and European marketing rights to several of its prescription medicines and is providing research and development and international industry expertise. In January 1995, the joint venture began co-promotion of the Company's prescription medicines, Prinivil and Prinzide (lisinopril and hydrochlorothiazide), in the United States. Effective April 1992, the Company, through the Merck Vaccine Division, and Connaught Laboratories, Inc. ("Connaught"), recently renamed Pasteur Merieux Connaught USA ("PMC USA"), an affiliate of Pasteur Merieux Connaught ("PMC"), which is part of the Rhone-Poulenc group, 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 addition, the Company and Connaught have agreed that PMC USA will promote selected Company vaccine products. In 1994, the Company, through the Merck Vaccine Division, and PMC formed a joint venture to market human vaccines and to collaborate in the development of new combination vaccines for distribution in the European Union ("EU") and the European Free Trade Association. The Company and PMC contributed, among other things, their European vaccine businesses for equal shares in the joint venture, known as Pasteur Merieux 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 through affiliates in Belgium, Denmark, Italy, Germany, Spain and the United Kingdom, and through distributors throughout the rest of Europe. In 1995, Merck-Medco entered into a joint venture with Wyeth-Ayerst Laboratories, a division of American Home Products Corporation, to develop, market and implement health management programs for certain conditions, including several involving women's health. The joint venture company, Innovative Health Solutions, L.P., introduced its first health management program in 1997. In April 1997, the Company and Chugai Pharmaceutical Co., Ltd. completed arrangements relating to the formation of a joint venture, Chugai MSD Co., Ltd. ("Chugai MSD"), which was created for the development and marketing of self-medication pharmaceutical products in Japan. Products currently marketed by Chugai MSD include the Chugai Ichoyaku line of gastrointestinal products, and Efeel, a famotidine product for stomach pain, nausea, heartburn and indigestion, which is marketed in the United States, Canada and various European markets by the Johnson & Johnson Merck Consumer Pharmaceuticals Co. joint venture under the trademark Pepcid AC. In August 1997, the Company and Rhone-Poulenc combined their respective animal health and poultry genetics businesses to form Merial, a fully- integrated, stand-alone joint venture, equally owned by the Company and Rhone- Poulenc. Merial is the world's largest company dedicated to the discovery, manufacture and marketing of veterinary pharmaceuticals and vaccines. The Company contributed developmental research personnel, sales and marketing activities, and animal health products, as well as its poultry genetics business. Rhone-Poulenc contributed research and development, manufacturing, sales and marketing activities, and animal health products, as well as its poultry genetics business. Competition--The markets in which the Company's business is conducted are highly competitive and, in many cases, highly regulated. Such competition involves an intensive search for technological innovations and 4 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 expanding 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 Clinoril (sulindac) and Aldomet (methyldopa), and slowed the growth of certain other products. See also the description of the effect upon competition of the Drug Price Competition and Patent Term Restoration Act of 1984 ("PTRA") on page 7. It is generally the Company's position to limit individual product price increases of its human health products in the United States to the projected Consumer Price Index ("CPI") plus one percent on an annual basis and to limit the net weighted average price changes for all human health products in the United States to the projected general rate of inflation as measured by the CPI, given stable markets and government policies that foster innovation. 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 healthcare programs. Merck-Medco competes primarily on the basis of its ability to design and administer innovative programs which contain a plan sponsor's overall prescription drug costs, its flexibility in handling integrated prescription drug programs resulting from its ability to dispense drugs through mail service and act as retail prescription drug manager, and the sophistication and quality of its systems, procedures and services. Distribution--The Company sells its human health products to drug wholesalers and retailers, hospitals, clinics, government agencies and managed healthcare 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 healthcare professionals in private practice, group practices and managed-care 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 5 resources earmarked for the review of human drug 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 healthcare system, either nationally or at the state level. 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 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 has 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 bring new drugs to market in this regulatory environment. One type of federal initiative to contain federal healthcare 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 payor is fiscally responsible. This type of payment system and other cost containment systems are now widely used by public and private payors 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. Also, federal and state governments have pursued methods to directly reduce the cost of drugs for which they pay. For example, federal legislation enacted in 1990 requires the Company to pay a specified rebate for medicines reimbursed by Medicaid. Federal legislation enacted in 1992 mandates the payment of rebates similar to the Medicaid rebate for outpatient medicines purchased by certain Public Health Service entities and "disproportionate share" hospitals (hospitals meeting certain criteria). That same law mandates 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. The Omnibus Budget Reconciliation Act of 1993 established a new Federal Vaccines for Children entitlement program, under which the U.S. Centers for Disease Control and Prevention ("CDC") funds and purchases recommended pediatric vaccines at a capped public sector price for the immunization of Medicaid-eligible, uninsured, native American and certain underinsured children. The Company was awarded eight CDC contracts in 1997 for the supply of its pediatric vaccines for this program. The Company encounters similar regulatory and legislative issues in most of the foreign 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. The Company is subject to the jurisdiction of various regulatory agencies and is, therefore, subject to potential administrative actions. Such actions may include product recalls, seizures of products and other civil and criminal sanctions. Under certain circumstances, the Company may deem it advisable to initiate product recalls voluntarily. Although it is difficult to predict the ultimate effect of these activities and legislative, administrative and regulatory 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 healthcare 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 6 pharmacists. These regulations are issued by an administrative body in each state (typically, a pharmacy board), which is empowered to impose sanctions for non-compliance. 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 marketing exclusivity. This is the case with the following major products in the United States: Chibroxin (norfloxacin), Cozaar, Crixivan, Fosamax, Hyzaar, Mefoxin (cefoxitin sodium), Mevacor, Noroxin, PedvaxHIB (Haemophilus b conjugate vaccine), Pepcid, Primaxin, Propecia, Proscar (finasteride), Recombivax HB, Sinemet CR (carbidopa and levodopa), Timoptic- XE, Trusopt, Vaseretic, Vasotec and Zocor. Prinivil is subject to a license to a third party and is not marketed exclusively by the Company. Several products will face expiration of product patents in the United States and other countries commencing December 1999 through the year 2001, including Mevacor (U.S.--2001), Pepcid (U.S.--2000), Prinivil/Prinzide (U.S.-- 2001), Vasotec (U.S.--2000), and Vaseretic (U.S.--2001). In addition, Prilosec, which is sold by the Company's Astra Merck joint venture, will face expiration of a substance patent in 2001. Product patent protection in the United States has expired for the following human and animal pharmaceutical products: Aldomet, Aldoril (methyldopa and hydrochlorothiazide), Amprol (amprolium), Blocadren (timolol maleate), Clinoril, Decadron (dexamethasone), Diuril (chlorothiazide), Dolobid (diflunisal), Flexeril (cyclobenzaprine hydrochloride), HydroDiuril (hydrochlorothiazide), Indocin (indomethacin), Ivomec (ivermectin), ivermectin- containing products, Moduretic (amiloride HCl and hydrochlorothiazide), Sinemet (carbidopa and levodopa), TBZ and Thibenzole (thiabendazole), Timoptic and Timolide (timolol maleate and hydrochlorothiazide). While the expiration of a product patent normally results in the loss of marketing 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 special compositions and formulations; and (iv) marketing exclusivity that may be available under the PTRA. 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. The PTRA in the United States permits restoration of up to five years of the patent term for new products to compensate for patent term lost during the regulatory review process. Additionally, under the PTRA new chemical entities approved after September 24, 1984 receive a period of five years' exclusivity from the date of NDA approval, during which time an "abbreviated NDA" or "paper NDA" may not be submitted to the FDA. Similarly, in the case of non-new chemical entities approved after September 24, 1984, the applications for which include the new data of clinical investigations conducted or sponsored by the applicant essential to approval, no abbreviated NDA or paper NDA may become effective before three years from NDA approval. However, the PTRA has also resulted in a general increase in the number and use of generic products marketed in the United States because the regulatory requirements for approval of generic versions of off-patent pioneer drugs have significantly lessened. Additionally, the PTRA has increased the incentive for abbreviated NDA applicants to challenge the validity of U.S. patents claiming pioneer drugs because such a 7 challenge could result in an earlier effective approval date for the generic version of the pioneer drug and a six-month period during which other generic versions of the pioneer drug could not be marketed. In Japan, a patent term restoration law enacted in 1988 provides, under specific conditions, up to five years of additional patent life for pharmaceuticals. In 1992, the Council of the European Communities published a regulation which created supplementary protection certificates for medicinal products. Thus, as of January 1993, certain medicinal products sold in the EU became eligible for up to five years of market exclusivity after patent expiration. However, this market exclusivity will expire throughout the EU 15 years after the first product approval in the EU. In February 1993, Canada enacted Bill C91 which significantly modified Canadian patent law by eliminating compulsory licensing of pharmaceutical products after December 20, 1991. Thus, patented pharmaceutical products will have market exclusivity for the full 20-year patent life in Canada. The North American Free Trade Agreement was passed in November 1993. Pursuant to the agreement, Mexico improved its patent law to meet international standards and to provide full patent protection to pharmaceutical products. The General Agreement on Tariff and Trade ("GATT") negotiations were concluded in December 1993 and the U.S. implementing legislation was enacted in December 1994. The required changes in U.S. law became effective in June 1995. The GATT implementing law changed the patent term of new inventions to 20 years from the date of patent filing. Existing patents were granted a patent term of the greater of 17 years from issue or 20 years from filing. Patents on several products of the Company obtained longer life as a result. The GATT agreement also requires countries to upgrade their intellectual property laws to meet minimum international standards and to provide full patent protection for pharmaceutical products not later than the end of a ten- year transition period. Many countries are in the process of upgrading their patent laws due to the GATT agreement. The Generic Animal Drug and Patent Term Restoration Act, enacted in November 1988, provides for the extension of term of patents claiming new animal drugs approved after enactment. This legislation also establishes a process by which generic versions of new animal drugs can be approved via an Abbreviated New Animal Drug Application procedure. The provisions of this legislation, in general, are parallel to those found in the PTRA covering human health products. 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 1997 on patent and know-how licenses and other rights amounted to $101.3 million. The Company also paid royalties amounting to $226.9 million in 1997 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 7,540 people are employed in the Company's research activities. Expenditures for the Company's research and development programs were $1,683.7 million in 1997, $1,487.3 million in 1996 and $1,331.4 million in 1995 and will be approximately $1.9 billion in 1998. 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 1988 through 1997 exceeded $11.0 billion with a compound annual growth rate of 12%. Research and development costs incurred by the joint ventures in which the Company participates, totaling $556.6 million in 1997, are not included in the Company's consolidated research and development expenses. 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 and 8 animal health are being carried on in various fields such as bacterial and viral infections, cardiovascular functions, cancer, diabetes, inflammation, ulcer therapy, kidney function, mental health, the nervous system, ophthalmic research, prostate therapy, the respiratory system, bone diseases, endoparasitic and ectoparasitic diseases, companion animal diseases and production improvement. In the development of human and animal 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 pre-clinical tests and controlled clinical evaluation. Before a new drug may be marketed in the United States, recorded data on the experience so gained are included in the NDA or the biological Product License Application to the FDA for the approval required. 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 Aggrastat (tirofiban hydrochloride), an intravenous platelet blocker for the treatment of cardiovascular disorders, for which the Company filed an NDA with the FDA on October 31, 1997; and Cosopt (dorzolamide hydrochloride and timolol maleate), a combination of Timoptic-XE and Trusopt, for the treatment of glaucoma. Other products in development include Vioxx, a new product to treat arthritis pain and inflammation; an injectable antibiotic; an antifungal agent; an oral compound with a novel mechanism of action potentially useful for the treatment of depression and other neuropsychiatric diseases; and certain new vaccines. 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; except that Cozaar and Hyzaar are registered trademarks of E.I. du Pont de Nemours and Company, Wilmington, DE. EMPLOYEES At the end of 1997, the Company had 53,800 employees worldwide, with 33,800 employed in the United States, including Puerto Rico. Approximately 30.5% of the Company's worldwide employees 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 1997, the Company incurred capital expenditures of approximately $41.8 million for environmental protection facilities. Capital expenditures for this purpose are forecasted to exceed $470.0 million for the years 1998 through 2002. In addition, the Company's operating and maintenance expenditures for environmental protection facilities were approximately $89.4 million in 1997. Expenditures for this purpose for the years 1998 through 2002 are forecasted to exceed $569.0 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 $18.8 million in 1997, and are estimated at $123.0 million for the years 1998 through 2002. 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, therefore, management 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. 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," 9 "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. Although it is not possible to predict or identify all such factors, they may include the following: . Generic competition as several products face expiration of product patents in the United States and other countries commencing December 1999 through the year 2001, including Mevacor (U.S. -2001), Pepcid (U.S. - 2000), Prinivil/Prinzide (U.S. - 2001), Vasotec (U.S.- 2000) and Vaseretic (U.S. - 2001). In addition, Prilosec, which is sold by the Company's Astra Merck joint venture will face expiration of a substance patent 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 healthcare reform, pharmaceutical reimbursement and pricing in general. . 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, environmental concerns and patent disputes with 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. . 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. . 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 INFORMATION The Company's operations outside the United States are conducted primarily through subsidiaries. Sales by subsidiaries outside the United States were 27% of sales in 1997, and 30% and 32% of sales in 1996 and 1995, 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 10 expansion of its operations abroad. However, the Company closely reviews its methods of operations and adopts strategies responsive to changing economic and political conditions. The ongoing integration of the European market continues to offer opportunities to businesses operating within the EU, particularly companies such as the Company that maintain a strong research and manufacturing presence within and marketing and sales organizations throughout Europe. The Company is continually seeking to take advantage of these opportunities to improve the efficiency and productivity of its EU operations. In recent years, the Company has been expanding its operations in countries located in Latin America, Eastern Europe and the Asia Pacific region where changes in government policies and economic conditions are making it possible for the Company to earn fair returns. Businesses in these developing areas, while less stable, offer important opportunities for growth over time. Financial information about geographic areas of the Company's business is incorporated by reference to page 49 of the Company's 1997 Annual Report to stockholders. OTHER MATTERS The Company has developed and begun implementing a plan to ensure that its systems are compliant with the requirements to process transactions in the year 2000. Management does not expect the cost of implementing this plan to be material to the Company's financial position, results of operations, liquidity or capital resources. ITEM 2. PROPERTIES. The Company's corporate headquarters is located in Whitehouse Station, New Jersey. The Company's human health business is conducted through divisional or subsidiary headquarters located in Montvale, New Jersey; Rahway, New Jersey; and West Point, Pennsylvania. Principal research facilities for human and animal health products are located in Rahway and West Point. The Company also has production facilities for human and animal health products at nine locations in the United States and Puerto Rico. Branch warehouses are conveniently located to provide services throughout the country. Merck-Medco operates its primary businesses through owned or leased facilities in various locations throughout the United States. 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. Capital expenditures for 1997 were $1,448.8 million compared with $1,196.7 million for 1996. In the United States, these amounted to $1,062.8 million for 1997 and $937.8 million for 1996. Abroad, such expenditures amounted to $386.0 million for 1997 and $258.9 million for 1996. 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. The Company and several other defendants have entered into an agreement to settle the federal class 11 action alleging conspiracy, which represents the single largest group of retail pharmacy claims, pursuant to which the Company is obligated to pay $51.8 million, in four equal annual installments. The court approved an amended version of the settlement agreement which incorporated revisions, unrelated to the monetary payment, to address concerns specified by the court. Following the dismissal of appeals brought by objectors, the approval became final in October 1997. The Company has not engaged in any conspiracy and no admission of wrongdoing has been made or is included in the amended agreement, which was entered into in order to avoid the cost of litigation and the risk of an inaccurate adverse verdict by a jury presented with a case of this size and complexity. While it is not feasible to predict the final outcome of these proceedings, in the opinion of the Company, such proceedings should not ultimately result in any liability which would have a material adverse effect on the financial position, liquidity or results of operations of the Company. 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 material 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. In November 1994, the Company, along with other pharmaceutical manufacturers and pharmaceutical benefits managers ("PBMs"), received a notice from the Federal Trade Commission ("FTC") that the FTC intended to investigate agreements, alliances, activities and acquisitions involving pharmaceutical manufacturers and PBMs. In March 1996, the Company, along with other pharmaceutical manufacturers, received a notice from the FTC that it was conducting an investigation into pricing practices. The Company has cooperated fully with these investigations, and believes that it is currently operating in all material respects in accordance with applicable standards. Accordingly, although the Company cannot predict the outcome of the investigations, it does not believe that either investigation will have a material adverse effect on the financial position, liquidity or results of operations of the Company. 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 material adverse effect on the financial position, liquidity or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. ---------------- 12 EXECUTIVE OFFICERS OF THE REGISTRANT (AS OF MARCH 1, 1998) RAYMOND V. GILMARTIN--Age 56 November, 1994--Chairman of the Board, President and Chief Executive Officer June, 1994--President and Chief Executive Officer Prior to June, 1994, Mr. Gilmartin was President and Chief Executive Officer (1989 to 1992) and Chairman, President and Chief Executive Officer (1992 to 1994) of Becton Dickinson and Company (medical supplies and devices and diagnostic systems). DAVID W. ANSTICE--Age 49 January, 1997--President, Human Health-The Americas--responsible for the Company's prescription drug business in the United States, Canada and Latin America and medical and scientific affairs September, 1994--President, Human Health-U.S./Canada--responsible for the Company's prescription drug business in the United States and Canada, worldwide coordination of marketing policies and medical and scientific affairs January, 1994--President, Human Health-Europe January, 1993--Senior Vice President, Merck Human Health Division-Europe PAUL R. BELL--Age 52 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 and Managing Director- Australia and New Zealand May, 1993--Vice President and Managing Director, Merck Sharp & Dohme (Australia) Pty. Limited (MSD Australia), a wholly-owned subsidiary of the Company September, 1988--Managing Director, MSD Australia CELIA A. COLBERT--Age 41 January, 1997--Vice President, Secretary and Assistant General Counsel November, 1993--Secretary and Assistant General Counsel September, 1993--Secretary February, 1993--Secretary, New Products Committee CAROLINE DORSA--Age 38 January, 1997--Vice President and Treasurer January, 1994--Treasurer July, 1993--Executive Director, Customer Marketing, U. S. Human Health (USHH) June, 1992--Executive Director, Pricing and Strategic Planning, USHH R. GORDON DOUGLAS JR.--Age 63 January, 1994--President, Merck Vaccines April, 1991--President, Merck Vaccine Division KENNETH C. FRAZIER--Age 43 January, 1997--Vice President, Public Affairs and Assistant General Counsel--responsible for public affairs, corporate legal activities and The Merck Company Foundation April, 1994--Vice President, Public Affairs May, 1992--Vice President, General Counsel and Secretary, Astra/Merck Group 13 BERNARD J. KELLEY--Age 56 December, 1993--President, Merck Manufacturing Division (MMD) August, 1993--Senior Vice President, Operations, MMD September, 1991--Senior Vice President, Administration, Planning and Quality, MMD JUDY C. LEWENT--Age 49 January, 1997--Senior Vice President and Chief Financial Officer-- responsible for financial and corporate development functions, internal auditing and the Company's joint venture relationships September, 1994--Senior Vice President and Chief Financial Officer-- responsible for financial and public affairs functions, The Merck Company Foundation, internal auditing and the Company's joint venture relationships December, 1993--Senior Vice President and Chief Financial Officer-- responsible for financial and public affairs functions and The Merck Company Foundation June, 1993--Senior Vice President, Chief Financial Officer and Controller January, 1993--Senior Vice President and Chief Financial Officer PER G. H. LOFBERG--Age 50 December, 1995--President, Merck-Medco Managed Care, L.L.C., a wholly-owned subsidiary of the Company January, 1994--President, Merck-Medco Managed Care Division April, 1991--Senior Executive Vice President, Strategic Planning and Marketing, Medco Containment Services, Inc. MARY M. MCDONALD--Age 53 January, 1997--Senior Vice President and General Counsel--responsible for legal and public affairs functions and The Merck Company Foundation January, 1993--Senior Vice President and General Counsel PETER E. NUGENT--Age 55 September, 1993--Vice President, Controller July, 1989--Vice President, Corporate Taxes EDWARD M. SCOLNICK--Age 57 September, 1994--Executive Vice President, Science and Technology and President, Merck Research Laboratories (MRL)--responsible for worldwide research function and activities of Merck Manufacturing Division (MMD), computer resources and corporate licensing December, 1993--Executive Vice President, Science and Technology and President, MRL--responsible for worldwide research function and activities of MMD and computer resources January, 1993--Executive Vice President and President, MRL--responsible for worldwide research function and activities of Merck AgVet Division and computer resources BENNETT M. SHAPIRO--Age 58 September, 1990--Executive Vice President, Worldwide Basic Research, Merck Research Laboratories DEBORAH K. SMITH--Age 50 June, 1996--Senior Vice President, Human Resources Prior to June, 1996, Ms. Smith held numerous senior human resources positions (1972 to 1995) at Xerox Corporation and most recently was Senior Vice President, Human Resources (1995 to 1996) of Bausch & Lomb Incorporated. 14 PER WOLD-OLSEN--Age 50 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 coordination of marketing policies September, 1994--President, Human Health-Europe--responsible for the Company's European prescription drug business January, 1994--Senior Vice President, Worldwide Human Health Marketing September, 1991--Senior Vice President, Human Health Marketing, Merck Human Health Division All officers listed above serve at the pleasure of the Board of Directors. None of these officers, other than Mr. Gilmartin (who has an employment agreement with the Company which is an exhibit to this Form 10-K) was elected pursuant to any arrangement or understanding between the officer and the Board. There are no family relationships among the officers listed above. 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 37 and 52 of the Company's 1997 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 52 of the Company's 1997 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 28 through 37 of the Company's 1997 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 35 (under the caption "Analysis of Liquidity and Capital Resources") and 36 of the Company's 1997 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, 1997 and 1996, and the related consolidated statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1997 and the report dated January 27, 1998 of Arthur Andersen LLP, independent public accountants, are incorporated by reference to pages 38 through 49 and page 50 of the Company's 1997 Annual Report to stockholders. (b) SUPPLEMENTARY DATA Selected quarterly financial data for 1997 and 1996 are incorporated by reference to the data contained in the Condensed Interim Financial Data table on page 37 of the Company's 1997 Annual Report to stockholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 15 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The required information on directors and nominees is incorporated by reference to pages 2 (beginning with the caption "Election of Directors") through 5 of the Company's Proxy Statement for the Annual Meeting of Stockholders to be held April 28, 1998. Information on executive officers is set forth in Part I of this document on pages 13 through 15. The required information on compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to page 21 (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 28, 1998. ITEM 11. EXECUTIVE COMPENSATION. The information required for this item is incorporated by reference to page 7 (under the caption "Compensation of Directors"), and 9 through 18 of the Company's Proxy Statement for the Annual Meeting of Stockholders to be held April 28, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required for this item is incorporated by reference to page 8 of the Company's Proxy Statement for the Annual Meeting of Stockholders to be held April 28, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required for this item is incorporated by reference to page 7 (under the caption "Relationships with Outside Firms") of the Company's Proxy Statement for the Annual Meeting of Stockholders to be held April 28, 1998. 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 1997 Annual Report to stockholders, as noted on page 16 of this document: Consolidated statement of income for the years ended December 31, 1997, 1996 and 1995 Consolidated statement of retained earnings for the years ended December 31, 1997, 1996 and 1995 Consolidated balance sheet as of December 31, 1997 and 1996 Consolidated statement of cash flows for the years ended December 31, 1997, 1996 and 1995 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. The registrant is primarily an operating company and all of the subsidiaries included in the consolidated financial statements filed are wholly owned except for minority interests in five consolidated subsidiaries. 16 3. EXHIBITS
EXHIBIT NUMBER DESCRIPTION METHOD OF FILING ------- ----------- ---------------- 3(a) -- Restated Certificate of * Incorporation of Merck & Co., Inc. (May 6, 1992) 3(b) -- By-Laws of Merck & Co., Incorporated by reference Inc. (as amended to Form 10-Q Quarterly effective February 25, Report for the period 1997) ended March 31, 1997 10(a) -- Executive Incentive Plan *** (as amended effective February 27, 1996) 10(b) -- Base Salary Deferral Incorporated by reference Plan (as adopted on to Form 10-K Annual October 22, 1996, Report for the fiscal effective January 1, year ended December 31, 1997) 1996 10(c) -- 1987 Incentive Stock * Plan (as amended effective May 6, 1992) 10(d) -- 1991 Incentive Stock ** Plan (as amended effective February 23, 1994) 10(e) -- 1996 Incentive Stock *** Plan (as amended on October 24, 1995, effective January 1, 1996) 10(f) -- Non-Employee Directors Filed with this document Stock Option Plan (as amended and restated February 24, 1998) 10(g) -- 1996 Non-Employee Filed with this document Directors Stock Option Plan (as amended and restated February 24, 1998) 10(h) -- Supplemental Retirement ** Plan (as amended effective January 1, 1995) 10(i) -- Retirement Plan for the Incorporated by reference Directors of Merck & to Form 10-Q Quarterly Co., Inc. (amended and Report for the period restated June 21, 1996) ended June 30, 1996 10(j) -- Plan for Deferred Incorporated by reference Payment of Directors' to Form 10-Q Quarterly Compensation (amended Report for the period and restated June 21, ended June 30, 1996 1996) 10(k) -- Form of Stock Option **** Agreement dated October 14, 1992 between Merck- Medco and Per G.H. Lofberg (together with a list showing the number of options held) 10(l) -- Employment Agreement Incorporated by reference between Per G.H. to Form 10-K Annual Lofberg and Merck-Medco Report of Medco dated April 1, 1993 Containment Services, Inc. for the fiscal year ended June 30, 1993
17
EXHIBIT NUMBER DESCRIPTION METHOD OF FILING ------- ----------- ---------------- 10(m) -- Amendment dated July 27, 1993 *** to Employment Agreement between Per G.H. Lofberg and Merck-Medco dated April 1, 1993 10(n) -- Letter Agreement dated May Incorporated by reference 24, 1996 with respect to the to Form 10-Q Quarterly Employment Agreement between Report for the period Per G.H. Lofberg and Merck- ended June 30, 1996 Medco dated April 1, 1993 and amended July 27, 1993 10(o) -- Employment Agreement between Incorporated by reference Raymond V. Gilmartin and the to Form 10-Q Quarterly Company dated June 9, 1994 Report for the period ended June 30, 1994 12 -- Computation of Ratios of Filed with this document Earnings to Fixed Charges 13 -- 1997 Annual Report to Filed with this document stockholders (only those portions incorporated by reference in this document are deemed "filed") 21 -- List of subsidiaries Filed with this document 24 -- Power of Attorney and Filed with this document Certified Resolution of Board of Directors 27(a) -- Financial Data Schedule Filed with this document 27(b) -- Restated Financial Data Filed with this document Schedule
- -------- * Incorporated by reference to Form 10-K Annual Report for the fiscal year ended December 31, 1992 ** Incorporated by reference to Form 10-K Annual Report for the fiscal year ended December 31, 1994 *** Incorporated by reference to Form 10-K Annual Report for the fiscal year ended December 31, 1995 **** Incorporated by reference to Post Effective Amendment No. 1 to Registration Statement on Form S-8 to Form S-4 Registration Statement (No. 33-50667) 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, 1997, no current reports on Form 8-K were filed. 18 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 20, 1998 RAYMOND V. GILMARTIN By __________________________________ (Chairman of the Board, President and Chief Executive Officer) /s/ CELIA A. COLBERT By __________________________________ 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 20, 1998 President and Chief Executive Officer; Principal Executive Officer; Director Judy C. Lewent Senior Vice President and March 20, 1998 Chief Financial Officer; Principal Financial Officer Peter E. Nugent Vice President, Controller; March 20, 1998 Principal Accounting Officer Derek Birkin Director March 20, 1998 Lawrence A. Bossidy Director March 20, 1998 William G. Bowen Director March 20, 1998 Johnnetta B. Cole Director March 20, 1998 Carolyne K. Davis Director March 20, 1998
19
SIGNATURES TITLE DATE ---------- ----- ---- Lloyd C. Elam Director March 20, 1998 William N. Kelley Director March 20, 1998 Edward M. Scolnick Director March 20, 1998 Samuel O. Thier Director March 20, 1998
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. /s/ CELIA A. COLBERT By __________________________________ Celia A. Colbert (Attorney-in-Fact) 20 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report, incorporated by reference in this Form 10-K, 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 and 333-23295), on Form S-4 (No. 33-50667) and on Form S-3 (Nos. 33-39349, 33- 60322, 33-51785, 33-57421, 333-17045 and 333-36383). It should be noted that we have not audited any financial statements of the Company subsequent to December 31, 1997 or performed any audit procedures subsequent to the date of our report. ARTHUR ANDERSEN LLP New York, New York March 20, 1998 21 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION METHOD OF FILING ------- ----------- ---------------- 3(a) -- Restated Certificate of Incorporation * of Merck & Co., Inc. (May 6, 1992) 3(b) -- By-Laws of Merck & Co., Inc. (as Incorporated by reference amended effective February 25, 1997) to Form 10-Q Quarterly Report for the period ended March 31, 1997 10(a) -- Executive Incentive Plan (as amended *** effective February 27, 1996) 10(b) -- Base Salary Deferral Plan (as adopted Incorporated by reference on October 22, 1996, effective to Form 10-K Annual January 1, 1997) Report for the fiscal year ended December 31, 1996 10(c) -- 1987 Incentive Stock Plan (as amended * effective May 6, 1992) 10(d) -- 1991 Incentive Stock Plan (as amended ** effective February 23, 1994) 10(e) -- 1996 Incentive Stock Plan (as amended *** on October 24, 1995, effective January 1, 1996) 10(f) -- Non-Employee Directors Stock Option Filed with this document Plan (as amended and restated February 24, 1998) 10(g) -- 1996 Non-Employee Directors Stock Filed with this document Option Plan (as amended and restated February 24, 1998) 10(h) -- Supplemental Retirement Plan (as ** amended effective January 1, 1995) 10(i) -- Retirement Plan for the Directors of Incorporated by reference Merck & Co., Inc. (amended and to Form 10-Q Quarterly restated June 21, 1996) Report for the period ended June 30, 1996 10(j) -- Plan for Deferred Payment of Incorporated by reference Directors' Compensation (amended and to Form 10-Q Quarterly restated June 21, 1996) Report for the period ended June 30, 1996 10(k) -- Form of Stock Option Agreement dated **** October 14, 1992 between Merck-Medco and Per G.H. Lofberg (together with a list showing the number of options held) 10(l) -- Employment Agreement between Per G.H. Incorporated by reference Lofberg and Merck-Medco dated April to Form 10-K Annual 1, 1993 Report of Medco Containment Services, Inc. for the fiscal year ended June 30, 1993 10(m) -- Amendment dated July 27, 1993 to *** Employment Agreement between Per G.H. Lofberg and Merck-Medco dated April 1, 1993
EXHIBIT NUMBER DESCRIPTION METHOD OF FILING ------- ----------- ---------------- 10(n) -- Letter Agreement dated May 24, 1996 Incorporated by reference with respect to the Employment to Form 10-Q Quarterly Agreement between Per G.H. Lofberg Report for the period and Merck-Medco dated April 1, 1993 ended June 30, 1996 and amended July 27, 1993 10(o) -- Employment Agreement between Raymond Incorporated by reference V. Gilmartin and the Company dated to Form 10-Q Quarterly June 9, 1994 Report for the period ended June 30, 1994 12 -- Computation of Ratios of Earnings to Filed with this document Fixed Charges 13 -- 1997 Annual Report to stockholders Filed with this document (only those portions incorporated by reference in this document are deemed "filed") 21 -- List of subsidiaries Filed with this document 24 -- Power of Attorney and Certified Filed with this document Resolution of Board of Directors 27(a) -- Financial Data Schedule Filed with this document 27(b) -- Restated Financial Data Schedule Filed with this document
- -------- * Incorporated by reference to Form 10-K Annual Report for the fiscal year ended December 31, 1992 ** Incorporated by reference to Form 10-K Annual Report for the fiscal year ended December 31, 1994 *** Incorporated by reference to Form 10-K Annual Report for the fiscal year ended December 31, 1995 **** Incorporated by reference to Post Effective Amendment No. 1 to Registration Statement on Form S-8 to Form S-4 Registration Statement (No. 33-50667) EX-10.F 2 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EXHIBIT 10(f) MERCK & CO., INC. NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN (AMENDED AND RESTATED FEBRUARY 24, 1998) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN The Non-Employee Directors Stock Option Plan (the "Plan") is established to attract, retain and compensate for service highly qualified individuals who are not current or former employees of Merck & Co., Inc. (the "Company") as members of the Board of Directors and to enable them to increase their ownership in the Company's Common Stock. The Plan will be beneficial to the Company and its stockholders since it will allow these directors to have a greater personal financial stake in the Company through the ownership of Company stock, in addition to underscoring their common interest with stockholders in increasing the value of the Company stock longer term. 1. ELIGIBILITY All members of the Company's Board of Directors who are not current or former employees of the Company or any of its subsidiaries ("Non-Employee Directors") are eligible to participate in this Plan. 2. OPTIONS Only a nonqualified stock option ("NQSO") may be granted under this Plan. 3. SHARES AVAILABLE (a) Number of Shares Available: There are hereby reserved for issuance under this Plan 225,000 shares of Common Stock, no par value, which may be authorized but unissued shares, treasury shares, or shares purchased on the open market. (b) Recapitalization Adjustment: 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, adjustments in the number and kind of shares authorized by this Plan, in the number and kind of shares covered by, and in the option price of, outstanding NQSOs under this Plan shall be made if, and in the same manner as, such adjustments are made to NQSOs issued under the Company's then current Incentive Stock Plan. 4. ANNUAL GRANT OF NONQUALIFIED STOCK OPTIONS Each year on the first Friday following the Company's Annual Meeting of Stockholders, each individual elected, reelected or continuing as a Non- Employee Director shall automatically receive a NQSO covering 1,000 shares of Common Stock. Notwithstanding the foregoing, if, on that first Friday, the General Counsel of the Company determines, in his/her sole discretion, that the Company is in possession of material, undisclosed information about the Company, then the annual grant of NQSOs to Non-Employee Directors shall be suspended until the second day after public dissemination of such information and the price, exercisability date and option period shall then be determined by reference to such later date. If Common Stock is not traded on the New York Stock Exchange ("NYSE") on any date a grant would otherwise be awarded, then the grant shall be made the next day thereafter on which Common Stock is so traded. 5. OPTION PRICE The price of the NQSO shall be either (1) the simple average of the high and low prices at which the Common Stock traded on the date of the grant, as quoted on the NYSE on that date, or (2) the price of the last sale of Common Stock on that date as quoted by the NYSE, whichever is higher, and rounding out such figure to the next higher multiple of 25 cents (unless the figure is already a multiple of 25 cents). 6. OPTION PERIOD A NQSO granted under this Plan shall become exercisable five years after date of grant and shall expire ten years after date of grant ("Option Period"). 2 7. PAYMENT The NQSO price shall be paid in cash in U.S. dollars at the time the NQSO is exercised. 8. CESSATION OF SERVICE Upon cessation of service as a Non-Employee Director (for reasons other than retirement or death), only those NQSOs immediately exercisable at the date of cessation of service shall be exercisable by the grantee. Such NQSOs must be exercised within 90 days of cessation of service (but in no event after the expiration of the Option Period) or they shall be forfeited. 9. RETIREMENT If a grantee ceases service as a Non-Employee Director and is at least age 65 with ten or more years of service or age 70 with five or more years of service, then any of his/her outstanding NQSOs shall continue to become exercisable. All outstanding NQSOs must be exercised by the earlier of (i) sixty months following the date of such cessation of service or (ii) the expiration of the Option Period, or such NQSOs shall be forfeited. 10. DEATH Upon the death of a Non-Employee Director, only those NQSOs which were exercisable on the date of death shall be exercisable by his/her legal representatives or heirs. Such NQSOs must be exercised within 36 months from date of death (but in no event after the expiration of the Option Period) or they shall be forfeited. 11. ADMINISTRATION AND AMENDMENT OF THE PLAN This Plan shall be administered by the Board of Directors of the Company. This Plan may be terminated or amended by the Board of Directors as they deem advisable. However, an amendment revising the price, date of exercisability, option period of, or amount of shares under a NQSO shall not be made more frequently than every six months unless necessary to comply with the Internal Revenue Code of 1986, as amended, or with the Employee Retirement Income Security Act of 1974, as amended. No amendment may revoke or alter in a manner unfavorable to the grantees any NQSOs then outstanding, nor may the Board amend this Plan 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 (the "Act"), or any other requirement of applicable law or regulation. A NQSO may not be granted under this Plan after December 31, 1995 but NQSOs granted prior to that date shall continue to become exercisable and may be exercised according to their terms. 12. TRANSFERABILITY Except as set forth in this section, the NQSOs granted under this Plan shall not be exercisable during the grantee's lifetime by anyone other than the grantee, the grantee's legal guardian or the grantee's legal representative, and shall not be transferable other than by will or by the laws of descent and distribution. NQSOs granted under this Plan shall be transferable during a grantee's lifetime only in accordance with the following provisions: The grantee may only transfer an NQSO while serving as a Non-Employee Director of the Company or within one year of ceasing service as a Non- Employee Director due to retirement as defined in Section 9. The NQSO may be transferred only to the grantee's spouse, children (including adopted children and stepchildren) and grandchildren (collectively, "Family Members"), to one or more trusts for the benefit of Family Members or, at the discretion of the Board of Directors, to one or more partnerships where the grantee and his Family Members are the only partners, in accordance with the rules set forth in this section. The grantee shall not receive any payment or other consideration for such transfer (except that if the transfer is to a partnership, the grantee shall be permitted to receive an interest in the partnership in consideration for the transfer). 3 Any NQSO transferred in accordance with this section shall continue to be subject to the same terms and conditions in the hands of the transferee as were applicable to such NQSO prior to the transfer, except that the grantee's right to transfer such NQSO in accordance with this section shall not apply to the transferee. However, if the transferee is a natural person, upon the transferee's death, the NQSO privileges may be exercised by the legal representatives or beneficiaries of the transferee within the exercise periods otherwise applicable to the NQSO. Any purported transfer of an NQSO under this section shall not be effective unless, prior to such transfer, the grantee has (1) met the minimum stock ownership target then in place for Directors of the Company, (2) notified the Company of the transferee's name and address, the number of shares under the Option to be transferred, and the grant date and exercise price of such shares, and (3) demonstrated, if requested by the Board of Directors, that the proposed transferee qualifies as a permitted transferee under the rules set forth in this section. In addition, the transferee must sign an agreement that he or she is bound by the rules and regulations of the Plans and by the same insider trading restrictions that apply to the grantee. No transfer shall be effective unless the Company has in effect a registration statement filed under the Securities Act of 1933 covering the securities to be acquired by the transferee upon exercise of the NQSO, or the General Counsel of Merck & Co., Inc. has determined that registration of such shares is not necessary. 13. COMPLIANCE WITH SEC REGULATIONS It is the Company's intent that the Plan comply in all respects with Rule 16b-3 of the Act and any regulations promulgated thereunder. If any provision of this Plan is later found not to be in compliance with the Rule, the provision shall be deemed null and void. All grants and exercises of NQSOs under this Plan shall be executed in accordance with the requirements of Section 16 of the Act, as amended, and any regulations promulgated thereunder. 14. MISCELLANEOUS Except as provided in this Plan, no Non-Employee Director shall have any claim or right to be granted a NQSO under this Plan. Neither the Plan nor any action thereunder shall be construed as giving any director any right to be retained in the service of the Company. 15. EFFECTIVE DATE This Plan shall be effective April 28, 1992 or such later date as stockholder approval is obtained. 4 EX-10.G 3 1996 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EXHIBIT 10(g) MERCK & CO., INC. 1996 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN (AMENDED AND RESTATED FEBRUARY 24, 1998) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1996 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN The 1996 Non-Employee Directors Stock Option Plan (the "Plan") is established to attract, retain and compensate for service as members of the Board of Directors of Merck & Co., Inc. (the "Company") highly qualified individuals who are not current or former employees of the Company and to enable them to increase their ownership in the Company's Common Stock. The Plan will be beneficial to the Company and its stockholders since it will allow these directors to have a greater personal financial stake in the Company through the ownership of Company stock, in addition to underscoring their common interest with stockholders in increasing the value of the Company stock longer term. 1. Eligibility All members of the Company's Board of Directors who are not current or former employees of the Company or any of its subsidiaries ("Non-Employee Directors") are eligible to participate in this Plan. 2. Options Only nonqualified stock options ("NQSOs") may be granted under this Plan. 3. Shares Available a) Number of Shares Available: There is hereby reserved for issuance under this Plan 225,000 shares of Merck Common Stock, no par value, which may be authorized but unissued shares, treasury shares, or shares purchased on the open market. b) Recapitalization Adjustment: 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, adjustments in the number and kind of shares authorized by this Plan, in the number and kind of shares covered by, and in the option price of outstanding NQSOs under this Plan shall be made if, and in the same manner as, such adjustments are made to NQSOs issued under the Company's then current Incentive Stock Plan. 4. Annual Grant of Nonqualified Stock Options Each year on the first Friday following the Company's Annual Meeting of Stockholders, each individual elected, reelected or continuing as a Non- Employee Director shall automatically receive NQSOs covering one thousand (1,000) shares of Merck Common Stock. Notwithstanding the foregoing, if, on that first Friday, the General Counsel of the Company determines, in her/his sole discretion, that the Company is in possession of material, undisclosed information about the Company, then the annual grant of NQSOs to Non-Employee Directors shall be suspended until the second day after public dissemination of such information and the price, exercisability date and option period shall then be determined by reference to such later date. If Merck Common Stock is not traded on the New York Stock Exchange on any date a grant would otherwise be awarded, then the grant shall be made the next day thereafter that Merck Common Stock is so traded. 5. Option Price The price of the NQSO shall be the closing price on the date of the grant of the Company's Common Stock as quoted on the composite tape of the New York Stock Exchange. 6. Option Period A NQSO granted under this Plan shall become exercisable five years after date of grant and shall expire ten years after date of grant ("Option Period"). 2 7. Payment The NQSO price shall be paid in cash in U.S. dollars at the time the NQSO is exercised. 8. Cessation of Service Upon cessation of service as a Non-Employee Director (for reasons other than retirement or death), only those NQSOs immediately exercisable at the date of cessation of service shall be exercisable by the grantee. Such NQSOs must be exercised within ninety days of cessation of service (but in no event after the expiration of the Option Period) or they shall be forfeited. 9. Retirement If a grantee ceases service as a Non-Employee Director and is at least age 65 with ten or more years of service or age 70 with five or more years of service, then any of his/her outstanding NQSOs shall continue to become exercisable. All outstanding NQSOs must be exercised by the earlier of (i) sixty months following the date of such cessation of service or (ii) the expiration of the Option Period, or such NQSOs shall be forfeited. 10. Death Upon the death of a grantee, those NQSOs which had been held for at least twelve months at date of death shall become immediately exercisable upon death. The NQSOs which become exercisable upon the date of death and those NQSOs which were exercisable on the date of death may be exercised by the grantee's legal representatives or heirs by the earlier of (i) thirty-six months from the date of death or (ii) the expiration of the Option Period; if not exercised by the earlier of (i) or (ii), such NQSOs shall be forfeited. 11. Administration and Amendment of the Plan This Plan shall be administered by the Board of Directors of Merck & Co., Inc. This Plan may be terminated or amended by the Board of Directors as it deems advisable. However, an amendment revising the price, date of exercisability, option period of, or amount of shares under a NQSO shall not be made more frequently than every six months unless necessary to comply with applicable laws or regulations. No amendment may revoke or alter in a manner unfavorable to the grantees any NQSOs then outstanding, nor may the Board amend this Plan 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 (the "Act"), or any other requirement of applicable law or regulation. A NQSO may not be granted under this Plan after December 31, 2000 but NQSOs granted prior to that date shall continue to become exercisable and may be exercised according to their terms. 12. Transferability Except as set forth in this section, the NQSOs granted under this Plan shall not be exercisable during the grantee's lifetime by anyone other than the grantee, the grantee's legal guardian or the grantee's legal representative, and shall not be transferable other than by will or by the laws of descent and distribution. NQSOs granted under this Plan shall be transferable during a grantee's lifetime only in accordance with the following provisions: The grantee may only transfer an NQSO while serving as a Non-Employee Director of the Company or within one year of ceasing service as a Non- Employee Director due to retirement as defined in Section 9. The NQSO may be transferred only to the grantee's spouse, children (including adopted children and stepchildren) and grandchildren (collectively, "Family Members"), to one or more trusts for the benefit of Family Members or, at the discretion of the Board of Directors, to one or more partnerships where the grantee and his Family Members are the only partners, in accordance with the rules set forth in this section. The grantee shall not receive any payment or other consideration for such transfer (except that if the transfer 3 is to a partnership, the grantee shall be permitted to receive an interest in the partnership in consideration for the transfer). Any NQSO transferred in accordance with this section shall continue to be subject to the same terms and conditions in the hands of the transferee as were applicable to such NQSO prior to the transfer, except that the grantee's right to transfer such NQSO in accordance with this section shall not apply to the transferee. However, if the transferee is a natural person, upon the transferee's death, the NQSO privileges may be exercised by the legal representatives or beneficiaries of the transferee within the exercise periods otherwise applicable to the NQSO. Any purported transfer of an NQSO under this section shall not be effective unless, prior to such transfer, the grantee has (1) met the minimum stock ownership target then in place for Directors of the Company, (2) notified the Company of the transferee's name and address, the number of shares under the Option to be transferred, and the grant date and exercise price of such shares, and (3) demonstrated, if requested by the Board of Directors, that the proposed transferee qualifies as a permitted transferee under the rules set forth in this section. In addition, the transferee must sign an agreement that he or she is bound by the rules and regulations of the Plans and by the same insider trading restrictions that apply to the grantee. No transfer shall be effective unless the Company has in effect a registration statement filed under the Securities Act of 1933 covering the securities to be acquired by the transferee upon exercise of the NQSO, or the General Counsel of Merck & Co., Inc. has determined that registration of such shares is not necessary. 13. Compliance with SEC Regulations It is the Company's intent that the Plan comply in all respects with Rule 16b-3 of the Act, and any regulations promulgated thereunder. If any provision of this Plan is later found not to be in compliance with the Rule, the provision shall be deemed null and void. All grants and exercises of NQSOs under this Plan shall be executed in accordance with the requirements of Section 16 of the Act, as amended, and any regulations promulgated thereunder. 14. Miscellaneous Except as provided in this Plan, no Non-Employee Director shall have any claim or right to be granted a NQSO under this Plan. Neither the Plan nor any action thereunder shall be construed as giving any director any right to be retained in the service of the Company. 15. Effective Date This Plan shall be effective April 23, 1996 or such later date as stockholder approval is obtained. 4 EX-12 4 COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES EXHIBIT 12 MERCK & CO., INC. AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES (In millions except ratio data)
YEARS ENDED DECEMBER 31 ----------------------------------------------------- 1997 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- -------- Income Before Taxes and Cumulative Effect of Accounting Changes...... $6,462.3 $5,540.8 $4,797.2 $4,415.2 $3,102.7 $3,563.6 Add: One-third of rents..... 47.0 41.0 28.1 36.0 35.0 34.0 Interest expense, net.. 98.2 103.2 60.3 96.0 48.0 23.6 Preferred stock dividends............. 49.6 70.0 2.1 -- -- -- -------- -------- -------- -------- -------- -------- Earnings............. $6,657.1 $5,755.0 $4,887.7 $4,547.2 $3,185.7 $3,621.2 ======== ======== ======== ======== ======== ======== One-third of rents....... $ 47.0 $ 41.0 $ 28.1 $ 36.0 $ 35.0 $ 34.0 Interest expense......... 129.5 138.6 98.7 124.4 84.7 72.7 Preferred stock dividends............... 49.6 70.0 2.1 -- -- -- -------- -------- -------- -------- -------- -------- Fixed Charges............ $ 226.1 $ 249.6 $ 128.9 $ 160.4 $ 119.7 $ 106.7 ======== ======== ======== ======== ======== ======== Ratio of Earnings to Fixed Charges........... 29 23 38 28 27 34 ======== ======== ======== ======== ======== ========
For purposes of computing these ratios, "earnings" consist of income before taxes, cumulative effect of accounting changes, 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 5 1997 ANNUAL REPORT ================================================================================ 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) 1997 1996 1995 - -------------------------------------------------------------------------------- Elevated cholesterol .............. $ 4,672.3 $ 4,055.9 $ 3,211.1 Hypertension/heart failure ........ 3,918.2 3,512.4 3,021.3 Anti-ulcerants .................... 1,329.6 1,143.6 1,019.8 Antibiotics ....................... 774.9 822.3 848.3 Ophthalmologicals ................. 740.0 693.1 570.6 Vaccines/biologicals .............. 733.6 586.8 529.9 Human immunodeficiency virus (HIV) ..................... 581.7 187.8 -- Osteoporosis ...................... 532.1 281.8 45.2 Animal health/crop protection ..................... 550.0 1,044.1 1,041.9 Other Merck products .............. 364.2 342.9 675.8 Merck-Medco ....................... 9,440.3 7,158.0 5,717.2 - -------------------------------------------------------------------------------- $23,636.9 $19,828.7 $16,681.1 ================================================================================
Human health products include therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. Among these are elevated cholesterol products, which include Zocor and Mevacor; hypertension/heart failure products which include Vasotec, the largest-selling product among this group, Cozaar, Hyzaar, Prinivil and Vaseretic; anti-ulcerants, of which Pepcid is the largest-selling; antibiotics, of which Primaxin and Noroxin are the largest-selling; ophthalmologicals, of which Timoptic, Timoptic-XE and Trusopt are the largest-selling; vaccines/ biologicals, of which Recombivax HB (hepatitis B vaccine recombinant), M-M-R II, a pediatric vaccine for measles, mumps and rubella, and Varivax, a live virus vaccine for the prevention of chickenpox, are the largest-selling; HIV, comprised of Crixivan, a protease inhibitor for the treatment of human immunodeficiency viral infection in adults, which was launched in the United States in 1996; and osteoporosis, which includes Fosamax, for treatment and prevention in postmenopausal women. Animal health products include medicinals used to control and alleviate disease in livestock, small animals and poultry. Crop protection includes products for the control of crop pests and fungal disease. In July 1997, the Company sold its crop protection business to Novartis. In August 1997, Merck and Rhone-Poulenc combined their animal health and poultry genetics businesses to form Merial Limited (Merial). Amounts for 1997 reflect sales for these businesses prior to the completion of these transactions. Other Merck products include sales of other human pharmaceuticals, continuing sales to divested businesses and, beginning in 1997, supply sales to the Merial joint venture. 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 managed prescription drug programs and programs to manage health and drug utilization. Merck sells its human health products 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's business is conducted are highly competitive and, in many cases, highly regulated. Global efforts toward health care cost containment continue to exert pressure on product pricing and product availability. In the United States, efforts on the part of private and federal employers to slow the increase of health care costs, competitive pressures from other manufacturers and the demand for price discounts from managed care groups have limited the Company's ability to offset the effect of inflation on costs and expenses through price. Outside of the United States, government-mandated cost containment programs have required the Company to similarly limit selling prices. Additionally, government actions, including increased patient co-payments for prescription drugs, incentives for doctors to reduce prescriptions and incentives to prescribe generics, have impacted our sales growth rates. - -------------------------------------------------------------------------------- 28 Merck & Co., Inc. 1997 Annual Report Financial Section It is anticipated that the worldwide trend for cost containment and competitive pricing will continue for the balance of the 1990s and will result in continued pricing pressures. In the United States, legislative bodies are working to expand health care access and reduce the associated costs. The debate on reforms to the health care system will be protracted. Although the Company cannot fully predict the outcome of legislation to accomplish the goals of reform, it is well positioned to respond to evolving market forces resulting from legislative changes to the system. The Company believes that its current policies and strategies will enable it to maintain a strong position in this changing economic environment. Business Strategies Consistent with our strategy to grow through volume, the Company is firmly committed to a policy of constraining price increases, given stable market conditions and government policies that foster innovation. Since 1990, this policy has limited the net weighted average price changes for all human health products in the United States to the projected general rate of inflation as measured by the U.S. Consumer Price Index (CPI) and, since 1993, has further limited price increases on individual products to the projected CPI plus 1% on an annual basis. Since its inception, this policy has yielded a cumulative net price increase that is significantly below the cumulative increase in the general rate of U.S. inflation. 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 agreements 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. The Company expects that these gains will continue to offset inflation at the manufacturing level. Actions under-taken include optimizing plant utilization, implementing lowest-cost processes, improving technology transfer between research and manufacturing, re-engineering core and administrative processes and streamlining the organization. To enhance its competitive position in the fast-growing area of managed care, Merck acquired Medco Containment Services, Inc. in 1993 (renamed Merck-Medco Managed Care). Merck-Medco provides pharmaceutical benefit services in the United States to control prescription drug benefit costs. Merck-Medco manages prescription drug programs through its mail order and retail pharmacy networks, and offers a series of health management programs to manage health and drug utilization, which improve drug therapy, promote better health outcomes and lower the long-term cost of care associated with certain chronic 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. Strategic Alliances 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., in which Merck and Astra each own a 50% share. The joint venture, formed in November 1994, develops and markets most of Astra's new prescription medicines in the United States. Joint venture sales were $2.3 billion for 1997, $1.8 billion for 1996, and $1.3 billion for 1995, consisting primarily of 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 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 product marketed by the joint venture were $483.7 million for 1997, $530.2 million for 1996, and $403.5 million for 1995, consisting primarily of gastrointestinal products including Pepcid AC Acid Controller, a nonprescription formulation of Pepcid, Merck's H2-receptor antagonist, and Mylanta. Pepcid AC continues to lead the highly competitive U.S. acid relief market. In 1991, Merck and E.I. du Pont de Nemours and Company (DuPont) formed an independent, research-driven, worldwide pharmaceutical joint venture, equally owned by each party. DuPont contributed its entire pharmaceutical and radio-pharmaceutical imaging agents businesses, and is providing administrative services. Merck contributed cash and European marketing rights to several of its prescription medicines, and is providing research and development and international industry expertise. Joint venture sales were $1.3 billion for 1997 and 1996, and $1.2 billion for 1995, consisting primarily of cardiovascular, radiopharmaceutical and central nervous system products. In September 1997, the joint venture completed the sale of its generics and multisource business lines, allowing it to focus resources on bringing several potential new pharmaceutical products to market. Sales of the divested business lines included in joint venture sales for 1997 were $65.1 million. In 1994, Merck and Pasteur Merieux Connaught (Pasteur) established a 50% owned joint venture to market vaccines and collaborate in the development of combination vaccines, for distribution in Europe. Joint venture vaccine sales were $581.3 million for 1997, $663.0 million for 1996 and $598.6 million for 1995. In 1996, Merck agreed with Chugai Pharmaceutical Co., Ltd. to form a joint venture to develop and market over-the-counter pharmaceuticals in Japan. The new company, Chugai MSD Co., Ltd., began operations in April 1997 marketing gastrointestinal products. Joint venture sales for 1997 were $18.8 million. - -------------------------------------------------------------------------------- 29 Merck & Co., Inc. 1997 Annual Report Financial Section In August 1997, Merck and Rhone-Poulenc combined their animal health and poultry genetics businesses to form Merial, a fully integrated, stand-alone joint venture, equally owned by each party. Merial is the world's largest company dedicated to the discovery, manufacture and marketing of veterinary pharmaceuticals and vaccines. Merck contributed developmental research personnel, sales and marketing activities, and animal health products, as well as its poultry genetics business. Rhone-Poulenc contributed research and development, manufacturing, sales and marketing activities, and animal health products, as well as its poultry genetics business. This transaction is not expected to have a material impact on comparability of net income. Merial sales for 1997 were $746.3 million. Animal health sales reported in Merck's consolidated sales were $448.3 million prior to August 1. Foreign Operations The Company's operations outside the United States are conducted primarily through subsidiaries. Sales by subsidiaries outside the United States were 27% of sales in 1997, and 30% and 32% of sales in 1996 and 1995, respectively. [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Distribution of 1997 Foreign Sales ----------------------------------
Splits ------ Europe 56% Asia/Pacific 27% Other Foreign 17% ---- 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. The ongoing integration of the European market continues to offer opportunities to businesses operating within the European Union (EU), particularly companies such as Merck that maintain a strong research and manufacturing presence within Europe and marketing and sales organizations throughout. Merck is continually seeking to take advantage of these opportunities to improve the efficiency and productivity of its EU operations. In recent years, Merck has been expanding its operations in countries located in Latin America, 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 less stable, offer important opportunities for growth over time. Operating Results Total sales for 1997 increased 19% from 1996. The effect of a strengthening U.S. dollar against foreign currencies decreased 1997 sales growth by two percentage points. Sales for 1997 were affected by the formation of the Merial joint venture in August 1997 and divestiture of the crop protection business in July 1997. Adjusting for these effects, sales grew 22% in 1997 in total and 19% on a volume basis. Total sales for 1996 increased 19% from 1995. Foreign exchange reduced 1996 sales growth by one percentage point. Sales growth for 1996 was affected by the divestitures of Medco Behavioral Care (MBC) and Kelco in 1995. Adjusting for these effects, 1996 sales grew 21% in total and on a volume basis. [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Components of Human Health Sales Growth ---------------------------------------
Total Sales Sales Volume Net Pricing Foreign Growth Growth Actions Exchange Rates ----------- ------------ ----------- -------------- 1993 6.8% 8.6% -0.1% -1.7% 1994 8.4% 7.9% -0.4% 0.9% 1995 13.0% 10.9% -0.5% 2.6% 1996 17.7% 19.2% 0.4% -1.9% 1997 15.0% 17.6% 0.3% -2.9%
- -------------------------------------------------------------------------------- This chart illustrates the effects of price, volume and exchange on sales of Merck human health products. Growth for 1995 and 1994 has been adjusted for the effect of the Astra Merck joint venture formation. The human health business has grown predominantly through sales volume over the last five years. Price had essentially no effect on sales growth, while the effect of exchange has varied over the same period. In 1997, sales of Merck human health products grew 15%. Foreign exchange rates had a three percentage point unfavorable effect on sales growth, while price changes had essentially no effect. 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 17%, while foreign sales grew 13% including a six percentage point unfavorable effect from exchange. The unit volume growth from sales of Merck human health products was paced by established products, including Zocor, Vasotec, Vaseretic, Prinivil, Pepcid, Recombivax HB and M-M-R II, newer products, including Crixivan, Cozaar, Hyzaar, Fosamax, Trusopt, Varivax and Vaqta, and the 1997 launch of Comvax in the United States. - -------------------------------------------------------------------------------- 30 Merck & Co., Inc. 1997 Annual Report Financial Section Together, Merck's cholesterol-lowering agents, Zocor and Mevacor, continued their outstanding performance, holding more than 40% of the worldwide "statin" market. The cholesterol-lowering market continues to grow at a rate of more than 20% a year in major markets, driven primarily by growth of more than 30% annually in the statin category, yet today, even in the key U.S. market, only about one-third of potential patients are receiving treatment. In 1997, Zocor again established a new Merck product sales record and maintains the leading share of total prescriptions worldwide due to high physician awareness of the results of the landmark Scandinavian Simvastatin Survival Study (4S). The 4S study showed Zocor saves lives and prevents heart attacks in people with high cholesterol and coronary heart disease. In October 1997, the U.S. Food and Drug Administration (FDA) approved an expanded indication for Zocor to include the lowering of triglycerides in patients with elevated cholesterol levels. Zocor is available on more than 90% of managed care formularies in the United States, reflecting its standing as the only therapy in the statin class indicated to significantly reduce LDL cholesterol (the so-called bad cholesterol) and triglycerides, and save lives in people with high cholesterol and coronary heart disease. Vasotec and Prinivil, Merck's angiotensin converting enzyme (ACE) inhibitors for high blood pressure, heart failure and other cardiovascular disorders, continue to be among the most widely prescribed medicines in their class. Together, they hold about 40% of the U.S. ACE inhibitor market and are widely available on managed care formularies. Sales volumes for Vasotec continued to grow in 1997. Vasotec is the only ACE inhibitor indicated for the treatment of high blood pressure, heart failure and asymptomatic left ventricular dysfunction, and to reduce deaths due to symptomatic heart failure regardless of the underlying cause. Vaseretic, a combination of Vasotec and hydrochlorothiazide, prescribed for the treatment of high blood pressure, continued solid volume growth. Prinivil, which also treats high blood pressure and acts as an adjunctive therapy for treatment of heart failure, recorded strong growth as well. Pepcid, an H2-receptor antagonist for treatment of duodenal ulcers and the short-term treatment of gastric ulcers and gastroesophageal reflux disease (GERD), continued its strong growth in 1997, despite growing competition. It is the most widely used and fastest-growing acid suppressor in hospitals. The FDA is currently reviewing the Company's application to allow prescription-strength Pepcid for use in children. Merck's established vaccines, Recombivax HB, for hepatitis B infection, and M-M-R II, the most widely used combination vaccine for measles, mumps and rubella, recorded strong growth in 1997. Contributing to the growth of Recombivax HB was increased public awareness of hepatitis B and legislation in some states requiring immunization for children entering school. Crixivan, Merck's protease inhibitor for the treatment of HIV infection in adults, remains the world's most widely prescribed protease inhibitor. Cleared for marketing in more than 80 countries, it now holds about one-half of the U.S. market. Crixivan can be taken in combination with other anti-HIV therapies, or alone by adults with HIV infection when single therapy is warranted. Research presented in September 1997 showed that most patients taking Crixivan in triple therapy continued to have HIV levels suppressed below the level of detection for almost two years. For Crixivan taken in triple therapy, preliminary results from another study showed that a more convenient, twice-a-day regimen produced reductions in viral load comparable to those seen when taken three times a day. Other studies are being conducted to evaluate early- and late-stage disease treatment, and in other patient populations, such as children. Cozaar and Hyzaar (a combination of Cozaar and the diuretic hydrochlorothiazide), Merck's newest antihypertensive drugs, were the first in a new class of drugs that block a potent hormone called angiotensin II, resulting in gradual, smooth, 24-hour blood pressure reduction. Ongoing research has reinforced and expanded the medical value of these products, which have been adopted faster than any antihypertensive product launched this decade. Cozaar has been approved in 74 countries and continues to set new records for rapid adoption, based on its excellent tolerability and proven efficacy in treating high blood pressure. A recent major study demonstrated that Cozaar reduced mortality and prolonged life in heart failure patients. In November 1997, Cozaar received regulatory approval for a new heart failure indication in Denmark and Finland, and approval of this indication is pending in other foreign countries. Fosamax, Merck's nonhormonal medicine for the treatment and prevention of osteoporosis in postmenopausal women, continued to record significant growth in 1997. It is the only nonhormonal medicine proven to reduce fractures of the hip, spine and wrist, and is among the most successful new products launched in Merck history. Research continues to show the importance of Fosamax in treating and preventing postmenopausal osteoporosis and fractures due to the bone-thinning disease. Data from the 34-country Fosamax International Trial (FOSIT), released in September 1997, showed that among women in a general community population, Fosamax reduced nonspinal fractures by one-half after only one year. In 1997, the FDA cleared Fosamax for two new indications in postmenopausal women: prevention of fractures in those with osteoporosis (Fosamax 10 mg) and prevention of osteoporosis in those at risk for the disease (Fosamax 5 mg), doubling the number of American women who could benefit from its use. Since its introduction in 1995, Fosamax has been prescribed for more than two million women worldwide, yet this represents only a fraction of its potential population. Sales of Trusopt, the first carbonic anhydrase inhibitor made in a topical (eyedrop) formulation, continued its strong growth in 1997. It continues to be one of the most widely prescribed anti-glaucoma medicines in the world. Trusopt is indicated for the treatment of elevated intraocular pressure in patients with ocular hypertension or open-angle glaucoma, and has been proven effective in the consistent lowering of intraocular pressure in most patients. - -------------------------------------------------------------------------------- 31 Merck & Co., Inc. 1997 Annual Report Financial Section Varivax, a live-virus vaccine for protection against chickenpox in healthy individuals age 12 months and older who have not had the disease, recorded strong growth in 1997. It is the first and only chickenpox vaccine available in the United States and is the most rapidly accepted Merck vaccine since the Company first introduced its measles vaccine in 1963. Vaqta, Merck's new vaccine for the prevention of hepatitis A in persons age two years and older, which the FDA approved in April 1996, continued its strong growth in 1997. Hepatitis A is a highly contagious virus, spread through contaminated food or water, which attacks the liver and can cause victims to be ill for several weeks. Market share for Vaqta continued to expand in 1997 due to promotion by Merck's new vaccine sales force and contracts with the U.S. Department of Defense and the Centers for Disease Control and Prevention. In January 1997, Merck launched its newest vaccine, Comvax, a combination of the antigenic components of two existing Merck vaccines, PedvaxHIB and Recombivax HB. Comvax is the first combination product indicated for the vaccination of infants, age two months and older, against both invasive Haemophilus influenzae type b disease and hepatitis B virus. The combination reduces the number of injections required to immunize children against the two infections. Proscar provides long-term disease management of symptomatic benign prostate enlargement, a disease that affects more than 50% of men age 60 and older. The result of the Proscar Long-Term Efficacy and Safety Study (PLESS), the largest and longest study ever conducted in benign prostatic hyperplasia involving more than 3,000 men, showed that in men with urinary symptoms and enlarged prostates, Proscar reduced the risk of acute urinary retention by 57% and the need for prostate surgery by 55%. It is the only medication proven to prevent these consequences of prostate enlargement. A group of longer-established products, including Noroxin, Mefoxin, Moduretic and Aldomet, while still contributing to 1997 revenues, continued to decline in unit volume due to generic and therapeutic competition. In 1996, sales of Merck human health products grew 18%. Foreign exchange rates had a two percentage point unfavorable effect on sales growth, while price changes had essentially no effect. Domestic sales growth was 21%, while foreign sales grew 14% including a four percentage point unfavorable effect from exchange. The unit volume growth from sales of Merck human health products was paced by Zocor, Vasotec, Vaseretic, Prinivil, Pepcid and Proscar, coupled with the 1995 product introductions of Cozaar, Hyzaar, Fosamax, Trusopt and Varivax, and the 1996 launches of Crixivan and Vaqta. Sales of animal health products were lower in 1997 due to competition, a weak cattle market and the contribution of this business to the Merial joint venture formed with Rhone-Poulenc in August 1997. Sales of crop protection products were also lower, due to the divestiture of this business in July 1997. Merck-Medco sales contributed significantly to 1997 and 1996 sales growth. Merck-Medco currently manages pharmaceutical benefits for more than 51 million plan participants, up five percent over 1996. As a result, the number of prescriptions managed by Merck-Medco grew to 291 million in 1997, up from 235 million prescriptions in 1996. This growth was fueled by major new accounts gained in all market segments - employers, managed care organizations, Blue Cross/Blue Shield plans and government clients.
Costs, Expenses and Other - -------------------------------------------------------------------------------- ($ in millions) 1997 Change 1996 Change 1995 - -------------------------------------------------------------------------------- Materials and production ....... $11,790.3 +27% $ 9,319.2 +25% $ 7,456.3 Marketing and administrative ... 4,299.2 +12% 3,841.3 +16% 3,297.8 Research and development ...... 1,683.7 +13% 1,487.3 +12% 1,331.4 Equity income from affiliates .. (727.9) +21% (600.7) +73% (346.3) Gains on sales of businesses .... (213.4) * -- * (682.9) Other (income) expense, net ..... 342.7 +42% 240.8 -71% 827.6 - -------------------------------------------------------------------------------- $17,174.6 +20% $14,287.9 +20% $11,883.9 ================================================================================
* Over 100% In 1997, materials and production costs increased 27%. Adjusting for the effects of the 1997 formation of the Merial joint venture and sale of the crop protection business, materials and production costs increased 28%, compared to a 22% sales growth rate on the same basis. Adjusting for the aforementioned effects, and excluding exchange and inflation, these costs increased 21%, compared to a 19% unit sales volume gain in 1997. The higher growth rate in these costs over the sales volume growth is primarily attributable to growth in Merck-Medco's historically lower-margin business. This increase is partially offset by cost controls and productivity improvements from the Company's goal to reduce manufacturing costs. In 1996, materials and production costs increased 25%. Adjusting for the effects of the 1995 sales of MBC and Kelco, materials and production costs increased 29%, compared to a 21% sales growth rate on the same basis. Adjusting for the aforementioned effects, and excluding exchange and inflation, these costs increased 23%, compared to a 21% unit sales volume gain in 1996. Marketing and administrative expenses increased 12% in 1997. Adjusting for the effects of the 1997 formation of the Merial joint venture and sale of the crop protection business, marketing and administrative expenses increased 15%. Adjusting for the aforementioned effects, and excluding exchange and inflation, these expenses increased 16%. The increase in marketing and administrative expenses in 1997 primarily reflects the commitment of resources to support 1995 and 1996 product launches, pre-launch spending for anticipated 1998 launches, the expansion of sales forces in the United States and Europe, and investments in health management programs and information technology initiatives by - -------------------------------------------------------------------------------- 32 Merck & Co., Inc. 1997 Annual Report Financial Section Merck-Medco, which are setting new standards for prescription drug care and the management of major diseases. Marketing and administrative expenses increased 16% in 1996. Adjusting for the effects of the 1995 sales of MBC and Kelco, marketing and administrative expenses increased 18%. Adjusting for the aforementioned effects, and excluding exchange and inflation, these expenses increased 16%, primarily due to the commitment of resources to support 1995 and 1996 product launches, spending to support Merck-Medco's health management programs and investments in information technology. Marketing and administrative expenses as a percentage of sales were 18% in 1997, 19% in 1996 and 20% in 1995. The improvement in these ratios reflects the lower marketing and administrative costs relative to sales of Merck-Medco, continuing cost controls and productivity improvements. Research and development expenses increased 13% in 1997. Adjusting for the effects of the 1997 formation of the Merial joint venture and sale of the crop protection business, these expenses increased 15%. Adjusting for the aforementioned effects, and excluding exchange and inflation, these expenses increased 13%. Research and development expenses increased 12% in 1996. Excluding the effects of exchange and inflation, these expenses increased 9%. Not included in consolidated research and development expenses are costs incurred by the Company's joint ventures, which totaled $556.6 million in 1997, $440.7 million in 1996 and $376.9 million in 1995. Research and development in the pharmaceutical industry is inherently a long-term process. The data below show an unbroken trend of year-to-year increases in research and development spending. For the period 1988 to 1997, the compounded annual growth rate in research and development was 12%. Research and development expenses for 1998 are estimated to be almost $1.9 billion. [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] R&D Expenditures ---------------- ($ in millions)
Year Total R&D Expenditures - ---- ---------------------- 1988 $ 669 1989 $ 751 1990 $ 854 1991 $ 988 1992 $ 1,112 1993 $ 1,173 1994 $ 1,231 1995 $ 1,331 1996 $ 1,487 1997 $ 1,684
- -------------------------------------------------------------------------------- This chart excludes research and development costs incurred by the Company's joint ventures, which were $556.6 million in 1997. Equity income from affiliates reflects an improving trend resulting from the formation of the Merial joint venture with Rhone-Poulenc and favorable performance of our joint ventures with Astra and DuPont. In the third quarter of 1997, the Company recorded a gain of $213.4 million on the sale of its crop protection business. (See Note 3 to the consolidated financial statements for further information.) This gain was substantially offset by $207.3 million of nonrecurring charges included in Other (income) expense, net. These charges consist of $127.3 million for loss on sale of assets, $50.0 million for endowment of The Merck Company Foundation and $30.0 million for environmental costs. In 1995, the Company recorded gains of $682.9 million on the sales of Calgon Vestal Laboratories and Kelco. (See Note 3 to the consolidated financial statements for further information.) These gains were substantially offset by $675.5 million of nonrecurring charges included in Other (income) expense, net. These charges consist of $278.5 million for losses on sales of assets, $175.0 million for restructuring actions, $161.2 million for endowment of The Merck Company Foundation and $60.8 million for settlement of claims. The restructuring actions involve manufacturing facility consolidation, rationalization and work-force reduction in Europe and the United States. In 1997, other expense, net, increased primarily due to $207.3 million of nonrecurring charges, which substantially offset the gain on the sale of the crop protection business, and lower exchange gains resulting from translation of the Company's balance sheet. This increase was partially offset by realized gains on security sales, higher interest income, lower interest expense and lower income allocable to minority interests. In 1996, other expense, net, decreased primarily due to $675.5 million of nonrecurring charges recorded in 1995, which substantially offset the gains on the sales of Calgon Vestal Laboratories and Kelco. Also contributing to the year-to-year improvement were higher interest income and favorable exchange resulting from the translation of the Company's balance sheet. This effect was partially offset by higher interest expense and higher income allocable to minority interests. (See Note 15 to the consolidated financial statements for further information.)
Earnings - -------------------------------------------------------------------------------- ($ in millions except per share amounts) 1997 Change 1996 Change 1995 - -------------------------------------------------------------------------------- Net income ......... $4,614.1 +19% $3,881.3 +16% $3,335.2 As a % of sales .. 19.5% 19.6% 20.0% As a % of average total assets ... 18.4% 16.1% 14.6% Earnings per common share ..... $3.83 +20% $3.20 +19% $2.70 ================================================================================
Net income was up 19% in 1997 and 16% in 1996. Net income as a percentage of sales was 19.5% in 1997, compared to 19.6% in 1996 and 20.0% in 1995. The decline in the ratio - -------------------------------------------------------------------------------- 33 Merck & Co., Inc. 1997 Annual Report Financial Section from 1995 to 1997 is principally due to the higher growth rate in Medco's historically lower-margin business and the commitment of resources to the Company's recent and anticipated product launches, offset, in part, by the growth in Merck's human health business and manufacturing, marketing, and general and administrative productivity improvements. Foreign currency exchange had a two percentage point unfavorable effect as compared to essentially no effect in 1996. The Company's effective income tax rate in 1997 was 28.6%, compared to 30.0% in 1996 and 30.5% in 1995. The lower effective tax rate in 1997 and 1996 primarily relates to joint ventures, which also affected pretax income growth. Specifically, pretax income growth was reduced by the Company's share of the increase in taxes related to the Astra Merck joint venture, the European vaccine joint venture with Pasteur and, in 1997, the international operations of the Merial joint venture. Prior to the formation of these joint ventures, taxes related to these businesses were included in the Company's tax provision. Thus, the impact on pretax growth is offset by a corresponding reduction in the Company's tax rate, resulting in no effect on net income growth. Net income as a percentage of average total assets was 18.4% in 1997, 16.1% in 1996 and 14.6% in 1995, with the improvements attributed to the continued growth in operations and the Company's asset management efforts. Earnings per common share grew 20% in 1997, compared to 19% in 1996. In 1997 and 1996, earnings per common share increased at a faster rate than net income as a result of treasury stock purchases. [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Distribution Of 1997 Sales And Equity Income --------------------------------------------
Splits ------ Raw Materials and Production Costs 48% Operating Expenses 26% Taxes and Net Interest 7% Dividends 9% Retained Earnings 10% ---- 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 1997, the Company incurred capital expenditures of approximately $41.8 million for environmental protection facilities. Capital expenditures for this purpose are forecasted to exceed $470.0 million for the years 1998 through 2002. In addition, the Company's operating and maintenance expenditures for pollution control were approximately $89.4 million in 1997. Expenditures for this purpose for the years 1998 through 2002 are forecasted to exceed $569.0 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. While it is not feasible to predict or determine the outcome of these proceedings, management does not believe that they should result in a materially adverse effect on the Company's financial position, results of operations, liquidity or capital resources. The Company is also remediating environmental contamination resulting from past industrial activity at certain of its sites. The Company has taken an active role in identifying and providing for these costs; and, therefore, management 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. Expenditures for remediation and environmental liabilities were $18.8 million in 1997, and are estimated at $123.0 million for the years 1998 through 2002. These amounts do not consider potential recoveries from insurers or other parties. In 1994, the Company, along with other pharmaceutical manufacturers and pharmaceutical benefits managers (PBMs), received a notice from the Federal Trade Commission (FTC) that it intended to investigate agreements, alliances, activities and acquisitions involving pharmaceutical manufacturers and PBMs. In 1996, the Company, along with other pharmaceutical manufacturers, received a notice from the FTC that it was conducting an investigation into pricing practices. The Company has cooperated fully with the FTC in each of these investigations, and believes that it is currently operating in all material respects in accordance with applicable standards. While it is not feasible to predict or determine the outcome of either of these investigations, 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 has developed and begun implementing a plan to ensure that its systems are compliant with the requirements to process transactions in the Year 2000. Management does not expect the cost of implementing this plan to be material to the Company's financial position, results of operations, liquidity or capital resources. Capital Expenditures Capital expenditures were $1.4 billion in 1997 and $1.2 billion in 1996. Expenditures in the United States were $1.1 billion in 1997 and $.9 billion in 1996. Expenditures during 1997 included $669.9 million for production facilities, $223.9 million for research and development facilities, $41.8 million for environmental projects, and $513.2 million for administrative, safety and general site projects. Not included above are capital expenditures incurred by the Company's joint ventures, which totaled $187.7 million in 1997, including $54.4 million for research and development facilities. Capital expenditures approved but not yet spent at December 31, 1997 were $1.6 billion. Capital expenditures for 1998 are estimated to be $2.0 billion. - -------------------------------------------------------------------------------- 34 Merck & Co., Inc. 1997 Annual Report Financial Section Depreciation was $602.4 million in 1997 and $521.7 million in 1996, of which $437.3 million and $369.0 million, respectively, applied to locations in the United States. [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Capital Expenditures -------------------- ($ in millions)
Year Total Capital Expenditures - ---- -------------------------- 1988 $ 373 1989 $ 433 1990 $ 671 1991 $ 1,042 1992 $ 1,067 1993 $ 1,013 1994 $ 1,009 1995 $ 1,005 1996 $ 1,197 1997 $ 1,449
- -------------------------------------------------------------------------------- This chart excludes capital expenditures incurred by the Company's joint ventures, which were $187.7 million in 1997. 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 1997, pretax cash flows from operations were $7.6 billion, reflecting the continued growth of the Company's earnings. This cash was used to fund capital expenditures of $1.4 billion, to pay Company dividends of $2.0 billion and to partially fund the purchase of treasury shares. At December 31, 1997, the total of worldwide cash and investments was $4.8 billion, including $2.3 billion in cash, cash equivalents and short-term investments, and $2.5 billion of long-term investments. The above totals include $.9 billion in cash and investments held by Banyu Pharmaceutical Co., Ltd., in which the Company has a 50.87% ownership interest.
Selected Data - -------------------------------------------------------------------------------- ($ in millions) 1997 1996 1995 - -------------------------------------------------------------------------------- Working capital .................... $2,644.4 $2,897.4 $3,870.2 Total debt to total liabilities and equity ....................... 8.7% 7.3% 7.5% Cash provided by operations to total debt .................... 2.8:1 3.1:1 1.6:1 ================================================================================
Working capital levels are more than adequate to meet the operating requirements of the Company. Working capital in 1995 reflects proceeds from the sales of the Company's specialty chemical businesses and the issuance of $1.0 billion par value of variable rate nonconvertible Preferred Equity Certificates. These proceeds were used to fund a portion of the Company's stock repurchase program and for other general corporate purposes. From 1995 to 1997, debt levels were affected by purchases of treasury shares and other operating requirements, resulting in periodic reductions in working capital and increases in the ratio of total debt to total liabilities and equity. The favorable ratio of cash provided by operations to total debt is an indication of the ability of the Company to cover its debt obligations. In February 1997, the Board of Directors approved purchases of up to $5.0 billion of Merck shares. From 1995 to 1997, the Company purchased $6.6 billion of treasury shares under the programs authorized in 1994, 1995 and 1997. The 1994 program was completed in 1996, and the 1995 program was completed in 1997. Through December 31, 1997, $1.7 billion of shares had been purchased under the 1997 program. For the period 1988 to 1997, the Company has purchased 190.0 million shares at a total cost of $9.7 billion. In 1997, Merck filed a $1.5 billion shelf registration with the Securities and Exchange Commission for the issuance of debt securities, increasing available capacity under such filings to $1.7 billion at December 31, 1997. In addition, the Company established a $1.5 billion Euro Medium Term Note program. Proceeds from the sale of these securities are to be used for general corporate purposes. In February 1998, the Company issued $500.0 million of 30-year senior notes under the shelf, bearing a coupon of 6.4% payable semiannually. The remaining capacity under the shelf is $1.2 billion. The remaining capacity under the Euro Medium Term Note program is $1.5 billion. 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. A significant portion of the Company's cash flows are denominated in foreign currencies. The Company 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. To protect against the reduction in value of foreign currency cash flows, the Company has instituted balance sheet and revenue hedging programs to partially hedge this risk. - -------------------------------------------------------------------------------- 35 Merck & Co., Inc. 1997 Annual Report Financial Section The objective of the balance sheet hedging 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. To achieve this objective, the Company will hedge foreign currency risk on monetary assets and liabilities where hedging is cost beneficial. The Company seeks to fully hedge exposure denominated in developed country currencies, such as those of Japan, Germany, France and Canada, and will either partially hedge or not hedge at all exposure in other currencies, particularly exposure in hyperinflationary countries where hedging instruments may not be available at any cost. The Company will minimize the effect of exchange on unhedged exposure, principally by managing operating activities and net asset positions at the local level. The Company manages its net asset exposure principally with forward exchange contracts. These contracts enable the Company to buy and sell foreign currencies in the future at fixed exchange rates. For net monetary assets hedged, forward contracts offset the consequences of changes in foreign exchange on the amount of U.S. dollar cash flows derived from the net assets. Contracts used to hedge net monetary asset exposure have average maturities at inception of less than one year. A sensitivity analysis to changes in the value of the U.S. dollar on foreign currency denominated derivatives and monetary assets and liabilities indicates that if the U.S. dollar uniformly weakened by 10% against all currency exposures of the Company, Income before taxes would decline by $10.9 million. The balance sheet hedging program has significantly reduced the volatility of U.S. dollar cash flows derived from foreign currency denominated net monetary assets. The cash flows generated from these forward contracts are reported as arising from operating activities in the Consolidated Statement of Cash Flows. 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. To achieve this objective, the Company will partially hedge forecasted 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. The Company manages its forecasted transaction exposure principally with purchased local currency put options. On the forecasted transactions hedged, these option contracts effectively reduce the potential for a strengthening U.S. dollar to decrease the future U.S. dollar cash flows derived from foreign currency denominated sales. Purchased local currency put options provide the Company with a right, but not an obligation, to sell foreign currencies in the future at a predetermined price. If the value of the U.S. dollar weakens relative to other major currencies when the options mature, the options would expire unexercised, enabling the Company to benefit from favorable movements in exchange, except to the extent of premiums paid for the contracts. While a weaker U.S. dollar would result in a net benefit to the Company, the market value of existing hedges would decline by $67.0 million from a uniform 10% weakening of 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 associated with these contracts are reported as arising from operating activities in the Consolidated Statement of Cash Flows. In addition to the balance sheet and revenue hedging programs, the Company hedges interest rates on certain fixed and variable rate borrowing and investing transactions. Interest rates are hedged with swap contracts that exchange the cash flows from interest rates on the underlying financial instruments for those derived from interest rates inherent in the contracts. For foreign currency denominated borrowing and investing transactions, cross-currency interest rate swap contracts are used, which, in addition to exchanging cash flows derived from rates, exchange currencies at both inception and termination of the contracts. On investing transactions, swap contracts allow the Company to receive variable rate returns and limit foreign exchange risk, while on borrowing transactions, these contracts allow the Company to borrow at more favorable rates than otherwise attainable through direct issuance of variable rate U.S. dollar debt. The cash flows associated with these contracts are reported as arising from operating activities in the Consolidated Statement of Cash Flows. A sensitivity analysis to measure potential losses in the market value of the Company's investments, debt and related swaps from a change in interest rates indicates that a one percentage point increase in interest rates would increase the net aggregate market value of these instruments by $60.0 million. A one percentage point decrease in interest rates would decrease the net aggregate market value of these instruments by $71.0 million. Recently Issued Accounting Standards In February 1997, the Financial Accounting Standards Board (FASB) issued Statement No. 128, Earnings per Share, which requires presentation in the Consolidated Statement of Income of both basic and diluted earnings per share. The Company adopted this Statement in the fourth quarter of 1997. Earnings per common share (basic) as calculated in accordance with this Statement does not differ from earnings per share reported in prior periods and Earnings per common share assuming dilution is not materially different. - -------------------------------------------------------------------------------- 36 Merck & Co., Inc. 1997 Annual Report Financial Section In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income, which establishes standards for reporting comprehensive income and its components, and Statement No. 131, Disclosures about Segments of an Enterprise and Related Information, which establishes revised reporting and disclosure requirements for operating segments. The Company will adopt Statement Nos. 130 and 131 in the first quarter of 1998 and year-end 1998, respectively. These Statements increase disclosure only and will have no effect on the Company's financial position or results of operations. Cautionary Factors That May Affect Future Results This annual report and other written reports and oral statements made from time to time by Merck 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 Merck'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, 1997, which will be filed in March 1998, 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, reference should be made to Exhibit 99 in the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1997. 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 - -------------------------------------------------------------------------------- 1997 - -------------------------------------------------------------------------------- Sales ....................... $6,232.0 $5,927.7 $5,909.2 $5,567.9 Materials and production costs ..................... 3,068.7 2,991.0 2,944.3 2,786.3 Marketing/administrative expenses .................. 1,146.0 1,048.4 1,044.2 1,060.6 Research/development expenses .................. 493.9 424.7 396.4 368.7 Equity income from affiliates ................ (191.6) (262.6) (122.8) (151.0) Other expense, net .......... 43.2 31.3 14.8 39.9 Income before taxes ......... 1,671.8 1,694.9 1,632.3 1,463.4 Net income .................. 1,242.3 1,197.2 1,154.4 1,020.3 Earnings per common share ..................... $1.04 $.99 $.96 $.84 Earnings per common share assuming dilution ... $1.01 $.97 $.93 $.82 - -------------------------------------------------------------------------------- 1996 - -------------------------------------------------------------------------------- Sales ....................... $5,406.1 $4,983.4 $4,908.8 $4,530.4 Materials and production costs ..................... 2,473.9 2,328.4 2,283.8 2,233.1 Marketing/administrative expenses .................. 1,139.0 941.8 946.2 814.3 Research/development expenses .................. 423.3 366.8 347.7 349.5 Equity income from affiliates ................ (160.7) (146.2) (128.4) (165.4) Other expense, net .......... 60.6 55.2 65.1 59.9 Income before taxes ......... 1,470.0 1,437.4 1,394.4 1,239.0 Net income .................. 1,043.5 1,001.9 972.1 863.8 Earnings per common share ..................... $.87 $.83 $.80 $.70 Earnings per common share assuming dilution ... $.84 $.81 $.78 $.69 ================================================================================
In the chart above, amounts for the third and fourth quarters of 1997 were affected by the formation of the animal health joint venture and the sale of the crop protection business. Dividends Paid per Common Share
- -------------------------------------------------------------------------------- Year 4th Q 3rd Q 2nd Q 1st Q - -------------------------------------------------------------------------------- 1997 ................. $1.69 $ .45 $ .42 $ .42 $ .40 1996 ................. 1.42 .40 .34 .34 .34 ================================================================================
Common Stock Market Prices
- -------------------------------------------------------------------------------- 1997 4th Q 3rd Q 2nd Q 1st Q - -------------------------------------------------------------------------------- High ................. $107 7/8 $108 3/16 $104 13/16 $99 7/8 Low .................. 85 90 3/4 80 3/8 78 - -------------------------------------------------------------------------------- 1996 - -------------------------------------------------------------------------------- High ................. $ 84 1/4 $ 70 7/8 $ 66 1/8 $71 3/8 Low .................. 69 1/8 58 1/4 56 1/2 60 1/2 ================================================================================
The principal market for trading of the common stock is the New York Stock Exchange under the symbol MRK. - -------------------------------------------------------------------------------- 37 Merck & Co., Inc. 1997 Annual Report Financial Section ================================================================================ Consolidated Statement of Income ================================================================================ Merck & Co., Inc. and Subsidiaries
Years Ended December 31 ($ in millions except per share amounts) 1997 1996 1995 - ------------------------------------------------------------------------------------- Sales ...................................... $ 23,636.9 $ 19,828.7 $ 16,681.1 - ------------------------------------------------------------------------------------- Costs, Expenses and Other Materials and production ................... 11,790.3 9,319.2 7,456.3 Marketing and administrative ............... 4,299.2 3,841.3 3,297.8 Research and development ................... 1,683.7 1,487.3 1,331.4 Equity income from affiliates .............. (727.9) (600.7) (346.3) Gains on sales of businesses ............... (213.4) -- (682.9) Other (income) expense, net ................ 342.7 240.8 827.6 - ------------------------------------------------------------------------------------- 17,174.6 14,287.9 11,883.9 - ------------------------------------------------------------------------------------- Income Before Taxes ........................ 6,462.3 5,540.8 4,797.2 Taxes on Income ............................ 1,848.2 1,659.5 1,462.0 - ------------------------------------------------------------------------------------- Net Income ................................. $ 4,614.1 $ 3,881.3 $ 3,335.2 ===================================================================================== Earnings per Common Share .................. $ 3.83 $ 3.20 $ 2.70 ===================================================================================== Earnings per Common Share Assuming Dilution $ 3.74 $ 3.12 $ 2.64 =====================================================================================
================================================================================ Consolidated Statement of Retained Earnings ================================================================================ Merck & Co., Inc. and Subsidiaries
Years Ended December 31 ($ in millions) 1997 1996 1995 - ------------------------------------------------------------------------------------- Balance, January 1 ...................... $14,817.7 $12,740.6 $10,942.0 - ------------------------------------------------------------------------------------- Net Income ............................... 4,614.1 3,881.3 3,335.2 Common Stock Dividends Declared .......... (2,094.8) (1,793.4) (1,578.0) Net Unrealized (Loss) Gain on Investments (17.6) (10.8) 41.4 - ------------------------------------------------------------------------------------- Balance, December 31 .................... $17,319.4 $14,817.7 $12,740.6 =====================================================================================
The accompanying notes are an integral part of these consolidated financial statements. - -------------------------------------------------------------------------------- 38 Merck & Co., Inc. 1997 Annual Report Financial Section ================================================================================ Consolidated Balance Sheet ================================================================================ Merck & Co., Inc. and Subsidiaries
December 31 ($ in millions) 1997 1996 - --------------------------------------------------------------------------------------- Assets - --------------------------------------------------------------------------------------- Current Assets Cash and cash equivalents ..................................... $ 1,125.1 $ 1,352.4 Short-term investments ........................................ 1,184.2 829.2 Accounts receivable ........................................... 2,876.7 2,655.9 Inventories ................................................... 2,145.1 2,148.8 Prepaid expenses and taxes .................................... 881.9 740.3 - --------------------------------------------------------------------------------------- Total current assets .......................................... 8,213.0 7,726.6 - --------------------------------------------------------------------------------------- Investments ................................................... 2,533.4 2,499.4 - --------------------------------------------------------------------------------------- Property, Plant and Equipment (at cost) Land .......................................................... 216.4 206.9 Buildings ..................................................... 3,257.8 2,949.8 Machinery, equipment and office furnishings ................... 5,388.6 4,765.0 Construction in progress ...................................... 1,169.8 804.7 - --------------------------------------------------------------------------------------- 10,032.6 8,726.4 Less allowance for depreciation ............................... 3,423.2 2,799.7 - --------------------------------------------------------------------------------------- 6,609.4 5,926.7 - --------------------------------------------------------------------------------------- Goodwill and Other Intangibles (net of accumulated amortization of $815.8 million in 1997 and $606.5 million in 1996) ......... 6,780.5 6,736.6 - --------------------------------------------------------------------------------------- Other Assets .................................................. 1,675.6 1,403.8 - --------------------------------------------------------------------------------------- $25,811.9 $24,293.1 ======================================================================================= Liabilities and Stockholders' Equity - --------------------------------------------------------------------------------------- Current Liabilities Accounts payable and accrued liabilities ...................... $ 3,268.9 $ 2,937.8 Loans payable and current portion of long-term debt ........... 902.5 606.1 Income taxes payable .......................................... 859.6 802.6 Dividends payable ............................................. 537.6 482.7 - --------------------------------------------------------------------------------------- Total current liabilities ..................................... 5,568.6 4,829.2 - --------------------------------------------------------------------------------------- Long-Term Debt ................................................ 1,346.5 1,155.9 - --------------------------------------------------------------------------------------- Deferred Income Taxes and Noncurrent Liabilities .............. 5,098.9 4,027.3 - --------------------------------------------------------------------------------------- Minority Interests ............................................ 1,184.4 2,310.2 - --------------------------------------------------------------------------------------- Stockholders' Equity Common stock Authorized - 2,700,000,000 shares Issued - 1,483,925,990 shares - 1997 - 1,483,619,311 shares - 1996 ........................ 5,254.0 4,967.5 Retained earnings ............................................. 17,319.4 14,817.7 - --------------------------------------------------------------------------------------- 22,573.4 19,785.2 Less treasury stock, at cost 290,277,526 shares - 1997 277,016,963 shares - 1996 ................................... 9,959.9 7,814.7 - --------------------------------------------------------------------------------------- Total stockholders' equity .................................... 12,613.5 11,970.5 - --------------------------------------------------------------------------------------- $25,811.9 $24,293.1 =======================================================================================
The accompanying notes are an integral part of this consolidated financial statement. - -------------------------------------------------------------------------------- 39 Merck & Co., Inc. 1997 Annual Report Financial Section ================================================================================ Consolidated Statement of Cash Flows ================================================================================ Merck & Co., Inc. and Subsidiaries
Years Ended December 31 ($ in millions) 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Income before taxes ................................................ $ 6,462.3 $ 5,540.8 $ 4,797.2 Adjustments to reconcile income before taxes to cash provided from operations before taxes: Gains on sales of businesses .................................... (213.4) -- (682.9) Depreciation and amortization ................................... 837.1 730.9 667.2 Other ........................................................... 528.4 175.1 630.1 Net changes in assets and liabilities: Accounts receivable .......................................... (271.7) (224.7) (244.1) Inventories .................................................. (53.5) (267.6) (271.8) Accounts payable and accrued liabilities ..................... 321.8 414.2 383.1 Noncurrent liabilities ....................................... 20.4 143.0 (262.0) Other ........................................................ (19.9) 10.4 (43.0) - ---------------------------------------------------------------------------------------------------------- Cash Provided by Operating Activities Before Taxes ................. 7,611.5 6,522.1 4,973.8 Income Taxes Paid .................................................. (1,294.9) (1,094.4) (2,029.6) - ---------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities .......................... 6,316.6 5,427.7 2,944.2 - ---------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities Capital expenditures ............................................... (1,448.8) (1,196.7) (1,005.5) Purchase of securities, subsidiaries and other investments ......... (22,986.7) (15,719.1) (13,772.3) Proceeds from sale of securities, subsidiaries and other investments 22,075.4 15,079.2 12,430.1 Proceeds from sales of businesses, net of cash transferred ......... 910.0 -- 1,321.1 Other .............................................................. (152.6) (142.7) (295.7) - ---------------------------------------------------------------------------------------------------------- Net Cash Used by Investing Activities .............................. (1,602.7) (1,979.3) (1,322.3) - ---------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities Net change in short-term borrowings ................................ 431.3 (7.1) 40.5 Proceeds from issuance of debt ..................................... 653.1 327.5 549.5 Payments on debt ................................................... (590.0) (341.7) (108.2) Proceeds from issuance of preferred stock of subsidiaries .......... -- -- 1,019.6 Redemption of preferred stock of subsidiary ........................ (1,000.0) -- -- Purchase of treasury stock ......................................... (2,572.8) (2,493.3) (1,570.9) Dividends paid to stockholders ..................................... (2,039.9) (1,728.9) (1,539.8) Proceeds from exercise of stock options ............................ 413.3 442.2 264.0 Other .............................................................. (153.9) (36.0) (56.1) - ---------------------------------------------------------------------------------------------------------- Net Cash Used by Financing Activities .............................. (4,858.9) (3,837.3) (1,401.4) - ---------------------------------------------------------------------------------------------------------- Effect of Exchange Rate Changes on Cash and Cash Equivalents ....... (82.3) (106.1) 22.9 - ---------------------------------------------------------------------------------------------------------- Net (Decrease) Increase in Cash and Cash Equivalents ............... (227.3) (495.0) 243.4 Cash and Cash Equivalents at Beginning of Year ..................... 1,352.4 1,847.4 1,604.0 - ---------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year ........................... $ 1,125.1 $ 1,352.4 $ 1,847.4 ==========================================================================================================
The accompanying notes are an integral part of this consolidated financial statement. - -------------------------------------------------------------------------------- 40 Merck & Co., Inc. 1997 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 managed prescription drug programs and programs to manage health and drug utilization. Merck sells its human health products and provides pharmaceutical benefit services 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. For those consolidated subsidiaries where Company ownership is less than 100%, the outside stockholders' interest is shown as Minority interests in the consolidated financial statements. The Company follows the equity method for 20% or more owned affiliates. 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. 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. Goodwill and Other Intangibles - Goodwill of $3.6 billion in 1997 and $3.8 billion in 1996 (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. Other acquired intangibles principally include customer relationships of $2.8 billion in 1997 and $2.9 billion in 1996 (net of accumulated amortization) that arose in connection with the acquisition of Medco Containment Services, Inc. (renamed Merck-Medco Managed Care). Other acquired intangibles are recorded at cost and are amortized on a straight-line basis over their estimated useful lives ranging from predominantly 28 to 40 years. The Company reviews goodwill and other intangibles to assess recoverability from future operations using undiscounted cash flows. Impairments are recognized in operating results to the extent that carrying value exceeds fair value. Stock-Based Compensation - 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 generally accepted accounting principles and, accordingly, include amounts that are based on management's best estimates and judgments. 3. Divestitures In July 1997, the Company sold its crop protection business for $910.0 million to Novartis, resulting in a pretax gain of $213.4 million, after taking into account deferred income related to long-term contractual commitments entered into in connection with the sale of the business. This business was not significant to the Company's financial position or results of operations. This gain was substantially offset by $207.3 million of nonrecurring charges included in Other (income) expense, net. (See Note 15.) The Company completed the sale of its specialty chemical businesses in 1995. Calgon Vestal Laboratories was sold to Bristol-Myers Squibb for $261.5 million, and Kelco was sold to Monsanto for $1.075 billion. These divestitures resulted in pretax gains of $682.9 million. These specialty chemical businesses were not significant to the Company's financial position or results of operations. These gains were substantially offset by $675.5 million of nonrecurring charges included in Other (income) expense, net. (See Note 15.) 4. Strategic Alliances 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., in which Merck and Astra each own a 50% share. This joint venture, formed in 1994, develops and markets most of Astra's new prescription medicines in the United States. Joint venture sales were $2.3 billion for 1997, $1.8 billion for 1996, and $1.3 billion for 1995, consisting primarily of 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. - -------------------------------------------------------------------------------- 41 Merck & Co., Inc. 1997 Annual Report Financial Section 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 venture was expanded into Europe in 1993, and into Canada in 1996. Sales of product marketed by the joint venture were $483.7 million for 1997, $530.2 million for 1996 and $403.5 million for 1995, consisting primarily of gastrointestinal products including Pepcid AC Acid Controller, a nonprescription formulation of Pepcid, Merck's H2-receptor antagonist, and Mylanta. In 1991, Merck and E.I. du Pont de Nemours and Company (DuPont) formed an independent, research-driven, worldwide pharmaceutical joint venture, equally owned by each party. DuPont contributed its entire pharmaceutical and radiopharmaceutical imaging agents businesses, and is providing administrative services. Merck contributed cash and European marketing rights to several of its prescription medicines, and is providing research and development and international industry expertise. Joint venture sales were $1.3 billion for 1997 and 1996, and $1.2 billion for 1995, consisting primarily of cardiovascular, radiopharmaceutical and central nervous system products. In September 1997, the joint venture completed the sale of its generics and multisource business lines, allowing it to focus resources on bringing several potential new pharmaceutical products to market. Sales of the divested business lines included in joint venture sales for 1997 were $65.1 million. In 1994, Merck and Pasteur Merieux Connaught (Pasteur) established an equally owned joint venture to market vaccines and collaborate in the development of combination vaccines, for distribution in Europe. Joint venture vaccine sales were $581.3 million for 1997, $663.0 million for 1996 and $598.6 million for 1995. In 1996, Merck agreed with Chugai Pharmaceutical Co., Ltd. to form a joint venture to develop and market over-the-counter pharmaceuticals in Japan. The new company, Chugai MSD Co., Ltd., began operations in April 1997 marketing gastrointestinal products. Joint venture sales for 1997 were $18.8 million. In August 1997, Merck and Rhone-Poulenc combined their animal health and poultry genetics businesses to form Merial Limited (Merial), a fully integrated, stand-alone joint venture, equally owned by each party. Merial is the world's largest company dedicated to the discovery, manufacture and marketing of veterinary pharmaceuticals and vaccines. Merck contributed developmental research personnel, sales and marketing activities, and animal health products, as well as its poultry genetics business. Rhone-Poulenc contributed research and development, manufacturing, sales and marketing activities, and animal health products, as well as its poultry genetics business. The transaction is not expected to have a material impact on comparability of net income. Merial sales for 1997 were $746.3 million. Animal health sales reported in Merck's consolidated sales were $448.3 million prior to August 1. Summarized below are net sales by therapeutic class for these joint ventures for the years ended December 31, 1997, 1996 and 1995:
1997 1996 1995 - -------------------------------------------------------------------------------- Gastrointestinals Ethical ......................... $2,241.7 $1,712.1 $1,223.4 OTC ............................. 405.1 420.5 307.2 - -------------------------------------------------------------------------------- 2,646.8 2,132.6 1,530.6 - -------------------------------------------------------------------------------- Cardiovasculars ................... 717.6 623.9 521.9 Human vaccines .................... 581.3 663.0 598.6 Radiopharmaceuticals .............. 295.9 325.4 304.0 Central nervous system ............ 281.0 267.7 247.5 Animal health ..................... 746.3 -- -- Other ............................. 224.8 276.9 289.2 - -------------------------------------------------------------------------------- $5,493.7 $4,289.5 $3,491.8 ================================================================================
5. Affiliates Accounted for Using the Equity Method Investments in affiliates accounted for using the equity method are included in Other assets and were $693.7 million at December 31, 1997 and $779.7 million at December 31, 1996. Dividends and distributions received from these affiliates were $791.0 million in 1997, $476.2 million in 1996 and $296.1 million in 1995. Summarized information for these affiliates is as follows:
Years Ended December 31 1997 1996 1995 - -------------------------------------------------------------------------------- Sales ................................ $5,655.8 $4,441.4 $3,632.9 Materials and production costs ....... 1,349.3 959.4 873.4 Other expense, net ................... 1,852.9 1,725.2 1,493.8 Income before taxes .................. 2,453.6 1,756.8 1,265.7 ================================================================================ December 31 1997 1996 - ------------------------------------------------------------------ Current assets $2,475.9 $1,613.8 Noncurrent assets .................... 2,824.0 3,111.3 Current liabilities .................. 1,920.1 1,048.0 Noncurrent liabilities ............... 699.8 1,307.6 ==================================================================
6. Financial Instruments Foreign Currency Risk Management The Company has established revenue and balance sheet hedging programs to protect against reductions in value and volatility of future foreign currency cash flows caused by changes in foreign exchange rates. The objectives and strategies of these programs are described in the Analysis of Liquidity and Capital Resources section of the Financial Review. The Company partially hedges forecasted revenues denominated in foreign currencies with purchased currency options. When the dollar strengthens against foreign currencies, the decline in the value of foreign currency cash flows is partially offset by the recognition of gains in the value of purchased currency options designated as hedges of the period. Conversely, when the dollar weakens, the increase in the value of foreign currency cash flows is reduced only by the recognition of the premium paid to acquire the options - -------------------------------------------------------------------------------- 42 Merck & Co., Inc. 1997 Annual Report Financial Section designated as hedges of the period. Market value gains and premiums on these contracts are recognized in Sales when the hedged transaction is recognized. The carrying value of purchased currency options is reported in Prepaid expenses and taxes or Other assets. The Company continually reviews its portfolio of purchased options and will adjust its portfolio to accommodate changes in exposure to forecasted revenues. The most cost-effective means of decreasing coverage provided by purchased options is to write options with terms identical to purchased options that are no longer necessary. Deferred gains or losses that accumulate on purchased options prior to writing an offsetting position will remain deferred and are recognized when the hedged transaction occurs. Subsequent changes in the market value of the written options and related purchased options are recorded in earnings. Because the changes in market value of the purchased options equally offset the written options, there is no net impact on earnings. The carrying value of written currency options is reported in Accounts payable and accrued liabilities or Deferred income taxes and noncurrent liabilities. Deferred gains and losses on currency options used to hedge forecasted revenues amounted to $95.4 million and $5.9 million at December 31, 1997 and $64.9 million and $6.3 million at December 31, 1996, respectively. The Company also hedges certain exposures to fluctuations in foreign currency exchange rates that occur prior to conversion of foreign currency denominated monetary assets and liabilities into U.S. dollars. Prior to conversion to U.S. dollars, these assets and liabilities are translated at spot rates in effect on the balance sheet date. The effects of changes in spot rates are reported in earnings and included in Other (income) expense, net. The Company hedges its exposure to changes in foreign exchange principally with forward contracts. Because monetary assets and liabilities are marked to spot and recorded in earnings, forward contracts designated as hedges of the monetary assets and liabilities are also marked to spot with the resulting gains and losses similarly recognized in earnings. Gains and losses on forward contracts are included in Other (income) expense, net, and offset losses and gains on the net monetary assets and liabilities hedged. The carrying values of forward exchange contracts are reported in Accounts receivable, Other assets, Accounts payable and accrued liabilities or Deferred income taxes and noncurrent liabilities. At December 31, 1997 and 1996, the Company had contracts to exchange foreign currencies, principally the Japanese yen, French franc and Deutschemark, for U.S. dollars in the following notional amounts:
1997 1996 - -------------------------------------------------------------------------------- Purchased currency options ................... $1,462.7 $1,952.6 Forward sale contracts ....................... 1,500.9 1,660.9 Forward purchase contracts ................... 412.1 431.5 ================================================================================
Interest Rate Risk Management The Company uses interest rate swap contracts on certain borrowing and investing transactions. Interest rate swap contracts are intended to be an integral part of borrowing and investing transactions and, therefore, are not recognized at fair value. Interest differentials paid or received under these contracts are recognized as adjustments to the effective yield of the underlying financial instruments hedged. Interest rate swap contracts would only be recognized at fair value if the hedged relationship is terminated. Gains or losses accumulated prior to termination of the relationship would be amortized as a yield adjustment over the shorter of the remaining life of the contract or the remaining period to maturity of the underlying instrument hedged. If the contract remained outstanding after termination of the hedged relationship, subsequent changes in market value of the contract would be recognized in earnings. The Company does not use leveraged swaps and, in general, does not use leverage in any of its investment activities that would put principal capital at risk. In 1995, the Company entered into a five-year combined interest rate and currency swap contract with a notional amount of $313.6 million at December 31, 1997 and $302.1 million at December 31, 1996, in 1996, a two-year interest rate and currency swap contract with a notional amount of $336.1 million and, in 1997, a seven-year interest rate and currency swap contract with a notional amount of $334.2 million. In 1997, the $336.1 million swap contract was terminated in conjunction with the sale of the related asset with an immaterial impact on net income. The outstanding swaps convert two different variable rate Dutch guilder investments to variable rate U.S. dollar investments. The market values of these contracts are reported in Other assets or Deferred income taxes and noncurrent liabilities with unrealized gains and losses recorded, net of tax, in Stockholders' equity. At December 31, 1997, the Company had one variable maturity interest rate swap contract outstanding with a notional amount of $85.0 million to convert 7.25% U.S. dollar callable debt issued in 1997 to variable rate U.S. dollar debt. This swap contract was terminated in February 1998 in conjunction with the retirement of the callable debt. At December 31, 1996, the Company had two interest rate swap contracts outstanding with a combined notional amount of $347.9 million to convert fixed rates on debt issues ($200.0 million in zero coupon euronotes and 200.0 million in Swiss franc eurobonds) to floating rates slightly below commercial paper rates. These swap contracts matured in 1997 in conjunction with the maturity of the related debt. - -------------------------------------------------------------------------------- 43 Merck & Co., Inc. 1997 Annual Report Financial Section Fair Value of Financial Instruments Summarized below are the carrying values and fair values of the Company's financial instruments at December 31, 1997 and 1996. Fair values were estimated based on market prices, where available, or dealer quotes.
1997 1996 -------------------- ------------------- Carrying Fair Carrying Fair Value Value Value Value - -------------------------------------------------------------------------------- Assets - -------------------------------------------------------------------------------- Cash and cash equivalents .......... $1,125.1 $1,125.1 $1,352.4 $1,352.4 Short-term investments ............. 1,184.2 1,184.2 829.2 828.9 Long-term investments .............. 2,533.4 2,531.8 2,499.4 2,496.4 Purchased currency options ......... 54.6 144.1 85.1 143.7 Forward exchange contracts and currency swaps ............... 197.0 197.0 134.7 134.7 Interest rate swaps ................ .1 .3 26.3 31.3 - -------------------------------------------------------------------------------- Liabilities - -------------------------------------------------------------------------------- Loans payable and current portion of long-term debt ........ $ 902.5 $ 900.5 $ 606.1 $ 609.7 Long-term debt ..................... 1,346.5 1,387.0 1,155.9 1,160.2 Forward exchange contracts and currency swap ................ 22.0 22.0 9.2 9.2 ================================================================================
A summary of the carrying values and fair values of the Company's investments at December 31 is as follows:
1997 1996 -------------------- ------------------- Carrying Fair Carrying Fair Value Value Value Value - -------------------------------------------------------------------------------- Available-for-sale Debt securities .................. $1,947.2 $1,947.2 $1,414.7 $1,414.7 Equity securities ................ 887.6 887.6 1,085.3 1,085.3 Held-to-maturity securities ........ 882.8 881.2 828.6 825.3 ================================================================================
A summary of gross unrealized gains and losses on the Company's investments at December 31 is as follows:
1997 1996 ---------------- ---------------- Gross Unrealized Gross Unrealized ---------------- ---------------- Gains Losses Gains Losses - -------------------------------------------------------------------------------- Available-for-sale Debt securities .................. $ 11.1 $ (2.8) $ 10.1 $ (5.8) Equity securities ................ 111.3 (91.9) 181.1 (53.0) Held-to-maturity securities ........ 2.9 (4.5) .7 (4.0) ================================================================================
Gross unrealized gains and losses with respect to available-for-sale investments are recorded, net of tax and minority interests, in Retained earnings. At December 31, 1997, available-for-sale debt securities and held-to-maturity securities maturing within one year totaled $1.0 billion and $.2 billion, respectively. Substantially all remaining debt securities mature within five years. Concentrations of Credit Risk As part of its ongoing control procedures, the Company monitors concentrations of credit risk associated with financial institutions with which it conducts business. Credit risk is minimal as credit exposure limits are established to avoid a concentration with any single financial institution. The Company also monitors the creditworthiness 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:
1997 1996 - -------------------------------------------------------------------------------- Finished goods ................................. $1,230.6 $1,237.3 Raw materials and work in process .............. 849.7 841.1 Supplies ....................................... 64.8 70.4 - -------------------------------------------------------------------------------- Total (approximates current cost) .............. 2,145.1 2,148.8 Reduction to LIFO cost ......................... -- -- - -------------------------------------------------------------------------------- $2,145.1 $2,148.8 ================================================================================
Inventories valued under the LIFO method comprised approximately 42% and 43% of inventories at December 31, 1997 and 1996, respectively. 8. Loans Payable and Long-Term Debt Loans payable at December 31, 1997 consisted primarily of commercial paper borrowings of $439.6 million and the current portion of long-term debt of $345.8 million. The remainder was principally borrowings by foreign subsidiaries. Loans payable at December 31, 1996 consisted primarily of the current portion of long-term debt. The weighted average interest rate for these borrowings was 6.4% and 6.2% at December 31, 1997 and 1996, respectively. Long-term debt at December 31 consisted of:
1997 1996 - -------------------------------------------------------------------------------- 5.8% notes due 2037 ........................ $ 500.0 $ -- 6.8% euronotes due 2005 .................... 499.0 498.9 6.3% debentures due 2026 ................... 246.7 246.6 5.3% euronotes due 1998 .................... -- 251.2 Other ...................................... 100.8 159.2 - -------------------------------------------------------------------------------- $1,346.5 $1,155.9 ================================================================================
The notes due 2037 are subject to repayment at par at the option of the holders beginning May 1999. Other consists primarily of pollution control, industrial revenue financing and foreign borrowings at varying rates up to 9.0%. - -------------------------------------------------------------------------------- 44 Merck & Co., Inc. 1997 Annual Report Financial Section The aggregate maturities of long-term debt for each of the next five years are as follows: 1998, $345.8 million; 1999, $6.8 million; 2000, $8.4 million; 2001, $8.9 million; and 2002, $6.7 million. 9. Contingent 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 January 1996, the Company and several other defendants entered into an agreement, subject to court approval, to settle the federal class action alleging conspiracy, which represents the single largest group of retail pharmacy claims, pursuant to which the Company would pay $51.8 million, payable in four equal annual installments. The court approved an amended version of the settlement agreement, which incorporated revisions, unrelated to the monetary payment, to address concerns specified by the court. Following the dismissal of appeals brought by objectors, the approval became final in October 1997. The Company has not engaged in any conspiracy, and no admission of wrongdoing has been made or is included in the amended agreement, which was entered into in order to avoid the cost of litigation and the risk of an inaccurate adverse verdict by a jury presented by a case of this size and complexity. While it is not feasible to predict or determine the final outcome of these 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. While it is not feasible to predict or determine the outcome of these 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 remediating environmental contamination resulting from past industrial activity at certain of its sites. The Company has taken an active role in identifying and providing for these costs; and, therefore, management 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. 10. Preferred Stock of Subsidiary Company In December 1995, the Company's wholly owned subsidiary, Merck Sharp & Dohme Overseas Finance, S.A., issued $1.0 billion par value of variable rate nonconvertible Preferred Equity Certificates (PECs). The proceeds were used to fund a portion of the Company's stock repurchase program and for other general corporate purposes. The PECs were redeemed by the Company at par in September 1997. The PECs were included in Minority interests in the consolidated financial statements prior to their redemption. 11. Stockholders' Equity In 1997, 1996 and 1995, common stock increased by $286.5 million, $225.0 million and $74.7 million, respectively, principally as a result of issuances of treasury stock for exercises of stock options. A summary of treasury stock transactions (shares in thousands) follows:
1997 1996 1995 ----------------------- ---------------------- ----------------------- Shares Cost Shares Cost Shares Cost - ------------------------------------------------------------------------------------------- Balance, Jan. 1 ..... 277,017.0 $ 7,814.7 254,614.8 $5,747.4 235,341.6 $ 4,470.8 Purchases .... 27,443.6 2,572.8 38,384.2 2,493.3 33,377.2 1,570.9 Issuances(1).. (14,183.1) (427.6) (15,982.0) (426.0) (14,104.0) (294.3) - ------------------------------------------------------------------------------------------- Balance, Dec. 31 .... 290,277.5 $ 9,959.9 277,017.0 $ 7,814.7 254,614.8 $ 5,747.4 ===========================================================================================
(1) Issued primarily under stock option plans. At December 31, 1997, 1996 and 1995, 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 and non-employee directors 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 also has plans that provide for the granting of performance-based stock awards. A summary of information relative to the Company's stock option plans follows:
Number Average(1) of Shares Price - -------------------------------------------------------------------------------- Outstanding at December 31, 1994 .............. 93,664,336 $ 29.05 Granted ....................................... 14,193,077 43.38 Exercised ..................................... (13,955,704) 18.96 Forfeited ..................................... (2,480,703) 34.89 - -------------------------------------------------------------------------------- Outstanding at December 31, 1995 .............. 91,421,006 32.65 Granted ....................................... 13,018,617 65.28 Exercised ..................................... (15,835,665) 27.92 Forfeited ..................................... (2,494,936) 37.68 Equivalent Options Assumed .................... 100,275 103.25 - -------------------------------------------------------------------------------- Outstanding at December 31, 1996 .............. 86,209,297 38.38 Granted ....................................... 15,938,930 97.48 Exercised ..................................... (13,997,358) 29.53 Forfeited ..................................... (2,695,275) 48.59 - -------------------------------------------------------------------------------- Outstanding at December 31, 1997 .............. 85,455,594 $ 50.54 ================================================================================
(1) Weighted average exercise price. - -------------------------------------------------------------------------------- 45 Merck & Co., Inc. 1997 Annual Report Financial Section The number of shares and average price of options exercisable at December 31, 1997, 1996 and 1995 were 23,635,641 shares at $32.97, 32,387,469 shares at $30.99 and 29,272,456 shares at $26.46, respectively. At December 31, 1997 and 1996, 57,180,159 shares and 70,493,629 shares, respectively, were available for future grants under the terms of these plans. Effective January 1, 1996, the Company adopted the provisions of Statement No. 123, Accounting for Stock-Based Compensation. As permitted by the Statement, the Company has chosen to continue to account for stock-based compensation using the intrinsic value method. Accordingly, no compensation expense has been recognized for its stock-based compensation plans other than for performance-based awards, which was not significant. Had the fair value method of accounting been applied to the Company's stock option plans, which requires recognition of compensation cost ratably over the vesting period of the underlying equity instruments, Net income would have been reduced by $102.5 million, or $.09 per share in 1997, $46.6 million, or $.04 per share in 1996 and $20.0 million, or $.02 per share in 1995. This pro forma impact only takes into account options granted since January 1, 1995 and is likely to increase in future years as additional options are granted and amortized ratably over the vesting period. The average fair value of options granted during 1997, 1996 and 1995 was $31.63, $19.12 and $12.31, respectively. This fair value was estimated using the Black-Scholes option-pricing model based on the weighted average market price at grant date of $97.48 in 1997, $65.28 in 1996 and $43.38 in 1995 and the following weighted average assumptions:
1997 1996 1995 - -------------------------------------------------------------------------------- Dividend yield ....................... 1.7% 2.1% 2.8% Risk-free interest rate .............. 6.4% 5.9% 6.9% Volatility ........................... 24% 24% 24% Expected life (years) ................ 6.6 6.7 6.5 ================================================================================
Summarized information about stock options outstanding and exercisable at December 31, 1997 is as follows:
Outstanding Exercisable --------------------------------- ------------------------- Exercise Price Number Average Average Number Average Range of Shares Life(1) Price(2) of Shares Price(2) - -------------------------------------------------------------------------------- $3 to 20 3,004,985 4.22 $ 13.72 3,004,985 $ 13.72 $20 to 30 10,849,489 7.12 26.26 8,338,306 25.64 $30 to 40 24,491,602 6.01 33.69 3,446,905 36.07 $40 to 50 17,275,425 5.79 42.92 7,146,914 43.20 $50 to 75 14,208,722 7.56 63.55 1,672,179 52.68 $75 to 100 13,738,429 9.12 96.64 3,500 87.21 Over $100 1,886,942 9.51 103.34 22,852 124.53 - -------------------------------------------------------------------------------- 85,455,594 23,635,641 ================================================================================
(1) Weighted average contractual life remaining in years. (2) Weighted average exercise price. 13. Retirement Plans In addition to required governmental retirement plans, the Company and certain of its subsidiaries have retirement plans for eligible employees that provide benefits based upon age, years of service and compensation. Certain plans also consider primary social security payments in calculating benefits. The expenses for these governmental, Company and subsidiary plans were $290.5 million in 1997, $294.9 million in 1996 and $285.6 million in 1995. Expenses for Company and subsidiary plans were $84.5 million in 1997, $106.6 million in 1996 and $109.0 million in 1995, comprised of the following components:
1997 1996 1995 - -------------------------------------------------------------------------------- Service cost - benefits earned during the year ....................... $105.9 $104.1 $ 98.7 Interest cost on projected benefit obligation .................... 149.4 144.2 139.8 Net amortization and deferral ........... 152.2 107.1 185.9 Actual return on assets ................. (323.0) (248.8) (315.4) - -------------------------------------------------------------------------------- Net pension cost ........................ $ 84.5 $106.6 $109.0 ================================================================================
The net pension cost attributable to international plans and included above was $49.9 million in 1997, $51.8 million in 1996 and $47.2 million in 1995. The Company's funding policy for Employee Retirement Income Security Act of 1974 and foreign plans is to contribute amounts to maintain assets in excess of the projected benefit obligations. Company contributions over the next several years are expected to continue to improve the funded status of the worldwide plans. The plans' assets are diversified in stocks, bonds, and short-term and other investments. The plans' funded status at December 31 was as follows:
1997 1996 ------------------- --------------------- Over- Under- Over- Under- funded funded funded funded - -------------------------------------------------------------------------------- Plan assets at market value ...... $2,152.2 $ 197.3 $1,838.4 $ 215.2 - -------------------------------------------------------------------------------- Accumulated benefit obligation Vested ....................... 1,271.8 276.5 1,171.0 257.6 Nonvested .................... 232.8 76.5 196.5 54.6 - -------------------------------------------------------------------------------- 1,504.6 353.0 1,367.5 312.2 - -------------------------------------------------------------------------------- Plan assets in excess of (less than) accumulated benefit obligation ............. 647.6 (155.7) 470.9 (97.0) Projected compensation increases ...................... 353.6 177.5 302.8 176.9 - -------------------------------------------------------------------------------- Plan assets in excess of (less than) projected benefit obligation ............. 294.0 (333.2) 168.1 (273.9) Unamortized transitional net (asset) obligation ......... (58.0) 2.8 (76.3) 2.9 Unrecognized net loss ............ 87.2 105.9 110.0 103.8 Unrecognized prior service cost ................... 51.6 9.3 46.4 11.4 - -------------------------------------------------------------------------------- Net pension asset (liability) .... $ 374.8 $ (215.2) $ 248.2 $ (155.8) ================================================================================
- -------------------------------------------------------------------------------- 46 Merck & Co., Inc. 1997 Annual Report Financial Section International plan assets at market value, included in the above table, were $676.4 million in 1997 and $654.2 million in 1996. The accumulated benefit obligation of international plans, included in this table, was $665.4 million in 1997 and $624.5 million in 1996. Assumptions used for the Company's pension plans at December 31 were as follows:
1997 1996 1995 - -------------------------------------------------------------------------------- Discount rate ................................. 7.0% 7.5% 7.0% Rate of future compensation increases ......... 4.5% 4.5% 4.5% Expected long-term rate of return on plan assets ................................. 10.0% 10.0% 10.0% ================================================================================
In the aggregate, average international plan assumptions do not vary significantly from U.S. assumptions. 14. Other Postretirement Benefits The Company provides health care (in excess of Medicare) and life insurance benefits for eligible active and retired employees, principally in the United States. The Company reserves the right to modify such benefits in the future. The expected costs of providing postretirement health care and life insurance benefits are accrued over the employee service period. The cost of health care and life insurance benefits for active employees was $163.8 million in 1997, $148.9 million in 1996 and $125.0 million in 1995. The cost of postretirement benefits other than pensions was $1.4 million in 1997, $9.4 million in 1996 and $7.6 million in 1995, comprised of the following components:
1997 1996 1995 - -------------------------------------------------------------------------------- Service cost - benefits earned during the year ........................ $ 24.7 $ 25.2 $ 16.8 Interest cost on accumulated postretirement benefit obligation ...... 48.2 45.7 44.0 Net amortization and deferral ............ 32.8 13.2 54.1 Actual return on assets .................. (104.3) (74.7) (107.3) - -------------------------------------------------------------------------------- Net postretirement benefit cost .......... $ 1.4 $ 9.4 $ 7.6 ================================================================================
The Company contributes to a retiree health care qualified trust that will be used to pay a portion of its postretirement benefit liability. The plans' assets are diversified in stocks, bonds, and short-term and other investments. The plans' funded status at December 31 was as follows:
1997 1996 - -------------------------------------------------------------------------------- Plan assets at market value .......................... $647.4 $541.6 - -------------------------------------------------------------------------------- Accumulated postretirement benefit obligation Retirees ........................................... 367.0 368.2 Other fully eligible participants .................. 51.0 46.1 Other active participants .......................... 316.9 249.4 - -------------------------------------------------------------------------------- 734.9 663.7 - -------------------------------------------------------------------------------- Accumulated postretirement benefit obligation in excess of plan assets ........................... (87.5) (122.1) Unrecognized net gain ................................ (171.8) (166.8) Unrecognized plan changes ............................ (128.3) (141.2) - -------------------------------------------------------------------------------- Net postretirement benefit liability ................. $(387.6) $(430.1) ================================================================================
Assumptions used for the Company's other postretirement benefit plans at December 31 were as follows:
1997 1996 1995 - -------------------------------------------------------------------------------- Discount rate ................................. 7.0% 7.5% 7.0% Expected long-term rate of return on plan assets ................................. 10.0% 10.0% 10.0% ================================================================================
The health care cost trend rate was 8.0% at December 31, 1997. The rate will gradually decline to 5.0% over a 6-year period. The effect of increasing the health care cost trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation at December 31, 1997 by $100.5 million and the total service and interest cost components of the 1997 net postretirement benefit cost by $8.1 million. 15. Other (Income) Expense, Net
1997 1996 1995 - -------------------------------------------------------------------------------- Interest income ...................... $(221.4) $(205.4) $(191.0) Interest expense ..................... 129.5 138.6 98.7 Exchange gains ....................... (18.0) (27.8) (7.8) Minority interests ................... 131.8 144.2 91.9 Amortization of goodwill and other intangibles .............. 197.2 196.2 192.0 Other, net ........................... 123.6 (5.0) 643.8 - -------------------------------------------------------------------------------- $342.7 $240.8 $827.6 ================================================================================
Minority interests include third parties' share of exchange gains and losses arising from translation of the financial statements into U.S. dollars. Minority interests reflect dividends on the PECs, which were issued in December 1995 and redeemed in September 1997. (See Note 10.) In 1997, other, net, includes $207.3 million of nonrecurring charges consisting of $127.3 million for loss on sale of assets, $50.0 million for endowment of The Merck Company Foundation and $30.0 million for environmental costs. - -------------------------------------------------------------------------------- 47 Merck & Co., Inc. 1997 Annual Report Financial Section In 1995, other, net, includes $675.5 million of nonrecurring charges consisting of $278.5 million for losses on sales of assets, $175.0 million for restructuring actions, $161.2 million for endowment of The Merck Company Foundation and $60.8 million for settlement of claims. The restructuring actions involve manufacturing facility consolidation, rationalization and work-force reduction in Europe and the United States. Interest paid was $130.5 million in 1997, $117.4 million in 1996 and $85.5 million in 1995. 16. Taxes on Income A reconciliation between the Company's effective tax rate and the U.S. statutory rate follows:
1997 Tax Rate ----------------------- Amount 1997 1996 1995 - -------------------------------------------------------------------------------- U.S. statutory rate applied to pretax income .................. $2,261.8 35.0% 35.0% 35.0% Differential arising from: Equity income from affiliates ..... (155.0) (2.4) (1.9) (1.5) Tax exemption for Puerto Rico operations .......... (122.7) (1.9) (1.9) (1.8) Foreign operations ................ (89.4) (1.4) (3.2) (.9) State taxes ....................... 64.7 1.0 .1 1.5 Other, including minority interests .............. (111.2) (1.7) 1.9 (1.8) - -------------------------------------------------------------------------------- $1,848.2 28.6% 30.0% 30.5% ================================================================================
The differential arising from equity income from affiliates represents the favorable impact of accounting for joint venture taxes as a reduction of equity income, offset in part by significantly higher effective tax rates within the joint ventures. Domestic companies contributed approximately 71% in 1997, 73% in 1996 and 76% in 1995 to consolidated pretax income. Taxes on income consisted of:
1997 1996 1995 - -------------------------------------------------------------------------------- Current provision Federal ...................... $1,322.2 $1,106.2 $1,043.4 Foreign ...................... 476.8 410.3 455.1 State ........................ 90.5 (14.6) 149.4 - -------------------------------------------------------------------------------- 1,889.5 1,501.9 1,647.9 - -------------------------------------------------------------------------------- Deferred provision Federal ...................... (48.1) 136.9 (64.3) Foreign ...................... (6.4) (15.4) (95.9) State ........................ 13.2 36.1 (25.7) - -------------------------------------------------------------------------------- (41.3) 157.6 (185.9) - -------------------------------------------------------------------------------- $1,848.2 $1,659.5 $1,462.0 ================================================================================
Deferred income taxes at December 31 consisted of:
1997 1996 --------------------- --------------------- Assets Liabilities Assets Liabilities - -------------------------------------------------------------------------------- Other intangibles ............ $ -- $1,173.4 $ -- $1,208.5 Accelerated depreciation ..... -- 591.2 -- 521.2 Inventory related ............ 629.0 235.4 511.6 208.2 Other postretirement benefits ................... 161.0 -- 187.7 -- Equity investments ........... -- 173.1 -- 163.0 Restructuring charge ......... 123.1 -- 151.3 -- Environmental related ........ 87.0 -- 84.0 -- Compensation related ......... 91.3 -- 81.8 -- Equivalent Merck-Medco options assumed ............ 40.8 -- 62.7 -- Pension benefits ............. 11.7 144.3 9.4 97.9 Leasing activity ............. -- 17.6 -- 27.0 Other ........................ 858.2 480.7 712.8 462.7 - -------------------------------------------------------------------------------- 2,002.1 2,815.7 1,801.3 2,688.5 Valuation allowance .......... (4.4) -- (4.5) -- - -------------------------------------------------------------------------------- $1,997.7 $2,815.7 $1,796.8 $2,688.5 ================================================================================
At December 31, 1997 and 1996, current deferred tax assets of $704.4 million and $568.6 million, respectively, were included in Prepaid expenses and taxes and current deferred tax liabilities of $164.8 million and $112.2 million, respectively, were included in Income taxes payable. In addition, at December 31, 1997 and 1996, noncurrent deferred tax assets of $111.3 million and $52.2 million, respectively, were included in Other assets and noncurrent deferred tax liabilities of $1.5 billion and $1.4 billion, respectively, were included in Deferred income taxes and noncurrent liabilities. Income taxes paid in 1997, 1996 and 1995 were $1.3 billion, $1.1 billion and $2.0 billion, respectively. The 1995 amount reflects taxes paid on the 1994 gain resulting from the sale to Astra of an interest in a joint venture, the 1995 gains on sales of subsidiaries and a change in law affecting the calculation of federal estimated payments. - -------------------------------------------------------------------------------- 48 Merck & Co., Inc. 1997 Annual Report Financial Section At December 31, 1997, foreign earnings of $6.6 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 1989. 17. Earnings per Share In the fourth quarter of 1997, the Company adopted Statement No. 128, Earnings per Share, which requires presentation in the Consolidated Statement of Income of both basic and diluted earnings per share. Earnings per common share (basic) as calculated in accordance with this Statement does not differ from earnings per share reported in prior periods and Earnings per common share assuming dilution is not materially different. The net income effect of dilutive securities was not significant. A reconciliation of weighted average common shares outstanding to weighted average common shares outstanding assuming dilution follows:
1997 1996 1995 - -------------------------------------------------------------------------------- Average common shares outstanding ....... 1,204.5 1,213.6 1,236.1 Common shares issuable(1) ............... 30.2 31.2 27.6 - -------------------------------------------------------------------------------- Average common shares outstanding assuming dilution ......... 1,234.7 1,244.8 1,263.7 ================================================================================
(1) Issuable primarily under stock option plans. Stock options outstanding at December 31, 1997 to purchase 14.5 million shares of common stock were not included in the computation of Earnings per common share assuming dilution because the options' exercise prices were greater than the average market price of the common shares. 18. Geographic Segment Reporting
1997 1996 1995 - -------------------------------------------------------------------------------- Customer Sales North America .................. $17,762.9 $14,321.7 $11,704.3 Europe ......................... 3,605.0 3,322.4 2,894.3 Asia Pacific ................... 1,756.6 1,767.0 1,753.2 Other Foreign .................. 512.4 417.6 329.3 Affiliate Sales North America .................. 2,233.5 1,723.2 1,640.3 Europe ......................... 1,057.0 909.8 798.8 Asia Pacific ................... 52.4 50.4 59.1 Other Foreign .................. 4.2 2.7 1.5 Eliminations ................... (3,347.1) (2,686.1) (2,499.7) - -------------------------------------------------------------------------------- $23,636.9 $19,828.7 $16,681.1 ================================================================================ Income Before Taxes North America .................. $ 4,486.3 $ 3,691.7 $ 3,442.1 Europe ......................... 1,132.2 1,043.0 925.2 Asia Pacific ................... 327.2 352.9 323.4 Other Foreign .................. 10.4 (2.3) (17.4) Eliminations ................... (224.6) (95.9) (259.4) - -------------------------------------------------------------------------------- 5,731.5 4,989.4 4,413.9 Non-operating Income ........... 730.8 551.4 383.3 - -------------------------------------------------------------------------------- $ 6,462.3 $ 5,540.8 $ 4,797.2 ================================================================================ Assets North America .................. $16,996.2 $15,662.0 $14,563.3 Europe ......................... 3,310.7 2,322.4 2,202.4 Asia Pacific ................... 1,511.4 1,499.5 1,542.3 Other Foreign .................. 312.8 306.1 196.9 Cash and Investments ........... 4,842.7 4,681.0 5,319.4 Other Corporate Assets ......... 1,560.5 1,444.3 1,513.3 Eliminations ................... (2,722.4) (1,622.2) (1,505.8) - -------------------------------------------------------------------------------- $25,811.9 $24,293.1 $23,831.8 ================================================================================
Sales to affiliates by North America include products manufactured in the United States that are shipped to facilities in foreign countries for manufacture into finished products. Sales to affiliates are at negotiated prices based on specific market conditions. Profits are shown within the geographic areas at the time of sale; such profits, however, are included in consolidated income when a sale is made to a customer. Research and development expenses are included in the geographic area in which the expenses were incurred. Investments in affiliates accounted for using the equity method are included in Other Corporate Assets and earnings from these investments are included in Non-operating Income. These affiliates primarily operate in North America. 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. - -------------------------------------------------------------------------------- 49 Merck & Co., Inc. 1997 Annual Report Financial Section ================================================================================ 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, 1997, 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 Senior 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, 1997 and 1996, and the related consolidated statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1997. 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 generally accepted auditing standards. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP New York, New York ARTHUR ANDERSEN LLP January 27, 1998 - -------------------------------------------------------------------------------- 50 Merck & Co., Inc. 1997 Annual Report Financial Section ================================================================================ Audit Committee's Report ================================================================================ The Audit Committee of the Board of Directors is comprised of five outside directors. The members of the Committee are: Charles E. Exley Jr., Chairman; Carolyne K. Davis, Ph.D.; Sir Derek Birkin; William N. Kelley, M.D.; and Samuel O. Thier, M.D. The Committee held three meetings during 1997. The Audit Committee meets with the independent public accountants, management and internal auditors to assure that all are carrying out their respective responsibilities. The Audit Committee reviews the performance and fees of the independent public accountants prior to recommending their appointment, and meets with them, without management present, to discuss the scope and results of their audit work, including the adequacy of internal controls and the quality of financial reporting. Both the independent public accountants and the internal auditors have full access to the Audit Committee. /s/ Charles E. Exley Jr. Charles E. Exley Jr. Chairman, Audit Committee ================================================================================ Compensation and Benefits Committee's Report ================================================================================ The Compensation and Benefits Committee is comprised of five outside directors. The members of the Committee are: H. Brewster Atwater Jr., Chairman; Lawrence A. Bossidy; William G. Bowen, Ph.D.; Johnnetta B. Cole, Ph.D.; and Lloyd C. Elam, M.D. The Committee held four meetings during 1997. 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. /s/ H. Brewster Atwater Jr. H. Brewster Atwater Jr. Chairman, Compensation and Benefits Committee - -------------------------------------------------------------------------------- 51 Merck & Co., Inc. 1997 Annual Report Financial Section ================================================================================ Selected Financial Data (1) ================================================================================ Merck & Co., Inc. and Subsidiaries
($ in millions except per share amounts) 1997 1996 1995 1994 1993 1992(2) - ------------------------------------------------------------------------------------------------------------------------------------ Results for Year: Sales ......................................... $23,636.9 $19,828.7 $16,681.1 $14,969.8 $10,498.2 $9,662.5 Materials and production costs ................ 11,790.3 9,319.2 7,456.3 5,962.7 2,497.6 2,096.1 Marketing/administrative expenses ............. 4,299.2 3,841.3 3,297.8 3,177.5 2,913.9 2,963.3 Research/development expenses ................. 1,683.7 1,487.3 1,331.4 1,230.6 1,172.8 1,111.6 Equity (income) loss from affiliates .......... (727.9) (600.7) (346.3) (56.6) 26.1 (25.8) Gains on sales of businesses .................. (213.4) -- (682.9) -- -- -- Restructuring charge .......................... -- -- -- -- 775.0 -- Gain on joint venture formation ............... -- -- -- (492.0) -- -- Provision for joint venture obligation ........ -- -- -- 499.6 -- -- Other (income) expense, net ................... 342.7 240.8 827.6 232.8 10.1 (46.3) Income before taxes ........................... 6,462.3 5,540.8 4,797.2 4,415.2 3,102.7 3,563.6 Taxes on income ............................... 1,848.2 1,659.5 1,462.0 1,418.2 936.5 1,117.0 Net income .................................... 4,614.1 3,881.3 3,335.2 2,997.0 2,166.2 2,446.6 Earnings per common share(3) .................. $3.83 $3.20 $2.70 $2.38 $1.87 $2.12 Earnings per common share assuming dilution(3) ........................ $3.74 $3.12 $2.64 $2.34 $1.86 $2.10 Dividends declared ............................ 2,094.8 1,793.4 1,578.0 1,463.1 1,239.0 1,106.9 Dividends paid per common share ............... $1.69 $1.42 $1.24 $1.14 $1.03 $.92 Capital expenditures .......................... 1,448.8 1,196.7 1,005.5 1,009.3 1,012.7 1,066.6 Depreciation .................................. 602.4 521.7 463.3 475.6 348.4 290.3 - ------------------------------------------------------------------------------------------------------------------------------------ Year-End Position: Working capital ............................... $2,644.4 $2,897.4 $3,870.2 $2,291.4 $541.6 $1,241.1 Property, plant and equipment (net) ........... 6,609.4 5,926.7 5,269.1 5,296.3 4,894.6 4,271.1 Total assets .................................. 25,811.9 24,293.1 23,831.8 21,856.6 19,927.5 11,086.0 Long-term debt ................................ 1,346.5 1,155.9 1,372.8 1,145.9 1,120.8 495.7 Stockholders' equity .......................... 12,613.5 11,970.5 11,735.7 11,139.0 10,021.7 5,002.9 - ---------------------------------------------------------------------------------------------------------------------------------- Financial Ratios: Net income as a % of: Sales ....................................... 19.5% 19.6% 20.0% 20.0% 20.6% 25.3% Average total assets ........................ 18.4% 16.1% 14.6% 14.3% 14.0% 24.1% - ---------------------------------------------------------------------------------------------------------------------------------- Year-End Statistics: Average common shares outstanding (millions) ...................... 1,204.5 1,213.6 1,236.1 1,257.2 1,156.5 1,153.5 Number of stockholders of record .............. 263,900 247,300 243,000 244,700 231,300 161,200 Number of employees ........................... 53,800 49,100 45,200 47,500 47,100(4) 38,400 ================================================================================================================================== ($ in millions except per share amounts) 1991 1990 1989 1988 1987 - -------------------------------------------------------------------------------------------------------------------- Results for Year: Sales ................................ $8,602.7 $7,671.5 $6,550.5 $5,939.5 $5,061.3 Materials and production costs ....... 1,934.9 1,778.1 1,550.3 1,526.1 1,444.3 Marketing/administrative expenses .... 2,570.3 2,388.0 2,013.4 1,880.3 1,684.6 Research/development expenses ........ 987.8 854.0 750.5 668.8 565.7 Equity (income) loss from affiliates . 21.1 22.4 11.5 (2.5) (2.5) Gains on sales of businesses ......... -- -- -- -- -- Restructuring charge ................. -- -- -- -- -- Gain on joint venture formation ...... -- -- -- -- -- Provision for joint venture obligation -- -- -- -- -- Other (income) expense, net .......... (78.1) (69.8) (58.2) (4.2) (36.0) Income before taxes .................. 3,166.7 2,698.8 2,283.0 1,871.0 1,405.2 Taxes on income ...................... 1,045.0 917.6 787.6 664.2 498.8 Net income ........................... 2,121.7 1,781.2 1,495.4 1,206.8 906.4 Earnings per common share(3) ......... $1.83 $1.52 $1.26 $1.02 $.74 Earnings per common share assuming dilution(3) ............... $1.81 $1.51 $1.25 $1.01 $.73 Dividends declared ................... 920.3 788.1 681.5 546.3 365.2 Dividends paid per common share ...... $.77 $.64 $.55 $.43 $.27 Capital expenditures ................. 1,041.5 670.8 433.0 372.7 253.7 Depreciation ......................... 242.7 231.4 206.4 189.0 188.5 - -------------------------------------------------------------------------------------------------------------------- Year-End Position: Working capital ...................... $1,496.5 $939.2 $1,502.5 $1,480.3 $798.3 Property, plant and equipment (net) .. 3,504.5 2,721.7 2,292.5 2,070.7 1,948.0 Total assets ......................... 9,498.5 8,029.8 6,756.7 6,127.5 5,680.0 Long-term debt ....................... 493.7 124.1 117.8 142.8 167.4 Stockholders' equity ................. 4,916.2 3,834.4 3,520.6 2,855.8 2,116.7 - -------------------------------------------------------------------------------------------------------------------- Financial Ratios: Net income as a % of: Sales .............................. 24.7% 23.2% 22.8% 20.3% 17.9% Average total assets ............... 24.2% 24.1% 23.2% 20.4% 16.8% - -------------------------------------------------------------------------------------------------------------------- Year-End Statistics: Average common shares outstanding (millions) ............. 1,159.9 1,172.1 1,188.3 1,186.9 1,221.2 Number of stockholders of record ..... 91,100 82,300 75,600 68,500 56,900 Number of employees .................. 37,700 36,900 34,400 32,000 31,100 =====================================================================================================================
(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) In 1997, the Company adopted Statement No. 128, Earnings per Share. (See Note 17 to the consolidated financial statements for further information.) (4) Increase in 1993 is due to the inclusion of 10,300 Merck-Medco employees. - -------------------------------------------------------------------------------- 52 Merck & Co., Inc. 1997 Annual Report Financial Section EX-21 6 LIST OF SUBSIDIARIES EXHIBIT 21 MERCK & CO., INC. SUBSIDIARIES AS OF 12/31/97 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 International Indemnity Ltd. Bermuda Istituto Gentili S.p.A. Italy/Delaware 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 Merck Capital Investment, Inc. Delaware Merck Capital Resources, Inc. Delaware MSD Technology, L.P./1/ Bermuda Merck Finance Co., Inc. Delaware Merck de Puerto Rico, Inc. Delaware Merck Enterprises Canada, Ltd. Canada Merck Foreign Sales Corporation Ltd. Bermuda Merck Holdings, Inc. Delaware Astra Merck, Inc./1/ Delaware Chugai MSD Co., Ltd./1/ Japan Frosst Laboratories, Inc. Delaware Frosst Portuguesa--Produtos Farmaceuticos, Lda. Portugal Merck-Medco Holdings II Corp. Delaware Cloverleaf International Holdings S.A. Luxembourg Coordinated Patient Care Scandinavia AS Norway Medidoc AB Sweden Coordination Medicale et Pharmaceutique, S.A. France Merck Frosst Canada, Inc. Canada Merck Sharp & Dohme (Australia) Pty. Limited Australia AMRAD Pharmaceuticals Pty. Ltd./1/ Australia Merck Sharp & Dohme B.V. Netherlands Abello Farmacia, S.L./1/ Spain Financiere MSD S.A.S. France Chibret Pharmazeutische GmbH Germany Laboratoires Jean-Paul Martin S.A.S./1/ France Laboratoires Merck Sharp & Dohme Chibret SNC France Pasteur Merieux MSD Gestion S.A./1/ France Pasteur Merieux MSD S.N.C./1/ France Pasteur Merieux MSD A/S Denmark Pasteur Merieux MSD GmbH Germany Pasteur Merieux MSD Ltd. (UK) Great Britain Pasteur Merieux MSD Ltd. (Ireland) Ireland
COUNTRY OR STATE NAME OF INCORPORATION - ---- ---------------- Pasteur Merieux MSD N.V. Belgium Pasteur Merieux MSD S.A. Spain Pasteur Merieux MSD S.p.A. Italy Pasteur Vaccins S.A. France Laboratorios Chibret, S.A. Spain Merck Sharp & Dohme GmbH Austria Merck Sharp & Dohme (Italia) S.p.A. Italy Abiogen Farma S.p.A. Italy Istituto Di Richerche Di Biologia Molecolare S.p.A./1/ Italy MSD (Proprietary) Limited South Africa MSD Sharp & Dohme GmbH Germany Dieckmann Arzneimittel GmbH Germany Woelm Pharma GmbH & Co./1/ Germany MSD Chibropharm GmbH Germany MSD Unterstutzungskasse GmbH Germany Varipharm Arzneimittel GmbH Germany Merck Sharp & Dohme Chibret A.G. Switzerland 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 Britian Merck Sharp & Dohme Finance Europe Great Britain Thomas Morson & Son Limited Great Britain Merck Sharp & Dohme IDEA, Inc. Switzerland Merck Sharp & Dohme (Sweden) A.B. Sweden Merck Sharp & Dohme (Israel--1996) Company Ltd. Israel Merck Sharp & Dohme Trading & Service Limited Liability Company Hungary MSD Ireland (Holdings) S.A. Luxembourg Fabrica de Productos Quimicos y Farmaceuticos Abello, S.A. Spain Fregenal Holdings S.A. Panama Frosst Iberica, 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 Merck Sharp & Dohme (Singapore) Ltd. Bermuda MSD Ireland (Investment) Ltd. Bermuda MSD Overseas Manufacturing Co. (Ireland) Ireland Crosswinds B.V. Netherlands Merck Sharp & Dohme (Ireland) Ltd. Bermuda Neopharmed S.p.A. Italy Ruskin Limited Bermuda MSD (Norge) A/S Norway Suomen MSD Oy Finland Kiinteisto Oy Irmelinpesa/1/ Finland Kiinteisto Oy Viistotie 11 Finland Merck Sharp & Dohme de Venezuela, C.A. Venezuela Merck Sharp & Dohme Holdings de Mexico, S.A. de C.V. Mexico
2
COUNTRY OR STATE NAME OF INCORPORATION - ---- ------------------ Merck Sharp & Dohme de Mexico, S.A. de C.V. Mexico 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 Industrial e Exportadora Ltda. Brazil Merck Sharp & Dohme Farmaceutica e Veterinaria 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 Quimica de Puerto Rico, Inc. Delaware Merck Sharp & Dohme S.A.R.L. Morocco Merck Ventures, Inc. Delaware MSD Chimie S.A France MSD Lakemedel (Scandinavia) Aktiebolog Sweden Prosalud Peruana S.A. Peru TELERx Marketing Inc. Pennsylvania Merck Investment Co., Inc. Delaware Merck-Medco Managed Care, L.L.C. Delaware CM Delaware Corporation Delaware DM-MG, L.L.C. Delaware MCCO Corp. New Jersey MCCO, L.L.C. New Jersey Medco Containment Insurance Company of New Jersey New Jersey Medco Containment Insurance Company of New York New York Medco Containment Life Insurance Company Pennsylvania Medco MM Corp. New Jersey Merck-Medco Managed Care of California, Inc. California Merck-Medco Rx Services of Florida No. 2, 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 Mergerco Delaware No. 7, L.L.C. Delaware Mergerco Delaware No. 10, L.L.C. Delaware
3
COUNTRY OR STATE NAME OF INCORPORATION - ---- ---------------- MW Holdings, L.L.C. Delaware NJRE, L.L.C. New Jersey NRx Federal Corp. Delaware National Rx Services, Inc. California National Rx Services, Inc. of Missouri Missouri National Rx Services No. 3, Inc. of Ohio Ohio New York PAID Independent Practice Association, L.L.C. New York Paid Direct, Inc. Delaware PAID Prescriptions, L.L.C. Nevada Replacement Distribution Center, Inc. Ohio Systemed, L.L.C. Delaware American Medical Outcomes Repository, Inc. Delaware Systemed Pharmacy of Iowa, L.L.C. Delaware Systemed Pharmacy of Ohio, Ltd. Ohio Merck Resource Management, Inc. Delaware 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 S.C. Peru Merck Sharp & Dohme (Philippines) Inc. Philippines Merial Limited/LLC/1/ Great Britain/Delaware British United Turkeys Limited/1/ Great Britain Turkey Research & Development Limited/1/ Great Britain MI (FDL) Holdings, Inc. Delaware MSD International Holdings, Inc. Delaware Banyu Pharmaceutical Company, Ltd./1/ Japan Banyu-A.S.C. Co., Ltd. Japan Nippon Merck-Banyu Co., Ltd. Japan MSD (Japan) Co., Ltd. Japan The Du Pont Merck Pharmaceutical Company/1/ Delaware The O'Hare Group, Inc./1/ Delaware
- -------- /1/ own less than 100% 4 EX-24 7 POWER OF ATTORNEY/CERTIFIED RESOLUTION EXHIBIT 24 POWER OF ATTORNEY Each of the undersigned does hereby appoint CELIA A. COLBERT, MARY M. McDONALD 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 l0-K Annual Report of Merck & Co., Inc. for the fiscal year ended December 3l, l997 under the Securities Exchange Act of l934, including amendments thereto and all exhibits and other documents in connection therewith. IN WITNESS WHEREOF, this instrument has been duly executed as of the 24th day of February, l998. Merck & Co., Inc. /s/ Raymond V. Gilmartin By___________________________________ 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 (Principal RAYMOND V. GILMARTIN Executive Officer; Director) /s/ Judy C. Lewent Senior Vice President and Chief - ------------------------------------- Financial Officer (Principal JUDY C. LEWENT Financial Officer) /s/ Peter E. Nugent Vice President, Controller - ------------------------------------- (Principal Accounting Officer) PETER E. NUGENT DIRECTORS /s/ Derek Birkin /s/ Lloyd C. Elam - ------------------------------------- ------------------------------------- DEREK BIRKIN LLOYD C. ELAM /s/ Lawrence A. Bossidy /s/ William N. Kelley - ------------------------------------- ------------------------------------- LAWRENCE A. BOSSIDY WILLIAM N. KELLEY /s/ William G. Bowen /s/ Edward M. Scolnick - ------------------------------------- ------------------------------------- WILLIAM G. BOWEN EDWARD M. SCOLNICK /s/ Johnnetta B. Cole /s/ Samuel O. Thier - ------------------------------------- ------------------------------------- JOHNNETTA B. COLE SAMUEL O. THIER /s/ Carolyne K. Davis - ------------------------------------- CAROLYNE K. DAVIS EXHIBIT 24 I, Nancy V. Van Allen, 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 24, l998, 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. 8--1998 RESOLVED, that the proposed form of Form l0-K Annual Report of the Company for the fiscal year ended December 3l, l997 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 l0-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, Mary M. McDonald 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 l0-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 20th day of March, l998. [Corporate Seal] /s/ Nancy V. Allen ------------------------------------------ Nancy V. Van Allen Assistant Secretary 2 EX-27.(A) 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 12-MOS DEC-31-1997 DEC-31-1997 1,125 1,184 2,877 0 2,145 8,213 10,033 (3,423) 25,812 5,569 1,347 0 0 5,254 7,360 25,812 23,637 23,637 11,790 11,790 1,684 0 130 6,462 1,848 4,614 0 0 0 4,614 3.83 3.74 NOT MATERIAL TO THE CONSOLIDATED FINANCIAL STATEMENTS.
EX-27.(B) 9 RESTATED FINANCIAL DATA SCHEDULE
5 RESTATED FINANCIAL DATA SCHEDULE INCLUDING COLUMNS FOR THE THREE REPORTING PERIODS ENDED SEPTEMBER 30, 1996, JUNE 30, 1997 AND SEPTEMBER 30, 1997; AND FOR THE TWO FISCAL YEARS ENDED DECEMBER 31, 1994 AND DECEMBER 31, 1996. 1,000,000
12-MOS 9-MOS 12-MOS 6-MOS 9-MOS DEC-31-1994 DEC-31-1996 DEC-31-1996 DEC-31-1997 DEC-31-1997 DEC-31-1994 SEP-30-1996 DEC-31-1996 JUN-30-1997 SEP-30-1997 1,604 1,344 1,352 1,587 1,282 666 1,008 829 1,129 885 2,351 2,723 2,656 2,697 2,996 0 0 0 0 0 1,661 1,921 2,149 2,171 2,227 6,922 7,781 7,727 8,419 8,210 7,673 8,414 8,726 9,270 9,485 (2,377) (2,747) 2,800 (3,134) (3,189) 21,857 23,982 24,293 25,628 25,898 5,449 5,004 4,829 4,603 5,335 1,146 1,328 1,156 1,727 1,690 0 0 0 0 0 0 0 0 0 0 4,668 4,884 4,968 5,116 5,199 6,471 6,552 7,003 7,706 7,635 21,857 23,982 24,293 25,628 25,898 14,970 14,423 19,829 11,477 17,405 14,970 14,423 19,829 11,477 17,405 5,963 6,845 9,319 5,731 8,722 5,963 6,845 9,319 5,731 8,722 1,231 1,064 1,487 765 1,190 0 0 0 0 0 124 104 139 56 90 4,415 4,071 5,541 3,096 4,791 1,418 1,233 1,660 921 1,419 2,997 2,838 3,881 2,175 3,372 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2,997 2,838 3,881 2,175 3,372 2.38 2.33 3.20 1.80 2.79 2.34 2.27 3.12 1.75 2.72 NOT MATERIAL TO THE CONSOLIDATED FINANCIAL STATEMENTS.
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