-----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, PWFgAlH9+g9u5YrMw/s9x6xEU0+mMcEKXBjR2lE0T3PlJKvTbvULdni6g4yuBPFV iQx+7ea5U3umkNNKlIEfog== 0000950130-99-001634.txt : 19990325 0000950130-99-001634.hdr.sgml : 19990325 ACCESSION NUMBER: 0000950130-99-001634 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990324 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERCK & CO INC CENTRAL INDEX KEY: 0000064978 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 221109110 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-03305 FILM NUMBER: 99571662 BUSINESS ADDRESS: STREET 1: ONE MERCK DR STREET 2: P O BOX 100 CITY: WHITEHOUSE STATION STATE: NJ ZIP: 08889-0100 BUSINESS PHONE: 9084234044 MAIL ADDRESS: STREET 1: ONE MERCK DR STREET 2: PO BOX 100 WS3AB-05 CITY: WHITEHOUSE STATION STATE: NJ ZIP: 08889-0100 10-K405 1 FORM 10K As filed with the Securities and Exchange Commission on March 24, 1999 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ---------------- FORM 10-K (MARK ONE) Annual Report Pursuant to Section 13 or 15(d) of the Securities [X] Exchange Act of 1934 For the Fiscal Year Ended December 31, 1998 or Transition Report Pursuant to Section 13 or 15(d) of the Securities [_] Exchange Act of 1934 For the transition period from ______ to ______
Commission File No. 1-3305 ---------------- MERCK & CO., INC. One Merck Drive Whitehouse Station, N. J. 08889-0100 (908) 423-1000 Incorporated in New Jersey I.R.S. Employer Identification No. 22-1109110 Securities Registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on which Registered Common Stock New York and Philadelphia Stock ($0.01 par value) Exchanges Number of shares of Common Stock ($0.01 par value) outstanding as of February 26, 1999: 2,362,986,851. Aggregate market value of Common Stock ($0.01 par value) held by non- affiliates on December 31, 1998 based on closing price on February 26, 1999: $192,283,000,000. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Documents Incorporated by Reference: Document Part of Form 10-K Annual Report to stockholders for Parts I and II the fiscal year ended December 31, 1998 Proxy Statement for the Annual Part III Meeting of Stockholders to be held April 27, 1999 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART I Item 1. Business. Merck & Co., Inc. (the "Company") is a global research-driven pharmaceutical company that discovers, develops, manufactures and markets a broad range of human and animal health products, directly and through its joint ventures, and provides pharmaceutical benefit services through Merck-Medco Managed Care, L.L.C. ("Merck-Medco"). The Company's operations are principally managed on a products and services basis and are comprised of two reportable segments: Merck Pharmaceutical and Merck-Medco. Merck Pharmaceutical products consist of therapeutic agents, sold by prescription, for the treatment of human disorders. Merck-Medco revenues are derived from the filling and management of prescriptions and health management programs. The following table shows the sales of various categories of the Company's products and services:
($ in millions) 1998 1997 1996 --------------- --------- --------- --------- Elevated cholesterol.......................... $ 4,694.1 $ 4,672.3 $ 4,055.9 Hypertension/heart failure.................... 4,213.5 3,855.0 3,452.6 Anti-ulcerants................................ 1,113.5 1,184.4 1,033.5 Vaccines/biologicals.......................... 846.7 733.6 586.8 Osteoporosis.................................. 775.2 532.1 281.8 Antibiotics................................... 743.3 774.9 822.3 Human immunodeficiency virus ("HIV").......... 676.3 581.7 187.8 Ophthalmologicals............................. 630.7 639.1 643.6 Animal health/crop protection................. -- 550.0 1,044.1 Other Merck products.......................... 1,603.2 673.5 562.3 Merck-Medco................................... 11,601.7 9,440.3 7,158.0 --------- --------- --------- Total....................................... $26,898.2 $23,636.9 $19,828.7 ========= ========= =========
Human health products include therapeutic agents within the Merck Pharmaceutical segment, sold by prescription for the treatment of human disorders, as well as preventive agents (vaccines/biologicals). 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; vaccines/biologicals, of which M-M-R II (measles, mumps and rubella virus vaccine live), Recombivax HB (hepatitis B vaccine [recombinant]) and Varivax (varicella virus vaccine live [Oka/Merck]), a live virus vaccine for the prevention of chickenpox, are the largest-selling; osteoporosis, which is comprised of Fosamax (alendronate sodium), for treatment and prevention in postmenopausal women; antibiotics, of which Primaxin (imipenem and cilastatin sodium) and Noroxin (norfloxacin) are the largest-selling; human immunodeficiency virus, which includes Crixivan (indinavir sulfate), a protease inhibitor for the treatment of human immunodeficiency viral infection in adults; and ophthalmologicals, of which Timoptic (timolol maleate), Timoptic-XE (timolol maleate ophthalmic gel forming solution) and Trusopt (dorzolamide hydrochloride) are the largest selling. 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. 2 Other Merck products include sales of Proscar (finasteride), which provides long-term disease management of symptomatic benign prostate enlargement ("BPH"), Singulair (montelukast sodium), for the prevention and chronic treatment of asthma in adults and children aged six years and above, Maxalt (rizatriptan benzoate), an anti-migraine treatment, Propecia (finasteride), which treats male pattern hair loss and Aggrastat (tirofiban hydrochloride), a platelet blocker, for treatment of acute coronary syndrome, and other human pharmaceuticals within the Merck Pharmaceutical segment, continuing sales to divested businesses, pharmaceutical and animal health supply sales to the Company's joint ventures and, as of July 1, 1998, supply sales to Astra Pharmaceuticals, L.P. Also included in this category are rebates and discounts on Company 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 help manage patient health. In 1997, the Company acquired Istituto Gentili S.p.A., a privately-held Italian pharmaceutical company that owned the intellectual property rights for alendronate, which is marketed in the United States by the Company as Fosamax. Propecia, which treats male pattern hair loss, was introduced in the United States and 11 other countries in 1998, with launches pending in 13 more. In 1998 and through February 1999, Cozaar received regulatory approval for a new heart failure indication in 16 countries, bringing the number of countries that have approved this indication to 18, and approvals are pending in other markets. In February 1998, the U.S. Food and Drug Administration ("FDA") cleared Singulair, 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 years and above. Singulair has now been launched in 38 countries including the United States, the United Kingdom, Spain, Germany, Sweden and Denmark. In March 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 March 1999, the FDA approved a new 333 mg capsule strength of Crixivan and a new unit dose (blister) package for existing 400 mg capsules. In March 1998, the FDA cleared Proscar for marketing to reduce the need for BPH-related surgery and the risk of developing acute urinary retention. In April 1998, the FDA approved an expanded indication for Zocor to reduce the risk of first stroke or transient ischemic attack in people with high cholesterol and coronary heart disease. In July 1998, the FDA approved an 80 mg tablet of Zocor. In addition, the prescribing information for Zocor in the United States has been changed to recommend the 20 mg tablet as the usual starting dose. In April 1998, the FDA granted marketing clearance for Cosopt (dorzolamide hydrochloride and timolol maleate ophthalmic solution), which is indicated for the reduction of elevated intraocular pressure in patients who do not respond adequately to beta- blockers alone. In May 1998, the FDA approved Aggrastat, a platelet blocker, for marketing in the United States for the treatment of acute coronary syndrome, including patients with unstable angina/non-Q-wave myocardial infarction who are managed medically and those undergoing angioplasty or atherectomy. Aggrastat has been launched in eight countries, including the United States, Switzerland, Germany and Mexico. In June 1998, the FDA approved for marketing in the United States, Maxalt, a new oral anti-migraine treatment. Maxalt is now marketed in 11 countries, including the United States, the United Kingdom, Sweden, the Netherlands and Mexico. In February 1999, Mexico became the first country to grant marketing clearance to Vioxx (rofecoxib), a once-daily, anti-inflammatory COX-2 specific inhibitor for the treatment of osteoarthritis and relief of pain, 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 November 23, 1998. On January 11, 1999, the FDA assigned a six-month priority review to the Company's NDA for Vioxx. In February 1999, the Company received confirmation that the FDA's Arthritis Advisory Committee meeting for Vioxx has been scheduled for April 20, 1999. In March 1999, the FDA approved a new use for Mevacor to reduce the risk of first heart attack, unstable angina and coronary revascularization procedures in people without symptoms of cardiovascular disease, with average to moderately elevated levels of total and LDL cholesterol and below average HDL cholesterol. Divestitures -- In July 1997, the Company sold its crop protection business to Novartis for $910.0 million. 3 In July 1998, the Company sold its one-half interest in The Dupont Merck Pharmaceutical Company, its joint venture with E.I. du Pont de Nemours and Company ("DuPont"), to DuPont for $2.6 billion in cash. These businesses were not significant to the Company's financial position, liquidity or results of operations. Joint Venture -- In 1982, the Company entered into an agreement with Astra AB ("Astra") to develop and market Astra products in the United States. In 1993, the Company's total sales of Astra products reached a level that triggered the first step in the establishment of a joint venture business carried on by Astra Merck Inc. ("AMI"), in which the Company and Astra each owned a 50% share. The joint venture, formed in November 1994, developed and marketed most of Astra's new prescription medicines in the United States. Joint venture sales consisted 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. On July 1, 1998, the Company and Astra completed the restructuring of the ownership and operations of the joint venture whereby the Company acquired Astra's interest in AMI, renamed KBI Inc. ("KBI"), for consideration totaling $3.1 billion. KBI's net operating assets, excluding certain product rights, were then combined with the net assets of Astra's wholly owned subsidiary, Astra USA, Inc., to form a new U.S. limited partnership named Astra Pharmaceuticals, L.P. in which the Company maintains a limited partner interest. For a franchise fee payment of $230.0 million, the partnership became the exclusive distributor of the products for which KBI retained rights. The Company earns certain partnership returns as well as ongoing revenue based on sales of current and future KBI products. The partnership returns include a priority return, a fixed return and certain variable returns which are based, in part, upon sales of certain former Astra USA, Inc. products. The fixed return represents accretion of the carrying value of the Company's limited partnership interest from its initial carrying value up to its liquidating net worth, which is being recognized into income over 10 years on a straight-line basis. For a payment of $443.0 million, Astra purchased an option to buy the Company's interest in the KBI products in 2008, 2012 or 2016, excluding the Company's interest in the gastrointestinal medicines Prilosec and perprazole. In December 1998, Astra announced plans to merge with Zeneca Group Plc. If this proposed merger is completed, Astra will be required to make one-time payments to the Company totaling approximately $1.8 billion for the relinquishment of certain rights, including option rights to future Astra products with no existing or pending U.S. patents at the time of the merger. This merger would also trigger a partial redemption of the Company's limited partnership interest in 2008. Furthermore, upon completion of the merger, Astra's option to buy the Company's interest in the KBI products would be exercisable only in 2010 and the Company would obtain the right to require Astra to purchase such interest in 2008. 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 (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 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 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 provided administrative services. The Company contributed cash and European marketing rights to several of its prescription medicines and provided 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. As discussed above under "Divestitures," in July 1998, the Company sold its one-half interest in the joint venture to DuPont for $2.6 billion in cash. 4 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 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. This joint venture was dissolved by the parties effective February 1999. 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 pharmaceutical business is conducted are highly competitive and, in many cases, highly regulated. Such competition involves an intensive search for technological innovations and the ability to market these innovations effectively. With its long-standing emphasis on research and development, the Company is well prepared to compete in the search for technological innovations. Additional resources to meet competition include quality control, flexibility to meet exact customer specifications, an efficient distribution system and a strong technical information service. The Company is active in acquiring and marketing products through joint ventures and licenses and has been 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, 5 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 Moduretic (amiloride HCl and hydrochlorothiazide), 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 8. It is generally the Company's position 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 U.S. Consumer Price Index, 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 that help plan sponsors provide high- quality, affordable prescription drug care and health management services to health plan members. Merck-Medco dispenses prescription drugs from its national network of mail service pharmacies, manages prescriptions dispensed through a national network of participating retail pharmacies and implements health management programs to help its clients provide better care for patients with high-cost, high-risk conditions. 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. Merck-Medco sells its pharmaceutical benefit management services to corporations, labor unions, insurance companies, Blue Cross/Blue Shield organizations, government agencies, federal and state employee plans, health maintenance and other similar organizations. Raw Materials -- Raw materials and supplies are normally available in quantities adequate to meet the needs of the Company's business. Government Regulation and Investigation -- The pharmaceutical industry is subject to global regulation by regional, country, state and local agencies. Of particular importance is the FDA in the United States, which administers requirements covering the testing, approval, safety, effectiveness, manufacturing, labeling and marketing of prescription pharmaceuticals. In many cases, the FDA requirements have increased the amount of time and money necessary to develop new products and bring them to market in the United States. In 1997, the Food and Drug Administration Modernization Act was passed and was the culmination of a comprehensive legislative reform effort designed to streamline regulatory procedures within the FDA and to improve the regulation of drugs, medical devices, and food. The legislation was principally designed to ensure the timely availability of safe and effective drugs and biologics by expediting the premarket review process for new products. A key provision of the legislation is the re-authorization of the Prescription Drug User Fee Act of 1992, which permits the continued collection of user fees from prescription drug manufacturers to augment FDA resources earmarked for the review of human drug 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 well positioned to respond to evolving market forces, it cannot predict the outcome or effect of legislation resulting from these reform efforts. 6 For many years, the pharmaceutical industry and the pharmacy benefits management business 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 conduct its operations, including the introduction of new drugs to the 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 payer is fiscally responsible. This type of payment system and other cost containment systems are now widely used by public and private payers and have caused hospitals, health maintenance organizations and other customers of the Company to be more cost-conscious in their treatment decisions, including decisions regarding the medicines to be made available to their patients. The Company continues to work with private and federal employers to slow increases in healthcare costs. Further, the Company's efforts to demonstrate that its medicines can help save costs in other areas, and pricing flexibility across its product portfolio, have encouraged the use of the Company's medicines and have helped offset the effects of increasing cost pressures. Also, federal and state governments have pursued methods to directly reduce the cost of drugs for which they pay. For example, federal legislation 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 1998 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. In addition, countries within the EU, recognizing the economic importance of the research-based pharmaceutical industry and the value of innovative medicines, are working with industry and the European Commission on proposals for market deregulation. The Company is subject to the jurisdiction of various regulatory agencies and is, therefore, subject to potential administrative actions. Such actions may include seizures of products and other civil and criminal sanctions. Under certain circumstances, the Company on its own may deem it advisable to initiate product recalls. Although it is difficult to predict the ultimate effect of these activities and legislative, administrative and regulatory 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 7 pharmacists. These regulations are issued by an administrative body in each state (typically, a pharmacy board), which is empowered to impose sanctions for noncompliance. The policies and procedures of the Company comply with these regulations. Patents, Trademarks and Licenses -- Patent protection is considered, in the aggregate, to be of material importance in the Company's marketing of human health products in the United States and in most major foreign markets. Patents may cover products per se, pharmaceutical formulations, processes for or intermediates useful in the manufacture of products or the uses of products. Protection for individual products extends for varying periods in accordance with the date of grant and the legal life of patents in the various countries. The protection afforded, which may also vary from country to country, depends upon the type of patent and its scope of coverage. Patent portfolios developed for products introduced by the Company normally provide marketing exclusivity. Patents are in effect for the following major products in the United States: Aggrastat, Cosopt, Chibroxin (norfloxacin), Cozaar, Crixivan, Fosamax, Hyzaar, Maxalt, Mefoxin (cefoxitin sodium), Mevacor, Noroxin, PedvaxHIB (Haemophilus b conjugate vaccine), Pepcid, Primaxin, Prinivil, Prinzide, Propecia, Proscar, Recombivax HB, Sinemet CR (carbidopa and levodopa), Singulair, Timoptic-XE, Trusopt, Vaseretic, Vasotec, Zocor and Prilosec (which was developed jointly by the Company and Astra and is supplied exclusively to Astra Pharmaceuticals, L.P.). The lisinopril products (which include Prinivil) and Sinemet CR are subject to agreements with third parties and are not marketed exclusively by the Company. Several products will face expiration of product patents in the United States and other countries in the near term, including Pepcid (U.S. - 2000), Vasotec (U.S. - 2000), Mevacor (U.S. - 2001), Prinivil/Prinzide (U.S. - 2001) and Vaseretic (U.S. - 2001). In addition, Prilosec will face expiration of a product patent in 2001. In the aggregate, domestic sales of these products represent 22% of the Company's human health sales for 1998. The Company expects a significant decline in these sales in the years 2000 through 2002 upon the loss of market exclusivity. With the exception of Prilosec, for which the Company has U.S. rights only, a decline is also expected in the Company's European sales for these products in the years 2000 through 2005 upon the loss of market exclusivity in European countries throughout this period. These sales represent 7% of the Company's human health sales for 1998. 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), certain ivermectin-containing animal health products, Moduretic, 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 market exclusivity for the covered product, commercial benefits may continue to be derived from: (i) later-granted patents on processes and intermediates related to the most economical method of manufacture of the active ingredient of such product; (ii) patents relating to the use of such product; (iii) patents relating to novel compositions and formulations; and (iv) in the United States, market exclusivity that may be available under federal law. The effect of product patent expiration also depends upon many other factors such as the nature of the market and the position of the product in it, the growth of the market, the complexities and economics of the process for manufacture of the active ingredient of the product and the requirements of new drug provisions of the Federal Food, Drug and Cosmetic Act or similar laws and regulations in other countries. 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 8 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 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 1997, the Food and Drug Administration Modernization Act was passed. The Act includes a Pediatric Exclusivity Provision that may provide an additional six months of market exclusivity in the United States for indications of new or currently marketed drugs, if certain agreed upon pediatric studies are completed by the applicant. 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 are entitled to a 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 Tariffs 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 have upgraded or 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 1998 on patent and know-how licenses and other rights amounted to $107.6 million. The Company also paid royalties amounting to $234.6 million in 1998 under patent and know-how licenses it holds. 9 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 8,500 people are employed in the Company's research activities. Expenditures for the Company's research and development programs were $1,821.1 million in 1998, $1,683.7 million in 1997 and $1,487.3 million in 1996 and will be approximately $2.1 billion in 1999. 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 1989 through 1998 exceeded $12.0 billion with a compound annual growth rate of 11%. 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 animal health are being carried on in various fields such as bacterial and viral infections, cardiovascular functions, cancer, diabetes, pain and 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 required approval. The development of certain other products is also subject to government regulations covering safety and efficacy in the United States and many foreign countries. There can be no assurance that a compound that is the result of any particular program will obtain the regulatory approvals necessary for it to be marketed. New product candidates resulting from this research and development program include Vioxx, a new anti-inflammatory product for the treatment of osteoarthritis and relief of pain, for which the Company filed an NDA with the FDA on November 23, 1998. On January 11, 1999, the FDA assigned a six-month priority review to the Company's NDA for Vioxx. In February 1999, the Company received confirmation that the FDA's Arthritis Advisory Committee meeting for Vioxx has been scheduled for April 20, 1999. Other products in development include an injectable antibiotic; an antifungal agent; an oral compound potentially useful for treatment of chemotherapy induced emesis; an oral compound potentially useful for the treatment of depression and other neuropsychiatric diseases; a second COX-2 specific inhibitor potentially useful for the treatment of osteoarthritis, rheumatoid arthritis and pain; 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. Cozaar and Hyzaar are registered trademarks of E.I. du Pont de Nemours and Company, Wilmington, DE. Employees At the end of 1998, the Company had 57,300 employees worldwide, with 35,900 employed in the United States, including Puerto Rico. Approximately 32% 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 1998, the Company incurred capital expenditures of approximately $56.5 million for environmental protection facilities. Capital expenditures for this purpose are forecasted to exceed $550.0 million for the years 1999 through 2003. In addition, the Company's operating and maintenance expenditures for environmental protection facilities were approximately $83.4 million in 1998. Expenditures for this purpose for the years 1999 through 2003 are forecasted to exceed $484.0 million. The Company is also 10 remediating environmental contamination resulting from past industrial activity at certain of its sites. Expenditures for remediation and environmental liabilities were $16.7 million in 1998, and are estimated at $220.0 million for the years 1999 through 2003. 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," "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 in the near term, including Pepcid (U.S. - 2000), Vasotec (U.S. - 2000), Mevacor (U.S. - 2001), Prinivil/Prinzide (U.S. - 2001) and Vaseretic (U.S. - 2001). In addition, Prilosec, which is supplied exclusively to Astra Pharmaceuticals, L.P., will face expiration of a product 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 and investigations, 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. 11 . 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 and Segment Information The Company's operations outside the United States are conducted primarily through subsidiaries. Sales of the Company's human health products by subsidiaries outside the United States were 43% of the Company's human health sales in 1998, and 46% and 47% in 1997 and 1996, respectively. The 1998 percentage was affected by increased domestic supply sales to Astra Pharmaceuticals, L.P., as a result of the restructuring of AMI. 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. Within the EU, there has been an evolution toward a single market in pharmaceuticals, for which Economic and Monetary Union ("EMU"), including the adoption of the euro as a single currency, marks an important step. The Company has recognized the strategic significance of this development and will adopt the euro in 1999 for use in EMU markets. In this way, the Company is demonstrating its support for the European Community's industrial policy. 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, the Middle East, Africa, Eastern Europe and Asia Pacific where changes in government policies and economic conditions are making it possible for the Company to earn fair returns. Business in these developing areas, while sometimes less stable, offers important opportunities for growth over time. Financial information about geographic areas and operating segments of the Company's business is incorporated by reference to page 51 of the Company's 1998 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. The continued efficient operation of the Company's business will be dependent upon the ability of its systems to process date sensitive information in the Year 2000. As a result, the Company initiated a program in 1996 to inventory all critical systems, assess the impact of Year 2000 noncompliance, develop plans to remediate or replace noncompliant systems and assess the readiness of key third parties. The inventory and assessment phases are complete for internal information technology ("IT") systems and the Company is approximately 75% complete with the remediation phase as of December 31, 1998. The evaluation and remediation phases for non-IT systems (e.g. building, process and factory control systems) are currently underway. Although the Company has designed these programs to properly prepare its systems for the Year 2000, there can be no assurance that the Company will not experience 12 business disruptions or incur material costs caused by the failure to detect and remediate all instances of Year 2000 noncompliance in its systems. Failure to complete these programs as planned could result in the corruption of data, hardware or equipment failures or the inability to manufacture products or conduct other business activities, all of which could have a material impact on the Company's business, results of operations or financial position. Contingency plans (including the substitution of systems, use of manual methods and other means to prevent the failure of critical systems from having a material effect on the Company) are under development, particularly for high risk areas such as those involving supplier and product management. In addition to risks associated with internal systems, the Company has relationships with, and is to varying degrees dependent upon, third parties that provide the Company with information, goods and services. These include financial institutions, suppliers, utilities, vendors, research partners and governmental entities, as well as customers and distributors. If a significant number of these third parties experience failures in their systems due to Year 2000 noncompliance, it could affect the Company's ability to process transactions, manufacture products or engage in other business activities. While some of these risks are outside of the Company's control, the Company has instituted programs, including internal records review and external questionnaires and supplier audits, to identify key third parties, assess their level of Year 2000 compliance, update contracts, develop supplier-based contingency plans and address any noncompliance issues. All critical aspects of the Company's Year 2000 compliance program are expected to be completed by the end of the third quarter 1999. Total costs to resolve the Year 2000 issue are not expected to be material to the Company's financial position, results of operations or cash flows. Item 2. Properties. The Company's corporate headquarters is located in Whitehouse Station, New Jersey. The Company's pharmaceutical business is conducted through divisional headquarters located in Rahway, New Jersey and West Point, Pennsylvania. Principal research facilities for human 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 provide services throughout the country. Outside the United States, through subsidiaries, the Company owns or has an interest in manufacturing plants or other properties in Australia, Canada, countries in Western Europe, Central and South America, Africa and Asia. Merck-Medco operates its primary businesses through its headquarters located in Montvale, New Jersey, and through owned or leased facilities in various locations throughout the United States. Capital expenditures for 1998 were $1,973.4 million compared with $1,448.8 million for 1997. In the United States, these amounted to $1,413.6 million for 1998 and $1,062.8 million for 1997. Abroad, such expenditures amounted to $559.8 million for 1998 and $386.0 million for 1997. 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 13 Northern District of Illinois. In 1996, the Company and several other defendants finalized an agreement to settle the federal class action alleging conspiracy, which represents the single largest group of retail pharmacy claims, pursuant to which the Company paid $51.8 million. Since that time, the Company has entered into other settlements on satisfactory terms. The Company has not engaged in any conspiracy and no admission of wrongdoing was made nor was included in the final agreements. 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 materially 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 materially adverse effect on the financial position, results of operations, liquidity or capital resources of the Company. The Company has taken an active role in identifying and providing for these costs and such amounts do not include any reduction for anticipated recoveries of cleanup costs from insurers, former site owners or operators or other recalcitrant potentially responsible parties. 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 August 1998, the Company and Merck-Medco reached an agreement with the FTC that resolves the investigation as to the Company and Merck-Medco. The agreement formalizes the policies and practices the Company and Merck-Medco voluntarily adopted over four years ago governing the operation of their businesses. The agreement will not affect how the Company and Merck- Medco currently compete in the marketplace, serve their customers or conduct business with third parties. Accordingly, the Company does not believe that the agreement will have a materially adverse effect on the Company's financial position, liquidity or results of operations. 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 the FTC in this investigation, 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 this investigation, it does not believe it will have a materially 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 materially 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. 14 Executive Officers of the Registrant (as of March 1, 1999) RAYMOND V. GILMARTIN -- Age 57 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 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 50 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 PAUL R. BELL -- Age 53 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 CELIA A. COLBERT -- Age 42 January, 1997 -- Vice President, Secretary and Assistant General Counsel November, 1993 -- Secretary and Assistant General Counsel LINDA M. DISTLERATH -- Age 45 January, 1999 -- Vice President, Public Affairs -- responsible for public affairs and The Merck Company Foundation (a not-for-profit charitable organization affiliated with the Company) October, 1997 -- Executive Director, Public Policy and Merck Research Laboratories (MRL) Public Affairs April, 1995 -- Executive Director, MRL Public Affairs October, 1990 -- Senior Director, Science & Technology Policy -- responsible for public policy strategies in support of the Company's research and development programs CAROLINE DORSA -- Age 39 February, 1999 -- Vice President and Treasurer -- responsible for the Company's treasury and tax functions January, 1997 -- Vice President and Treasurer January, 1994 -- Treasurer R. GORDON DOUGLAS JR. -- Age 64 April, 1991 -- President, Merck Vaccines KENNETH C. FRAZIER -- Age 44 January, 1999 -- Vice President and Deputy General Counsel January, 1997 -- Vice President, Public Affairs and Assistant General Counsel -- responsible for public affairs, corporate legal activities and The Merck Company Foundation (a not-for-profit charitable organization affiliated with the Company) 15 April, 1994 -- Vice President, Public Affairs May, 1992 -- Vice President, General Counsel and Secretary, Astra/Merck Group (a joint venture affiliated with the Company) RICHARD C. HENRIQUES JR. -- Age 43 February, 1999 -- Vice President, Controller -- responsible for the Corporate Controller's Group and providing financial support for U.S. Human Health, Canada and Latin America (The Americas) January, 1998 -- Vice President & Controller, The Americas January, 1997 -- Controller, The Americas January, 1994 -- Controller, North America Pharmaceutical Care BERNARD J. KELLEY -- Age 57 December, 1993 -- President, Merck Manufacturing Division JUDY C. LEWENT -- Age 50 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 (a not-for-profit charitable organization affiliated with the Company), internal auditing and the Company's joint venture relationships December, 1993 -- Senior Vice President and Chief Financial Officer (since January 1993) -- responsible for financial and public affairs functions and The Merck Company Foundation PER G. H. LOFBERG -- Age 51 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 MARY M. MCDONALD -- Age 54 January, 1999 -- Senior Vice President and General Counsel -- responsible for legal, public affairs and human resources functions and The Merck Company Foundation (a not-for-profit charitable organization affiliated with the Company) 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 56 Vice President, retiring effective May 1, 1999 September, 1993 to February, 1999 -- Vice President, Controller EDWARD M. SCOLNICK -- Age 58 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 16 December, 1993 -- Executive Vice President, Science and Technology and President, MRL -- responsible for worldwide research function and activities of MMD and computer resources BENNETT M. SHAPIRO -- Age 59 September, 1990 -- Executive Vice President, Worldwide Basic Research, Merck Research Laboratories PER WOLD-OLSEN -- Age 51 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 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 39 and 54 of the Company's 1998 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 54 of the Company's 1998 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 30 through 39 of the Company's 1998 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 37 (under the caption "Analysis of Liquidity and Capital Resources") to 39 of the Company's 1998 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, 1998 and 1997, and the related consolidated statements of income, retained earnings, comprehensive income and cash flows for each of the three years in the period ended December 31, 1998 and the report dated January 26, 1999 of Arthur Andersen LLP, independent public accountants, are incorporated by reference to pages 40 through 51 and page 52 of the Company's 1998 Annual Report to stockholders. 17 (b) Supplementary Data Selected quarterly financial data for 1998 and 1997 are incorporated by reference to the data contained in the Condensed Interim Financial Data table on page 39 of the Company's 1998 Annual Report to stockholders. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. 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") to 6 of the Company's Proxy Statement for the Annual Meeting of Stockholders to be held April 27, 1999. Information on executive officers is set forth in Part I of this document on pages 15 through 17. The required information on compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to page 23 (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 27, 1999. Item 11. Executive Compensation. The information required for this item is incorporated by reference to pages 7 (under the caption "Compensation of Directors") and 8, and 9 (beginning with the caption "Compensation and Benefits Committee Report on Executive Compensation") to 19 of the Company's Proxy Statement for the Annual Meeting of Stockholders to be held April 27, 1999. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required for this item is incorporated by reference to pages 8 (under the caption "Security Ownership of Directors and Executive Officers") and 9 of the Company's Proxy Statement for the Annual Meeting of Stockholders to be held April 27, 1999. Item 13. Certain Relationships and Related Transactions. Not applicable. 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 1998 Annual Report to stockholders, as noted on page 18 of this document: Consolidated statement of income for the years ended December 31, 1998, 1997 and 1996 Consolidated statement of retained earnings for the years ended December 31, 1998, 1997 and 1996 18 Consolidated statement of comprehensive income for the years ended December 31, 1998, 1997 and 1996 Consolidated balance sheet as of December 31, 1998 and 1997 Consolidated statement of cash flows for the years ended December 31, 1998, 1997 and 1996 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. 19 3. Exhibits
Exhibit Number Description Method of Filing ------- ----------- ---------------- 2.1 -- Master Restructuring Agreement dated *** as of June 19, 1998 between Astra AB, Merck & Co., Inc., Astra Merck Inc., Astra USA, Inc., KB USA, L.P., Astra Merck Enterprises, Inc., KBI Sub Inc., Merck Holdings, Inc. and Astra Pharmaceuticals, L.P. (Portions of this Exhibit are subject to a request for confidential treatment filed with the Commission) 3(a) -- Restated Certificate of Incorporation Incorporated by reference of Merck & Co., Inc. to Form 10-K Annual (May 6, 1992) Report for the fiscal year ended December 31, 1992 3(b) -- Certificate of Amendment to the Filed with this document Certificate of Incorporation of Merck & Co., Inc. (as amended January 14, 1999, effective February 16, 1999) 3(c) -- By-Laws of Merck & Co., Inc. (as Incorporated by reference amended effective to Form 10-Q Quarterly February 25, 1997) 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, to Form 10-K Annual effective January 1, 1997) Report for the fiscal year ended December 31, 1996 10(c) -- 1987 Incentive Stock Plan (as amended Incorporated by reference effective May 6, 1992) to Form 10-K Annual Report for the fiscal year ended December 31, 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 Incorporated by reference Plan (as amended and to Form 10-K Annual restated February 24, 1998) Report for the fiscal year ended December 31, 1997 10(g) -- 1996 Non-Employee Directors Stock Incorporated by reference Option Plan (as amended to Form 10-K Annual and restated February 24, 1998) Report for the fiscal year ended December 31, 1997
20
Exhibit Number Description Method of Filing ------- ----------- ---------------- 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 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 10(p) -- Amended and Restated License and *** Option Agreement dated as of July 1, 1998 between Astra AB and Astra Merck Inc. 10(q) -- KBI Shares Option Agreement dated as *** of July 1, 1998 by and among Astra AB, Merck & Co., Inc. and Merck Holdings, Inc. 10(r) -- KBI-E Asset Option Agreement dated as *** of July 1, 1998 by and among Astra AB, Merck & Co., Inc., Astra Merck Inc. and Astra Merck Enterprises Inc. 10(s) -- KBI Supply Agreement dated as of July *** 1, 1998 between Astra Merck Inc. and Astra Pharmaceuticals, L.P. (Portions of this Exhibit are subject to a request for confidential treatment filed with the Commission) 10(t) -- Second Amended and Restated *** Manufacturing Agreement dated as of July 1, 1998 among Merck & Co., Inc., Astra AB, Astra Merck Inc. and Astra USA, Inc. 10(u) -- Limited Partnership Agreement dated as *** of July 1, 1998 between KB USA, L.P. and KBI Sub Inc.
21
Exhibit Number Description Method of Filing ------- ----------- ---------------- 10(v) -- Distribution Agreement dated as of July *** 1, 1998 between Astra Merck Enterprises Inc. and Astra Pharmaceuticals, L.P. 10(w) -- Agreement to Incorporate Defined Terms *** dated as of June 19, 1998 between Astra AB, Merck & Co., Inc., Astra Merck Inc., Astra USA, Inc., KB USA, L.P., Astra Merck Enterprises Inc., KBI Sub Inc., Merck Holdings, Inc. and Astra Pharmaceuticals, L.P. 12 -- Computation of Ratios of Earnings to Filed with this document Fixed Charges 13 -- 1998 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 23 -- Consent of Independent Public Contained on page 24 Accountants of this Report 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 27(c) -- Restated Financial Data Schedule Filed with this document
- -------- * 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 Form 10-Q Quarterly Report for the period ended June 30, 1998 **** 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, 1998, one Current Report was filed on Form 8-K under Item 5 -- Other Events regarding the Company's business briefing to analysts. This report was dated and filed December 9, 1998. 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MERCK & CO., INC. /s/ Dated: March 23, 1999 By: _________________________________ Raymond V. Gilmartin (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 ---------- ----- ---- /s/ Chairman of the Board, March 23, 1999 _________________________________ President and Chief Raymond V. Gilmartin Executive Officer; Principal Executive Officer; Director /s/ Senior Vice President and March 23, 1999 _________________________________ Chief Financial Officer; Judy C. Lewent Principal Financial Officer /s/ Vice President, Controller; March 23, 1999 _________________________________ Principal Accounting Richard C. Henriques Jr. Officer /s/ Director March 23, 1999 _________________________________ H. Brewster Atwater, Jr. /s/ Director March 23, 1999 _________________________________ Derek Birkin /s/ Director March 23, 1999 _________________________________ Lawrence A. Bossidy /s/ Director March 23, 1999 _________________________________ William G. Bowen /s/ Director March 23, 1999 _________________________________ Johnnetta B. Cole /s/ Director March 23, 1999 _________________________________ Carolyne K. Davis /s/ Director March 23, 1999 _________________________________ Lloyd C. Elam /s/ Director March 23, 1999 _________________________________ Charles E. Exley, Jr. /s/ Director March 23, 1999 _________________________________ William N. Kelley /s/ Director March 23, 1999 _________________________________ Edward M. Scolnick /s/ Director March 23, 1999 _________________________________ Samuel O. Thier /s/ Director March 23, 1999 _________________________________ Dennis Weatherstone
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 all of the directors of the Company. /s/ Celia A. Colbert By: _____________________________ Celia A. Colbert (Attorney-in-Fact) 23 Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this Form 10-K of our report dated January 26, 1999 included in the Company's Annual Report to stockholders for the fiscal year ended December 31, 1998, 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, 1998 or performed any audit procedures subsequent to the date of our report. ARTHUR ANDERSEN LLP New York, New York March 23, 1999 24 EXHIBIT INDEX
Exhibit Number Description Method of Filing ------- ----------- ---------------- 2.1 -- Master Restructuring Agreement dated *** as of June 19, 1998 between Astra AB, Merck & Co., Inc., Astra Merck Inc., Astra USA, Inc., KB USA, L.P., Astra Merck Enterprises, Inc., KBI Sub Inc., Merck Holdings, Inc. and Astra Pharmaceuticals, L.P. (Portions of this Exhibit are subject to a request for confidential treatment filed with the Commission) 3(a) -- Restated Certificate of Incorporation Incorporated by reference of Merck & Co., Inc. to Form 10-K Annual (May 6, 1992) Report for the fiscal year ended December 31, 1992 3(b) -- Certificate of Amendment to the Filed with this document Certificate of Incorporation of Merck & Co., Inc. (as amended January 14, 1999, effective February 16, 1999) 3(c) -- By-Laws of Merck & Co., Inc. (as Incorporated by reference amended effective to Form 10-Q Quarterly February 25, 1997) 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, to Form 10-K Annual effective January 1, 1997) Report for the fiscal year ended December 31, 1996 10(c) -- 1987 Incentive Stock Plan (as amended Incorporated by reference effective May 6, 1992) to Form 10-K Annual Report for the fiscal year ended December 31, 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 Incorporated by reference Plan (as amended and to Form 10-K Annual restated February 24, 1998) Report for the fiscal year ended December 31, 1997 10(g) -- 1996 Non-Employee Directors Stock Incorporated by reference Option Plan (as amended to Form 10-K Annual and restated February 24, 1998) Report for the fiscal year ended December 31, 1997
Exhibit Number Description Method of Filing ------- ----------- ---------------- 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 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 10(p) -- Amended and Restated License and *** Option Agreement dated as of July 1, 1998 between Astra AB and Astra Merck Inc. 10(q) -- KBI Shares Option Agreement dated as *** of July 1, 1998 by and among Astra AB, Merck & Co., Inc. and Merck Holdings, Inc. 10(r) -- KBI-E Asset Option Agreement dated as *** of July 1, 1998 by and among Astra AB, Merck & Co., Inc., Astra Merck Inc. and Astra Merck Enterprises Inc. 10(s) -- KBI Supply Agreement dated as of July *** 1, 1998 between Astra Merck Inc. and Astra Pharmaceuticals, L.P. (Portions of this Exhibit are subject to a request for confidential treatment filed with the Commission) 10(t) -- Second Amended and Restated *** Manufacturing Agreement dated as of July 1, 1998 among Merck & Co., Inc., Astra AB, Astra Merck Inc. and Astra USA, Inc. 10(u) -- Limited Partnership Agreement dated as *** of July 1, 1998 between KB USA, L.P. and KBI Sub Inc.
Exhibit Number Description Method of Filing ------- ----------- ---------------- 10(v) -- Distribution Agreement dated as of July *** 1, 1998 between Astra Merck Enterprises Inc. and Astra Pharmaceuticals, L.P. 10(w) -- Agreement to Incorporate Defined Terms *** dated as of June 19, 1998 between Astra AB, Merck & Co., Inc., Astra Merck Inc., Astra USA, Inc., KB USA, L.P., Astra Merck Enterprises Inc., KBI Sub Inc., Merck Holdings, Inc. and Astra Pharmaceuticals, L.P. 12 -- Computation of Ratios of Earnings to Filed with this document Fixed Charges 13 -- 1998 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 23 -- Consent of Independent Public Contained on page 24 Accountants of this Report 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 27(c) -- Restated Financial Data Schedule Filed with this document
- -------- * 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 Form 10-Q Quarterly Report for the period ended June 30, 1998 **** 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. EX-3.(B) 2 CERTIFICATE OF AMENDMENT TO THE CERT OF INCORP Exhibit 3(b) CERTIFICATE OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF MERCK & CO., INC. ---------------------------------------- (for use by domestic corporations only) TO: The Secretary of State State of New Jersey Pursuant to the provisions of Section 14A:7-15, Corporations, General, of the New Jersey Statutes, the undersigned corporation executes the following Certificate of Amendment to its Certificate of Incorporation: 1. The name of the corporation is Merck & Co., Inc. 2. The following amendment to the Certificate of Incorporation was approved by the directors of the corporation on the 24th day of November 1998: RESOLVED, that the first paragraph of Article IV of the Certificate of Incorporation be amended in its entirety to read as follows: "The amount of the total authorized capital stock of the Corporation shall be 5,410,000,000 shares consisting of 5,400,000,000 shares of Common Stock, par value $.01 per share, and 10,000,000 shares of Preferred Stock, without par value, issuable in one or more series." 3. The amendment to the Certificate of Incorporation will not adversely affect the rights or preferences of the holders of outstanding shares of any class or series and will not result in the percentage of authorized shares that remains unissued after the share division exceeding the percentage of authorized shares that was unissued before the share division. 4. The class of shares subject to the division is the corporation's common stock, the number of shares subject to the division is 1,483,925,990 and the number of shares into which they will be divided is 2,967,851,980. 5. The division of the shares is to become effective on February 16, 1999. 6. The effective date of this Amendment to the Certificate of Incorporation shall be January 25, 1999. Dated this 13th day of January, 1999. MERCK & CO., INC. By: /s/ Celia A. Colbert --------------------------- Celia A. Colbert Vice President, Secretary & Assistant General Counsel - 2 - EX-12 3 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)
Year Ended December 31 ---------------------------------------------------------------- 1998 1997 1996 1995 1994 1993 --------- -------- -------- -------- -------- -------- Income Before Taxes $8,133.1 $6,462.3 $5,540.8 $4,797.2 $4,415.2 $3,102.7 Add: One-third of rents 56.0 47.0 41.0 28.1 36.0 35.0 Interest expense, net 150.6 98.2 103.2 60.3 96.0 48.0 Preferred stock dividends 62.1 49.6 70.0 2.1 - - -------- -------- -------- -------- -------- -------- Earnings $8,401.8 $6,657.1 $5,755.0 $4,887.7 $4,547.2 $3,185.7 ======== ======== ======== ======== ======== ======== One-third of rents $ 56.0 $ 47.0 $ 41.0 $ 28.1 $ 36.0 $ 35.0 Interest expense 205.6 129.5 138.6 98.7 124.4 84.7 Preferred stock dividends 62.1 49.6 70.0 2.1 - - -------- -------- -------- -------- -------- -------- Fixed Charges $ 323.7 $ 226.1 $ 249.6 $ 128.9 $ 160.4 $ 119.7 ======== ======== ======== ======== ======== ======== Ratio of Earnings to Fixed Charges 26 29 23 38 28 27 == == == == == ==
For purposes of computing these ratios, "earnings" consist of income before taxes, one-third of rents (deemed by the Company to be representative of the interest factor inherent in rents), interest expense, net of amounts capitalized, and dividends on preferred stock of subsidiary companies. "Fixed charges" consist of one-third of rents, interest expense as reported in the Company's consolidated financial statements and dividends on preferred stock of subsidiary companies. EX-13 4 1998 ANNUAL REPORT EXHIBIT 13 Financial Section - -------------------------------------------------------------------------------- Contents Financial Review Description of Merck's Business ......................................30 Competition and the Health Care Environment ..........................30 Business Strategies ..................................................31 Joint Ventures .......................................................31 Foreign Operations ...................................................32 Operating Results ....................................................32 Environmental and Other Matters ......................................36 Capital Expenditures .................................................37 Analysis of Liquidity and Capital Resources ..........................37 Recently Issued Accounting Standards .................................39 Cautionary Factors That May Affect Future Results ....................39 Condensed Interim Financial Data .....................................39 Dividends Paid per Common Share ......................................39 Common Stock Market Prices ...........................................39 Consolidated Statement of Income .........................................40 Consolidated Statement of Retained Earnings ..............................40 Consolidated Statement of Comprehensive Income ...........................40 Consolidated Balance Sheet ...............................................41 Consolidated Statement of Cash Flows .....................................42 Notes to Consolidated Financial Statements ...............................43 Management's Report ......................................................52 Report of Independent Public Accountants .................................52 Audit Committee's Report .................................................53 Compensation and Benefits Committee's Report .............................53 Selected Financial Data ..................................................54 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) 1998 1997 1996 - -------------------------------------------------------------------------------- Elevated cholesterol ................. $ 4,694.1 $ 4,672.3 $ 4,055.9 Hypertension/heart failure ........... 4,213.5 3,855.0 3,452.6 Anti-ulcerants ....................... 1,113.5 1,184.4 1,033.5 Vaccines/biologicals ................. 846.7 733.6 586.8 Osteoporosis ......................... 775.2 532.1 281.8 Antibiotics .......................... 743.3 774.9 822.3 Human immunodeficiency virus (HIV) ........................ 676.3 581.7 187.8 Ophthalmologicals .................... 630.7 639.1 643.6 Animal health/crop protection ........ -- 550.0 1,044.1 Other Merck products ................. 1,603.2 673.5 562.3 Merck-Medco .......................... 11,601.7 9,440.3 7,158.0 - -------------------------------------------------------------------------------- $26,898.2 $23,636.9 $19,828.7 ================================================================================ 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; vaccines/biologicals, of which M-M-R II, a pediatric vaccine for measles, mumps and rubella, Recombivax HB (hepatitis B vaccine recombinant), and Varivax, a live virus vaccine for the prevention of chickenpox, are the largest-selling; osteoporosis, comprised of Fosamax, for treatment and prevention in postmenopausal women; antibiotics, of which Primaxin and Noroxin are the largest-selling; HIV, which includes Crixivan, a protease inhibitor for the treatment of human immunodeficiency viral infection in adults; and opthalmologicals, of which Timoptic, Timoptic-XE and Trusopt are the largest-selling. 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, pharmaceutical and animal health supply sales to the Company's joint ventures and, as of July 1, 1998, supply sales to Astra Pharmaceuticals, L.P. (APLP). (See Note 4 to the consolidated financial statements for further information.) 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 patient 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 conducts its business are highly competitive and often highly regulated. Global efforts toward health care cost containment continue to exert pressure on product pricing and availability. In the United States, the Company has been working with private and federal employers to slow the increase of health care costs. Demonstrating that the Company's medicines can help save costs in other areas and pricing flexibly across our product portfolio have encouraged growing use of our medicines and helped offset the effects of increasing cost pressures. Legislative bodies continue to work to expand health care access and reduce associated costs. Although no one can predict the outcome of legislation to accomplish the goals of reform, we are well positioned to respond to the evolving health care environment and market forces. Outside of the United States, in increasingly difficult environments encumbered by government cost containment actions, the Company has worked with payers to help them allocate 30 Merck & Co., Inc. 1998 Annual Report Financial Section scarce resources to optimize health care outcomes, limiting the potentially detrimental effects of government actions on sales growth. In addition, countries within the European Union (EU), recognizing the economic importance of the research-based pharmaceutical industry and the value of innovative medicines to society, are working with industry and the European Commission on proposals for market deregulation. Several products face expiration of product patents in the near term. U.S. product patents will expire for Vasotec and Pepcid in 2000 and for Prilosec, which is supplied exclusively to APLP, Prinivil, for which co-marketing rights have been licensed to a third party, Mevacor, Vaseretic and Prinzide in 2001. In the aggregate, domestic sales of these products represent 22% of Merck human health sales for 1998. The Company expects a significant decline in these sales in the years 2000 through 2002 upon the loss of market exclusivity. With the exception of Prilosec, for which the Company has U.S. rights only, a decline is also expected in the Company's European sales for these products in the years 2000 through 2005 upon the loss of market exclusivity in European countries throughout this period. These sales represent 7% of Merck human health sales for 1998. While the expiration of a product patent normally results in a loss of market exclusivity, commercial benefits may continue to be derived from other patents on processes, intermediates, compositions and formulations related to the product, patents relating to the use of a product and, in the United States, additional market exclusivity that may be available under federal law. We anticipate that the worldwide trend toward cost-containment will continue into the new millennium, resulting in ongoing pressures on health care budgets. As we continue to launch new products successfully, contribute to health care debates and monitor reforms, our new products, policies and strategies will enable us to maintain our strong position in the changing economic environment. Business Strategies 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). 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. Productivity initiatives include, at the manufacturing level, optimizing plant utilization, implementing lowest-cost processes and improving technology transfer between research and manufacturing, and throughout the Company, reducing the cost of purchased materials and services, re-engineering core and administrative processes and streamlining the organization. At the manufacturing level, the Company expects that productivity gains will continue to substantially offset inflation. 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. Merck-Medco manages prescription drug programs through its mail service and retail pharmacy networks, and offers a series of health management programs to help payers, providers and patients manage high-risk, high-cost diseases. Merck-Medco sells its pharmaceutical benefit management services to corporations, labor unions, insurance companies, Blue Cross/Blue Shield organizations, government agencies, federal and state employee plans, health maintenance and other similar organizations. Joint Ventures To expand its research base and realize synergies from combining capabilities, opportunities and assets, the Company has formed a number of joint ventures. In 1982, Merck entered into an agreement with Astra AB (Astra) to develop and market Astra's products under a royalty-bearing license. In 1993, the Company's total sales of Astra products reached a level that triggered the first step in the establishment of a joint venture business carried on by Astra Merck Inc. (AMI), in which Merck and Astra each owned a 50% share. The joint venture, formed in November 1994, developed and marketed most of Astra's new prescription medicines in the United States. Joint venture sales were $1.7 billion for the first six months of 1998, $2.3 billion for 1997 and $1.8 billion for 1996, 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. On July 1, 1998, the Company and Astra completed the restructuring of the ownership and operations of the joint venture whereby the Company acquired Astra's interest in AMI, renamed KBI Inc. (KBI), for consideration totaling $3.1 billion. KBI's net operating assets, excluding certain product rights, were then combined with the net assets of Astra's wholly owned subsidiary, Astra USA, Inc., to form a new U.S. limited partnership, APLP, in which Merck maintains a limited partner interest. For a franchise fee payment of $230.0 million, APLP became the exclusive distributor of the products for which KBI retained rights. Merck earns certain partnership returns as well as ongoing revenue based on sales of current and future KBI products. The partnership returns include a priority return, a fixed return and certain variable returns which are based, in part, upon sales of certain former Astra USA, Inc. products. The fixed return represents accretion of the carrying value of Merck's limited partnership interest from its initial carrying value up to its liquidating net worth, which is being recognized into income over 10 years on a straight-line basis. For a payment of $443.0 million, Astra purchased an option to buy Merck's interest in the KBI products in 2008, 2012 or 2016, excluding Merck's interest in the gastrointestinal medicines Prilosec and perprazole. (See Note 4 to the consolidated financial statements for further information.) Merck & Co., Inc. 1998 Annual Report Financial Section 31 In December 1998, Astra announced plans to merge with Zeneca Group Plc. If this proposed merger is completed, Astra will be required to make one-time payments to Merck totaling approximately $1.8 billion for the relinquishment of certain rights, including option rights to future Astra products with no existing or pending U.S. patents at the time of the merger. This merger would also trigger a partial redemption of Merck's limited partnership interest in 2008. Furthermore, upon completion of the merger, Astra's option to buy Merck's interest in the KBI products would only be exercisable in 2010 and Merck would obtain the right to require Astra to purchase such interest in 2008. In 1989, Merck formed a joint venture with Johnson & Johnson to develop and market a broad range of nonprescription medicines for U.S. consumers. This 50% owned joint venture was expanded into Europe in 1993, and into Canada in 1996. Sales of joint venture products were as follows: 1998 1997 1996 - -------------------------------------------------------------------------------- Gastrointestinal products ............ $ 387.2 $ 386.3 $ 420.5 Other products ....................... 127.0 97.4 109.7 - -------------------------------------------------------------------------------- $ 514.2 $ 483.7 $ 530.2 ================================================================================ In 1991, Merck and E.I. du Pont de Nemours and Company (DuPont) formed an independent, research-driven, worldwide pharmaceutical joint venture, The DuPont Merck Pharmaceutical Company (DMPC), equally owned by each party. DuPont contributed its entire pharmaceutical and radiopharmaceutical imaging agents businesses, and provided administrative services. Merck contributed cash and European marketing rights to several of its prescription medicines, and provided research and development and international industry expertise. Joint venture sales were $686.2 million for the first six months of 1998, and $1.3 billion for 1997 and 1996, consisting primarily of cardiovascular, radiopharmaceutical and central nervous system products. On July 1, 1998, the Company sold its one-half interest in DMPC to DuPont for $2.6 billion in cash. (See Note 3 to the consolidated financial statements for further information.) In 1994, Merck and Pasteur Merieux Connaught established a 50% owned joint venture to market vaccines and collaborate in the development of combination vaccines, for distribution in Europe. Sales of joint venture products were as follows: 1998 1997 1996 - -------------------------------------------------------------------------------- Hepatitis vaccines ................ $ 189.0 $ 216.2 $ 242.0 Viral vaccines .................... 64.6 63.3 70.2 Other vaccines .................... 306.8 301.8 350.8 - -------------------------------------------------------------------------------- $ 560.4 $ 581.3 $ 663.0 ================================================================================ 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. The formation of Merial has not had a material impact on comparability of net income. Animal health sales reported in Merck's 1997 consolidated sales were $448.3 million prior to August 1. Sales of joint venture products were as follows: 1998 1997 - -------------------------------------------------------------------------------- Avermectin products ....................... $ 616.4 $ 308.6 Fipronil products ......................... 300.8 83.1 Other products ............................ 842.2 354.6 - -------------------------------------------------------------------------------- $1,759.4 $ 746.3 ================================================================================ Foreign Operations The Company's operations outside the United States are conducted primarily through subsidiaries. Sales of Merck human health products by subsidiaries outside the United States were 43% of Merck human health sales in 1998, and 46% and 47% in 1997 and 1996, respectively. The 1998 percentage was affected by increased domestic supply sales to APLP, as a result of the restructuring of AMI. DISTRIBUTION OF 1998 FOREIGN HUMAN HEALTH SALES [GRAPHIC] Splits ------ Western Europe 54% Asia/Pacific 24% Other Foreign 22% ------ 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. Within the EU, there has been an evolution toward a single market in pharmaceuticals, for which Economic and Monetary Union, including the adoption of the euro as a single currency, marks an important step. The Company has recognized the strategic significance of this development and will adopt the euro in 1999. In this way, we are demonstrating our support for the European Community's industrial policy, while working toward the EU's goal of a competition-driven market that will enhance access to quality healthcare for European citizens. In recent years, Merck has been expanding its operations in countries located in Latin America, the Middle East, Africa, Eastern Europe and Asia Pacific where changes in government policies and economic conditions are making it possible for Merck to earn fair returns. Businesses in these developing areas, while sometimes less stable, offer important opportunities for growth over time. Operating Results Total sales for 1998 increased 14% from 1997, including a three point increase attributable to supply sales to APLP, as a result of the restructuring of AMI. The effect of a strengthening U.S. dollar 32 Merck & Co., Inc. 1998 Annual Report Financial Section against foreign currencies decreased 1998 sales growth by two percentage points. Sales growth for 1998 was also affected by the 1997 formation of the Merial joint venture and divestiture of the crop protection business. Adjusting for these effects, sales grew 16% in 1998 in total and 13% on a volume basis. Total sales for 1997 increased 19% from 1996. Foreign exchange reduced 1997 sales growth by two percentage points. Sales growth for 1997 was affected by the formation of the Merial joint venture and the divestiture of the crop protection business. Adjusting for these effects, 1997 sales grew 22% in total and 19% on a volume basis. COMPONENTS OF HUMAN HEALTH SALES GROWTH [GRAPHIC] TOTAL SALES SALES VOLUME NET PRICING FOREIGN GROWTH GROWTH ACTIONS EXCHANGE RATES ------ ------ ------- -------------- 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 1998 10.9 14.1 -- -3.2 This chart illustrates the effects of price, volume and exchange on sales of Merck human health products. Growth for 1994 and 1995 has been adjusted for the effect of the Astra Merck joint venture formation. Growth for 1998 includes a five point increase attributable to the AMI restructuring. 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 1998, sales of Merck human health products grew 11%, including a five point increase attributable to the restructuring of AMI. 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%, including a nine point increase attributable to the restructuring of AMI, while foreign sales grew 4% including a seven percentage point unfavorable effect from exchange. The unit volume growth from sales of Merck human health products was paced by established products, including Zocor, Prinivil, Proscar and M-M-R II, newer products, including Cozaar, Hyzaar, Fosamax, Crixivan, Varivax, Vaqta, Comvax and Trusopt, as well as the 1998 launches of Singulair, Propecia, Maxalt, Cosopt and Aggrastat. Together, Merck's cholesterol-lowering agents, Zocor and Mevacor, continued to hold more than 40% of the worldwide statin market. The cholesterol-lowering market continues to grow rapidly, driven primarily by growth of more than 25% annually in the statin category, yet today, even in the U.S. market, only about one-third of eligible patients are receiving treatment. In 1998, Zocor continued its strong volume growth and continues to be the most widely used cholesterol-lowering medicine worldwide. In July 1998, the U.S. Food and Drug Administration (FDA) approved a new 80 mg tablet of Zocor, which lowered LDL ("bad") cholesterol in clinical studies by a mean of 47%. In addition, the prescribing information for Zocor in the United States was changed to recommend the 20 mg tablet as the usual starting dose. Merck has demonstrated its confidence in the efficacy of the new dosage range by introducing the "Get to Goal Guarantee" whereby patients can receive money back if they do not achieve the cholesterol goal set by their physicians while on Zocor. 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 world's most widely prescribed branded anti-hypertensives. Together, they hold about 30% of the worldwide market for ACE inhibitors. Prinivil, with its convenient once-daily dosing in hypertension, heart failure and acute myocardial infarction, continues to grow well above the rate of the overall ACE inhibitor market. In the United States, Vasotec is the only ACE inhibitor indicated for the treatment of high blood pressure, asymptomatic left ventricular dysfunction and heart failure, and the only ACE inhibitor indicated to reduce deaths due to symptomatic heart failure, regardless of the underlying cause. 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 results from the Proscar Long-Term Efficacy and Safety Study (PLESS), the largest and longest study ever conducted in benign prostate hyperplasia (BPH) 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%. In March 1998, the FDA granted a new indication for Proscar that made it the only drug for symptomatic BPH indicated to reduce the risk of acute urinary retention and the need for BPH-related surgery. Cozaar and Hyzaar (a combination of Cozaar and the diuretic hydrochlorothiazide), Merck's newest antihypertensive drugs and among Merck's fastest-growing products, 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. Cozaar has been approved in 78 countries, including its recent launch in Japan. Ongoing research has reinforced and expanded the medical value of these products, which have been adopted faster than any new antihypertensive product launched this decade because of its excellent tolerability profile and proven efficacy in treating high blood pressure. Cozaar is also the only product in its class cleared for use in the treatment of heart failure in any market. Currently, approval of this indication has been received in 15 countries and applications are pending in other countries. The Company has not yet filed an application for this indication in the United States. Fosamax, Merck's nonhormonal medicine to treat and prevent postmenopausal osteoporosis and reduce the risk of fractures due to osteoporosis, continued to record strong growth in 1998, and is the leading nonhormonal treatment for osteoporosis worldwide. Research continues to show the importance of Fosamax in treating and preventing postmenopausal osteoporosis and fractures due to bone-thinning. Two year results from a six year Early Postmenopausal Interventional Cohort trial showed that Fosamax is an effective nonhormonal alternative to hormone replacement therapy for stopping bone loss and building bone in postmenopausal women at risk for osteoporosis. Data from the landmark Fracture Intervention Trial confirmed the ability of Fosamax to reduce, by nearly half, the risk of hip and spine fractures in postmenopausal women with osteoporosis. Merck & Co., Inc. 1998 Annual Report Financial Section 33 Crixivan, Merck's protease inhibitor for the treatment of HIV infection, is sold in more than 80 countries. New data from a two year landmark study demonstrated sustained anti-HIV effects, suppressing HIV below detection level in nearly 75% of patients, when Crixivan is taken in triple therapy. Preliminary results from a Merck study, presented in November 1998 at the annual meeting of the Infectious Diseases Society of America in Denver, showed that the twice-daily combination of Crixivan with the protease inhibitor nelfinavir may be a potent and convenient regimen for HIV patients. Varivax, a live-virus vaccine for protection against chickenpox in healthy individuals age 12 months and older who have not had the disease, continued to record strong growth in 1998. It is the first and only chickenpox vaccine available in the United States. Vaqta, Merck's vaccine for the prevention of hepatitis A in persons age two years and older, continued its strong growth in 1998. 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. Comvax, Merck's newest vaccine, a combination of the antigenic components of two existing Merck vaccines, PedvaxHIB and Recombivax HB, recorded strong growth in 1998. 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. In 1998, Merck launched a series of new and unique products, many representing innovative treatments for conditions afflicting millions, including Singulair for chronic asthma, Propecia for male pattern hair loss, Maxalt for migraine headaches, Cosopt, a combination product of Timoptic and Trusopt, for patients with elevated intraocular pressure who did not respond adequately to beta-blockers alone, and Aggrastat, a platelet blocker for preventing cardiac ischemic events. Singulair, Merck's new once-a-day tablet for controlling chronic asthma in adults and children age six and older, has quickly become the leader in the U.S. leukotriene antagonist class. The product has been launched in 38 countries including the United States, United Kingdom, Spain, Germany, Sweden and Denmark. In clinical studies, Singulair improved asthma control in many patients by significantly decreasing asthma attacks, helping to prevent day- and night-time symptoms and reduce reliance on other asthma medications, such as bronchodilators and inhaled steroids. Propecia, the first and only tablet to treat male pattern hair loss, was introduced in the United States and 11 other countries in 1998, with launches pending in 13 more. In clinical studies, 83% of men treated with Propecia maintained their current hair count and 66% grew visible new hair. Since its introduction, U.S. physicians have written more than one million prescriptions for Propecia, and more than 400,000 men have started treatment. Maxalt, Merck's new treatment for migraine headaches, has been launched in 11 countries including the United States, United Kingdom, Sweden, the Netherlands and Mexico, making it the fastest growing oral migraine medication in the U.S. and other key markets. Maxalt provides fast and effective relief of the debilitating headache pain and other symptoms such as nausea and sensitivity to light and noise that often accompany a migraine attack. Maxalt is the first and only migraine medicine available in both conventional tablets and convenient, rapidly dissolving oral tablets, which disintegrate within seconds on the tongue without liquids. Aggrastat, a platelet blocker, was approved for the treatment of acute coronary syndrome, including patients with unstable angina/non-Q-wave myocardial infarction who are managed medically and those undergoing angioplasty or atherectomy. Clinical data showed that in combination with standard therapy, Aggrastat reduced the risk of heart attacks and death by 30% at 30 days, and reduced the overall risk of heart attacks by 47% at seven days. Aggrastat has been launched in eight countries including the United States, Switzerland, Germany, Brazil and Mexico. A group of mature products, including Pepcid, Timoptic, Noroxin, Mefoxin, Moduretic and Aldomet, while still contributing to 1998 revenues, declined in unit volume due to generic and therapeutic competition. 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. 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 Zocor, Vasotec, Vaseretic, Prinivil, Pepcid, Recombivax HB and M-M-R II, the newer products, including Crixivan, Cozaar, Hyzaar, Fosamax, Trusopt, Varivax and Vaqta, and the 1997 launch of Comvax in the United States. Sales of animal health products were affected by the formation of the Merial joint venture with Rhone-Poulenc in August of 1997. Prior to this, a weak worldwide cattle economy slowed sales growth. Crop protection sales were lower in 1997 due to the divestiture of this business. Merck-Medco sales contributed significantly to 1998 and 1997 sales growth. By continuing to invest in the development of important clinical programs, enhanced information management systems and communications technologies, Merck-Medco has strengthened its leadership position in managing prescription drug care and high-cost, high-risk diseases. In 1998, Merck-Medco demonstrated the value of its services by gaining important new customers in all market segments, including employers, managed care organizations, Blue Cross/Blue Shield plans, unions and government programs. The number of prescriptions managed by Merck-Medco grew to 322 million in 1998, up 11% from 291 million prescriptions in 1997. Costs, Expenses and Other - -------------------------------------------------------------------------------- ($ in millions) 1998 Change 1997 Change 1996 - -------------------------------------------------------------------------------- Materials and production ........ $13,925.4 +18% $11,790.3 +27% $ 9,319.2 Marketing and administrative .... 4,511.4 +5% 4,299.2 +12% 3,841.3 Research and development ....... 1,821.1 +8% 1,683.7 +13% 1,487.3 Acquired research .......... 1,039.5 * -- -- -- Equity income from affiliates ... (884.3) +21% (727.9) +21% (600.7) Gains on sales of businesses ..... (2,147.7) * (213.4) * -- Other (income) expense, net ...... 499.7 +46% 342.7 +42% 240.8 - -------------------------------------------------------------------------------- $18,765.1 +9% $17,174.6 +20% $14,287.9 ================================================================================ *Over 100% 34 Merck & Co., Inc. 1998 Annual Report Financial Section In 1998, materials and production costs increased 18%. 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 19%, compared to a 16% sales growth rate on the same basis. Adjusting for the aforementioned effects, and excluding exchange and inflation, these costs increased 12%, compared to a 13% unit sales volume gain in 1998. The lower growth rate in these costs over the sales volume growth is primarily attributable to the favorable effect of the AMI restructuring. In 1997, materials and production costs increased 27%. Adjusting for the effects of the 1997 formation of the Merial joint venture and the divestiture 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. Marketing and administrative expenses increased 5% in 1998. 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 9%. Adjusting for the aforementioned effects, and excluding exchange and inflation, these expenses also increased 9%. The increase in marketing and administrative expenses in 1998 primarily reflects the commitment of resources to support recent product launches, including five new products in 1998, expansion of sales forces in the United States and several key international markets, and investments in information technology initiatives by Merck-Medco, which are setting new standards for the management of major diseases. Marketing and administrative expenses increased 12% in 1997. Adjusting for the effects of the 1997 formation of the Merial joint venture and the divestiture 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%, primarily due to the commitment of resources to support 1995 through 1997 product launches, pre-launch spending for new products launched in 1998, expansion of sales forces in the United States and Europe, and investments in health management programs and information technology initiatives by Merck-Medco. Marketing and administrative expenses as a percentage of sales were 17% in 1998, 18% in 1997 and 19% in 1996. The improvement in these ratios reflects the lower marketing and administrative costs relative to Merck-Medco sales, continuing cost controls and productivity improvements and the favorable effect of the AMI restructuring. Research and development expenses increased 8% in 1998. Adjusting for the effects of the 1997 formation of the Merial joint venture and sale of the crop protection business, these expenses increased 10%. Adjusting for the aforementioned effects, and excluding exchange and inflation, these expenses increased 8%. 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 the effects of exchange and inflation, these expenses increased 13%. Research and development in the pharmaceutical industry is inherently a long-term process. The following data show an unbroken trend of year-to-year increases in research and development spending. For the period 1989 to 1998, the compounded annual growth rate in research and development was 11%. Research and development expenses for 1999 are estimated to approximate $2.1 billion. R&D EXPENDITURES ($ in millions) [GRAPHIC] Year Total R&D Expenditures ---- ---------------------- 1989 $ 751 1990 854 1991 988 1992 1,112 1993 1,173 1994 1,231 1995 1,331 1996 1,487 1997 1,684 1998 1,821 In 1998, in connection with the restructuring of AMI, the Company recorded a $1.04 billion charge for acquired research associated with 10 product candidates in Phase II or later stages of development and U.S. rights to future Astra products which have not yet entered Phase II, for which, at the acquisition date, commercial viability had not been established. (See Note 4 to the consolidated financial statements for further information.) Equity income from affiliates reflects the favorable performance of our joint ventures, and in the second half of 1998, partnership returns from APLP, which are recorded on a pretax basis, and the absence of equity income from DMPC following the Company's sale of its one-half interest. In the third quarter of 1998, the Company recorded a pretax gain of $2.15 billion ($1.25 billion after tax) on the sale of its one-half interest in DMPC. (See Note 3 to the consolidated financial statements for further information.) This gain was substantially offset on an after-tax basis by a $1.04 billion pretax and after-tax charge for acquired research in connection with the restructuring of AMI and $338.6 million of pretax other non recurring charges ($193.1 million after tax). These other charges, which are included in Other (income) expense, net, were primarily for environmental remediation costs and asset write-offs, principally deferred start-up costs which were expensed in accordance with the Company's third quarter adoption of Statement of Position No. 98-5, "Reporting on the Costs of Start-up Activities." In 1997, the Company recorded a pretax 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 pretax nonrecurring charges included in Other (income) expense, net, primarily for the loss on sale of assets, endowment of The Merck Company Foundation and environmental remediation costs. Merck & Co., Inc. 1998 Annual Report Financial Section 35 In 1998, other expense, net, increased primarily due to $338.6 million of nonrecurring charges, increased amortization of goodwill and other intangibles arising from the restructuring of AMI, increased minority interest expense reflecting dividends paid to Astra on preferred stock of a subsidiary and higher interest expense. This increase was partially offset by higher interest income benefiting from the proceeds from the sale of the Company's one-half interest in DMPC and $207.3 million of non-recurring charges recorded in 1997, which substantially offset the gain on the sale of the crop protection business. In 1997, other expense, net, increased primarily due to the aforementioned $207.3 million of nonrecurring charges and lower exchange gains resulting from translation of the Company's balance sheet. This increase was partially offset by realized gains on security sales, higher interest income, lower interest expense and lower income allocable to minority interests. (See Note 14 to the consolidated financial statements for further information.) Earnings - -------------------------------------------------------------------------------- ($ in millions except per share amounts) 1998 Change 1997 Change 1996 - -------------------------------------------------------------------------------- Net income ............$5,248.2 +14% $4,614.1 +19% $3,881.3 As a % of sales ..... 19.5% 19.5% 19.6% As a % of average total assets ....... 18.2% 18.5% 16.1% Earnings per common share assuming dilution ............ $2.15 +15% $1.87 +20% $1.56 ================================================================================ Net income was up 14% in 1998 and 19% in 1997. Net income as a percentage of sales was 19.5% in 1998 and 1997, compared to 19.6% in 1996. The decline in the ratio from 1996 is principally due to a higher growth rate in Medco's historically lower-margin business and the commitment of resources to support recent 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 four percentage point unfavorable effect as compared to a two percentage point unfavorable effect in 1997. The Company's effective income tax rate in 1998 was 35.5%, compared to 28.6% in 1997 and 30.0% in 1996. The higher effective rate in 1998 was primarily driven by the impact of nonrecurring items, principally the nondeductibility of the charge for acquired research in connection with the restructuring of AMI and the state tax impact of the gain on the sale of the Company's one-half interest in DMPC. The increased tax rate substantially offset the growth in pretax income from these items, resulting in no significant effect on net income growth. The lower effective tax rate in 1997 versus 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 certain of the Company's joint ventures. The impact on pretax growth, however, was 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 18.2% in 1998, 18.5% in 1997 and 16.1% in 1996, with the improvement from 1996 attributable to the continued growth in operations and the Company's asset management efforts. Earnings per common share assuming dilution grew 15% in 1998, compared to 20% in 1997. In 1998 and 1997, earnings per common share assuming dilution increased at a faster rate than net income as a result of treasury stock purchases. DISTRIBUTION OF 1998 SALES AND EQUITY INCOME (excluding nonrecurring items) [GRAPHIC] Splits ------ Raw Materials and Production Costs 50% Operating Expenses 24% 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 1998, the Company incurred capital expenditures of approximately $56.5 million for environmental protection facilities. Capital expenditures for this purpose are forecasted to exceed $550.0 million for the years 1999 through 2003. In addition, the Company's operating and maintenance expenditures for pollution control were approximately $83.4 million in 1998. Expenditures for this purpose for the years 1999 through 2003 are forecasted to exceed $484.0 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 $16.7 million in 1998, and are estimated at $220.0 million for the years 1999 through 2003. 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 August 1998, the Company and Merck-Medco reached an agreement with the FTC which, subject to final approval, resolves their portion of the investigation. The agreement formalizes the policies and practices the Company and Merck-Medco voluntarily adopted over four years ago governing the operation of their businesses. The agreement will not affect how the Company and Merck-Medco currently compete in the marketplace, serve their customers or conduct business with third parties. Accordingly, the Company does not believe that the agreement will have a materially adverse effect on the Company's financial position, liquidity or results of operations. 36 Merck & Co., Inc. 1998 Annual Report Financial Section 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 this investigation, 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 this investigation, management does not believe that it should result in a materially adverse effect on the Company's financial position, results of operations or liquidity. The continued efficient operation of the Company's business will be dependent upon the ability of its systems to process date sensitive information in the Year 2000. As a result, the Company initiated a program in 1996 to inventory all critical systems, assess the impact of Year 2000 noncompliance, develop plans to remediate or replace noncompliant systems and assess the readiness of key third parties. The inventory and assessment phases are complete for internal information technology (IT) systems and the Company is approximately 75% complete with the remediation phase as of December 31, 1998. The evaluation and remediation phases for non-IT systems (e.g. building, process and factory control systems) are currently underway. Although the Company has designed these programs to properly prepare its systems for the Year 2000, there can be no assurance that the Company will not experience business disruptions or incur material costs caused by the failure to detect and remediate all instances of Year 2000 noncompliance in its systems. Failure to complete these programs as planned could result in the corruption of data, hardware or equipment failures or the inability to manufacture products or conduct other business activities, all of which could have a material impact on the Company's business, results of operations or financial position. Contingency plans (including the substitution of systems, use of manual methods and other means to prevent the failure of critical systems from having a material effect on the Company) are under development, particularly for high risk areas such as those involving supplier and product management. In addition to risks associated with internal systems, the Company has relationships with, and is to varying degrees dependent upon, third parties that provide the Company with information, goods and services. These include financial institutions, suppliers, vendors, utilities, research partners and governmental entities, as well as customers and distributors. If a significant number of these third parties experience failures in their systems due to Year 2000 noncompliance, it could affect the Company's ability to process transactions, manufacture products, or engage in other business activities. While some of these risks are outside of the Company's control, the Company has instituted programs, including internal records review and external questionnaires and supplier audits, to identify key third parties, assess their level of Year 2000 compliance, update contracts, develop supplier-based contingency plans and address any noncompliance issues. All critical aspects of the Company's Year 2000 compliance program are expected to be completed by the end of the third quarter 1999. Total costs to resolve the Year 2000 issue are not expected to be material to the Company's financial position, results of operations or cash flows. Capital Expenditures Capital expenditures were $2.0 billion in 1998 and $1.4 billion in 1997. Expenditures in the United States were $1.4 billion in 1998 and $1.1 billion in 1997. Expenditures during 1998 included $851.5 million for production facilities, $505.0 million for research and development facilities, $56.5 million for environmental projects, and $560.4 million for administrative, safety and general site projects. Capital expenditures approved but not yet spent at December 31, 1998 were $2.1 billion. Capital expenditures for 1999 are estimated to be $2.3 billion. Depreciation was $700.0 million in 1998 and $602.4 million in 1997, of which $512.3 million and $437.3 million, respectively, applied to locations in the United States. CAPITAL EXPENDITURES ($ in millions) [GRAPHIC] YEAR TOTAL CAPITAL EXPENDITURES ---- -------------------------- 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 1998 1,973 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 1998, pretax cash flows from operations were $7.5 billion, reflecting the continued growth of the Company's earnings. This cash was used to fund capital expenditures of $2.0 billion, to pay Company dividends of $2.3 billion and to partially fund the purchase of treasury shares. At December 31, 1998, the total of worldwide cash and investments was $7.0 billion, including $3.4 billion in cash, cash equivalents and short-term investments, and $3.6 billion of long-term investments. The above totals include $1.1 billion in cash and investments held by Banyu Pharmaceutical Co., Ltd., in which the Company has a 50.87% ownership interest. Selected Data - -------------------------------------------------------------------------------- ($ in millions) 1998 1997 1996 - -------------------------------------------------------------------------------- Working capital ...................... $4,159.7 $2,644.4 $2,897.4 Total debt to total liabilities and equity ......................... 12.1% 8.7% 7.3% Cash provided by operations to total debt ...................... 1.4:1 2.8:1 3.1:1 ================================================================================ Working capital levels are more than adequate to meet the operating requirements of the Company. Working capital in 1998 reflects proceeds of $2.6 billion from the sale of the Company's one-half interest in DMPC and proceeds from the issuance of a $1.38 billion 40-year note to Astra. These proceeds were used to fund a portion of the Company's stock repurchase program and for other general corporate purposes. In 1998, debt levels were affected by the issuances of the $1.38 billion note to Astra and two $500.0 million debentures, increasing the ratio of total debt to total liabilities and equity. Merck & Co., Inc. 1998 Annual Report Financial Section 37 The favorable ratio of cash provided by operations to total debt, although impacted by these debt issuances, still reflects the ability of the Company to cover its debt obligations. In July 1998, the Board of Directors approved purchases of up to $5.0 billion of Merck shares. From 1996 to 1998, the Company purchased $8.4 billion of treasury shares under previously authorized completed programs, and $.3 billion under the 1998 program. Total treasury stock purchased in 1998 was $3.6 billion. For the period 1989 to 1998, the Company has purchased 436.8 million shares at a total cost of $13.3 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. In both February and November 1998, the Company issued $500.0 million of 30-year debentures under the shelf, bearing coupons of 6.4% and 6.0%, respectively, payable semiannually. The remaining capacity under the shelf is $.7 billion at December 31, 1998. Also in 1997, the Company established a $1.5 billion Euro Medium Term Note program, under which no securities have been issued. Proceeds from the sale of these securities are to be used for general corporate purposes. 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. 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 indicated that if the U.S. dollar uniformly weakened by 10% against all currency exposures of the Company at December 31, 1998 and 1997, Income before taxes would have declined by $53.9 million and $10.9 million, respectively. 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 from these contracts are reported as 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, the market value of the Company's hedges would have declined by $86.3 million and $67.0 million, respectively, from a uniform 10% weakening of the U.S. dollar at December 31, 1998 and 1997. Over the last three years, the program has reduced the volatility of cash flows and mitigated the loss in value of cash flows during periods of relative strength in the U.S. dollar for the portion of revenues hedged. The cash flows from these contracts are reported as operating activities in the Consolidated Statement of Cash Flows. 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 from these contracts are reported as operating activities in the Consolidated Statement of Cash Flows. 38 Merck & Co., Inc. 1998 Annual Report Financial Section A sensitivity analysis to measure potential changes in the market value of the Company's investments, debt and related swaps from a change in interest rates indicated that a one percentage point increase in interest rates at December 31, 1998 and 1997 would have positively impacted the net aggregate market value of these instruments by $424.8 million and $60.0 million, respectively. A one percentage point decrease at December 31, 1998 and 1997 would have negatively impacted the net aggregate market value by $616.6 million and $71.0 million, respectively. The increased impact of a change in interest rates on the net aggregate market values at December 31, 1998 primarily results from increased levels of longer-term fixed rate debt. Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which requires adoption by fiscal 2000. The Statement establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at fair value and that changes in fair value be recognized currently in earnings, unless specific hedge accounting criteria are met. The timing of adoption of the Statement and effect on the Company's financial position or results of operations have not yet been determined. Cautionary Factors That May Affect Future Results This annual report and other written reports and oral statements made from time to time by the Company may contain so-called "forward-looking statements," all of which are subject to risks and uncertainties. One can identify these forward-looking statements by their use of words such as "expects," "plans," "will," "estimates," "forecasts," "projects" and other words of similar meaning. One can also identify them by the fact that they do not relate strictly to historical or current facts. These statements are likely to address the Company's growth strategy, financial results, product approvals and development programs. One must carefully consider any such statement and should understand that many factors could cause actual results to differ from the Company's forward-looking statements. These factors include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actual future results may vary materially. The Company does not assume the obligation to update any forward-looking statement. One should carefully evaluate such statements in light of factors described in the Company's filings with the Securities and Exchange Commission, especially on Forms 10-K, 10-Q and 8-K (if any). In Item 1 of the Company's annual report on Form 10-K for the year ended December 31, 1998, which will be filed in March 1999, the Company discusses in more detail various important factors that could cause actual results to differ from expected or historic results. The Company notes these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. Prior to the filing of the Form 10-K for the year ended December 31, 1998, reference should be made to Item 1 of the Company's annual report on Form 10-K for the year ended December 31, 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 - -------------------------------------------------------------------------------- 1998 - -------------------------------------------------------------------------------- Sales .......................... $7,530.7 $6,838.3 $6,470.4 $6,058.8 Materials and production costs ........................ 3,762.3 3,544.1 3,383.4 3,235.6 Marketing/administrative expenses ..................... 1,370.2 1,087.2 1,058.8 995.1 Research/development expenses ..................... 541.2 450.4 441.0 388.5 Acquired research .............. -- 1,039.5 -- -- Equity income from affiliates ................... (176.6) (210.5) (271.1) (226.1) Gains on sales of businesses ................... -- (2,147.7) -- -- Other (income) expense, net ................. 77.1 360.0 32.2 30.5 Income before taxes ............ 1,956.5 2,715.3 1,826.1 1,635.2 Net income ..................... 1,400.7 1,367.0 1,316.1 1,164.4 Basic earnings per common share ................. $.60 $.57 $.55 $.49 Earnings per common share assuming dilution ...... $.58 $.56 $.54 $.47 - -------------------------------------------------------------------------------- 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) Gains on sales of businesses ................... -- (213.4) -- -- Other (income) expense, net ................. 43.2 244.7 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 Basic earnings per common share ................. $.52 $.50 $.48 $.42 Earnings per common share assuming dilution ...... $.51 $.48 $.47 $.41 ================================================================================ In the chart above, amounts for the third and fourth quarters of 1998 were affected by the restructuring of the ownership and operations of AMI and the sale of the Company's one-half interest in DMPC. 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 - -------------------------------------------------------------------------------- 1998.............. $.94 1/2 $.27 $.22 1/2 $.22 1/2 $.22 1/2 1997.............. .84 1/2 .22 1/2 .21 .21 .20 ================================================================================ Common Stock Market Prices - -------------------------------------------------------------------------------- 1998 4th Q 3rd Q 2nd Q 1st Q - -------------------------------------------------------------------------------- High....................... $80 7/8 $69 9/16 $67 1/8 $66 13/32 Low........................ 60 13/16 57 1/2 55 3/4 50 11/16 - -------------------------------------------------------------------------------- 1997 - -------------------------------------------------------------------------------- High....................... $53 15/16 $54 3/32 $52 13/32 $49 15/16 Low........................ 42 1/2 45 3/8 40 3/16 39 ================================================================================ The principal market for trading of the common stock is the New York Stock Exchange under the symbol MRK. Merck & Co., Inc. 1998 Annual Report Financial Section 39 - -------------------------------------------------------------------------------- Consolidated Statement of Income - -------------------------------------------------------------------------------- Merck & Co., Inc. and Subsidiaries
Years Ended December 31 ($ in millions except per share amounts) 1998 1997 1996 - -------------------------------------------------------------------------------------------- Sales ................................................ $ 26,898.2 $ 23,636.9 $ 19,828.7 - -------------------------------------------------------------------------------------------- Costs, Expenses and Other Materials and production ............................. 13,925.4 11,790.3 9,319.2 Marketing and administrative ......................... 4,511.4 4,299.2 3,841.3 Research and development ............................. 1,821.1 1,683.7 1,487.3 Acquired research .................................... 1,039.5 -- -- Equity income from affiliates ........................ (884.3) (727.9) (600.7) Gains on sales of businesses ......................... (2,147.7) (213.4) -- Other (income) expense, net .......................... 499.7 342.7 240.8 - -------------------------------------------------------------------------------------------- 18,765.1 17,174.6 14,287.9 - -------------------------------------------------------------------------------------------- Income Before Taxes .................................. 8,133.1 6,462.3 5,540.8 Taxes on Income ...................................... 2,884.9 1,848.2 1,659.5 - -------------------------------------------------------------------------------------------- Net Income ........................................... $ 5,248.2 $ 4,614.1 $ 3,881.3 ============================================================================================ Basic Earnings per Common Share ...................... $2.21 $1.92 $1.60 ============================================================================================ Earnings per Common Share Assuming Dilution .......... $2.15 $1.87 $1.56 ============================================================================================
- -------------------------------------------------------------------------------- Consolidated Statement of Retained Earnings - -------------------------------------------------------------------------------- Merck & Co., Inc. and Subsidiaries
Years Ended December 31 ($ in millions) 1998 1997 1996 - -------------------------------------------------------------------------------------------- Balance, January 1 ................................... $ 17,291.5 $ 14,772.2 $ 12,684.3 - -------------------------------------------------------------------------------------------- Net Income ........................................... 5,248.2 4,614.1 3,881.3 Common Stock Dividends Declared ...................... (2,353.0) (2,094.8) (1,793.4) - -------------------------------------------------------------------------------------------- Balance, December 31 ................................. $ 20,186.7 $ 17,291.5 $ 14,772.2 ============================================================================================
- -------------------------------------------------------------------------------- Consolidated Statement of Comprehensive Income - -------------------------------------------------------------------------------- Merck & Co., Inc. and Subsidiaries
Years Ended December 31 ($ in millions) 1998 1997 1996 - -------------------------------------------------------------------------------------------- Net Income ........................................... $ 5,248.2 $ 4,614.1 $ 3,881.3 - -------------------------------------------------------------------------------------------- Other Comprehensive Loss Net unrealized loss on investments, net of tax and net income realization ............. (5.6) (17.6) (10.8) Minimum pension liability, net of tax ................ (24.7) (12.4) (6.5) - -------------------------------------------------------------------------------------------- (30.3) (30.0) (17.3) - -------------------------------------------------------------------------------------------- Comprehensive Income ................................. $ 5,217.9 $ 4,584.1 $ 3,864.0 ============================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 40 Merck & Co., Inc. 1998 Annual Report Financial Section - -------------------------------------------------------------------------------- Consolidated Balance Sheet - -------------------------------------------------------------------------------- Merck & Co., Inc. and Subsidiaries
December 31 ($ in millions) 1998 1997 - -------------------------------------------------------------------------------------- Assets - -------------------------------------------------------------------------------------- Current Assets Cash and cash equivalents ..................................... $ 2,606.2 $ 1,125.1 Short-term investments ........................................ 749.5 1,184.2 Accounts receivable ........................................... 3,374.1 2,876.7 Inventories ................................................... 2,623.9 2,145.1 Prepaid expenses and taxes .................................... 874.8 881.9 - -------------------------------------------------------------------------------------- Total current assets .......................................... 10,228.5 8,213.0 - -------------------------------------------------------------------------------------- Investments ................................................... 3,607.7 2,533.4 - -------------------------------------------------------------------------------------- Property, Plant and Equipment (at cost) Land .......................................................... 228.8 216.4 Buildings ..................................................... 3,664.0 3,257.8 Machinery, equipment and office furnishings ................... 6,211.7 5,388.6 Construction in progress ...................................... 1,782.1 1,169.8 - -------------------------------------------------------------------------------------- 11,886.6 10,032.6 Less allowance for depreciation ............................... 4,042.8 3,423.2 - -------------------------------------------------------------------------------------- 7,843.8 6,609.4 - -------------------------------------------------------------------------------------- Goodwill and Other Intangibles (net of accumulated amortization of $1,123.9 million in 1998 and $815.8 million in 1997) ..... 8,287.2 6,780.5 - -------------------------------------------------------------------------------------- Other Assets .................................................. 1,886.2 1,599.6 - -------------------------------------------------------------------------------------- $31,853.4 $25,735.9 ====================================================================================== Liabilities and Stockholders' Equity - -------------------------------------------------------------------------------------- Current Liabilities Accounts payable and accrued liabilities ...................... $ 3,682.1 $ 3,268.9 Loans payable and current portion of long-term debt ........... 624.2 902.5 Income taxes payable .......................................... 1,125.1 859.6 Dividends payable ............................................. 637.4 537.6 - -------------------------------------------------------------------------------------- Total current liabilities ..................................... 6,068.8 5,568.6 - -------------------------------------------------------------------------------------- Long-Term Debt ................................................ 3,220.8 1,346.5 - -------------------------------------------------------------------------------------- Deferred Income Taxes and Noncurrent Liabilities .............. 6,057.0 5,060.1 - -------------------------------------------------------------------------------------- Minority Interests ............................................ 3,705.0 1,166.1 - -------------------------------------------------------------------------------------- Stockholders' Equity Common stock, one cent par value Authorized - 5,400,000,000 shares Issued - 2,967,851,980 shares ............................... 29.7 29.7 Other paid-in capital ......................................... 5,614.5 5,224.3 Retained earnings ............................................. 20,186.7 17,291.5 Accumulated other comprehensive (loss) income ................. (21.3) 9.0 - -------------------------------------------------------------------------------------- 25,809.6 22,554.5 Less treasury stock, at cost 607,399,428 shares - 1998 580,555,052 shares - 1997 ................................... 13,007.8 9,959.9 - -------------------------------------------------------------------------------------- Total stockholders' equity .................................... 12,801.8 12,594.6 - -------------------------------------------------------------------------------------- $31,853.4 $25,735.9 ======================================================================================
The accompanying notes are an integral part of this consolidated financial statement. Merck & Co., Inc. 1998 Annual Report Financial Section 41 - -------------------------------------------------------------------------------- Consolidated Statement of Cash Flows - -------------------------------------------------------------------------------- Merck & Co., Inc. and Subsidiaries
Years Ended December 31 ($ in millions) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Income before taxes ................................................ $ 8,133.1 $ 6,462.3 $ 5,540.8 Adjustments to reconcile income before taxes to cash provided from operations before taxes: Acquired research ............................................... 1,039.5 -- -- Gains on sales of businesses .................................... (2,147.7) (213.4) -- Depreciation and amortization ................................... 1,015.1 837.1 730.9 Other ........................................................... 156.6 528.4 175.1 Net changes in assets and liabilities: Accounts receivable ........................................... (579.1) (271.7) (224.7) Inventories ................................................... (409.5) (53.5) (267.6) Accounts payable and accrued liabilities ...................... 250.1 321.8 414.2 Noncurrent liabilities ........................................ (13.0) (29.4) 116.8 Other ......................................................... 9.8 29.9 36.6 - ------------------------------------------------------------------------------------------------------- Cash Provided by Operating Activities Before Taxes ................. 7,454.9 7,611.5 6,522.1 Income Taxes Paid .................................................. (2,126.6) (1,294.9) (1,094.4) - ------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities .......................... 5,328.3 6,316.6 5,427.7 - ------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities Capital expenditures ............................................... (1,973.4) (1,448.8) (1,196.7) Purchase of securities, subsidiaries and other investments ......... (29,675.4) (22,986.7) (15,719.1) Proceeds from sale of securities, subsidiaries and other investments ...................................................... 28,618.9 22,075.4 15,079.2 Proceeds from sales of businesses .................................. 2,586.2 910.0 -- Other .............................................................. 432.3 (152.6) (142.7) - ------------------------------------------------------------------------------------------------------- Net Cash Used by Investing Activities .............................. (11.4) (1,602.7) (1,979.3) - ------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities Net change in short-term borrowings ................................ (457.2) 431.3 (7.1) Proceeds from issuance of debt ..................................... 2,379.5 653.1 327.5 Payments on debt ................................................... (340.6) (590.0) (341.7) Redemption of preferred stock of subsidiary ........................ -- (1,000.0) -- Purchase of treasury stock ......................................... (3,625.5) (2,572.8) (2,493.3) Dividends paid to stockholders ..................................... (2,253.1) (2,039.9) (1,728.9) Proceeds from exercise of stock options ............................ 490.1 413.3 442.2 Other .............................................................. (114.1) (153.9) (36.0) - ------------------------------------------------------------------------------------------------------- Net Cash Used by Financing Activities .............................. (3,920.9) (4,858.9) (3,837.3) - ------------------------------------------------------------------------------------------------------- Effect of Exchange Rate Changes on Cash and Cash Equivalents ....... 85.1 (82.3) (106.1) - ------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash and Cash Equivalents ............... 1,481.1 (227.3) (495.0) Cash and Cash Equivalents at Beginning of Year ..................... 1,125.1 1,352.4 1,847.4 - ------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year ........................... $ 2,606.2 $ 1,125.1 $ 1,352.4 =======================================================================================================
The accompanying notes are an integral part of this consolidated financial statement. 42 Merck & Co., Inc. 1998 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 in which a controlling interest is maintained. For those consolidated subsidiaries where Company ownership is less than 100%, the outside stockholders' interests are shown as Minority interests. Investments in affiliates over which the Company has significant influence but not a controlling interest are carried on the equity basis. Foreign Currency Translation - The U.S. dollar is the functional currency for the Company's foreign subsidiaries. Cash and Cash Equivalents - Cash equivalents are comprised of certain highly liquid investments with original maturities of less than three months. Inventories - The majority of domestic inventories are valued at the lower of last-in, first-out (LIFO) cost or market. Remaining inventories are valued at the lower of first-in, first-out (FIFO) cost or market. 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 $4.3 billion in 1998 and $3.6 billion in 1997 (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 $2.7 billion in 1998 and $2.8 billion in 1997 (net of accumulated amortization) that arose in connection with the acquisition of Medco Containment Services, Inc. (renamed Merck-Medco Managed Care) and patent rights approximating $.9 billion in 1998 (net of accumulated amortization) acquired as part of the restructuring of Astra Merck Inc. (AMI). (See Note 4.) These acquired intangibles are recorded at cost and are amortized on a straight-line basis over their estimated useful lives of up to 40 years. The 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. Reclassifications - Certain reclassifications have been made to prior year amounts to conform with current year presentation. 3. Divestitures On July 1, 1998, the Company sold its one-half interest in The DuPont Merck Pharmaceutical Company (DMPC), its joint venture with E.I. du Pont de Nemours and Company (DuPont), to DuPont for $2.6 billion in cash, resulting in a pretax gain of $2.15 billion ($1.25 billion after tax). The joint venture was not significant to the Company's financial position or results of operations. This gain was substantially offset on an after-tax basis by a $1.04 billion pretax and after-tax charge for acquired research (see Note 4) and $338.6 million of pretax other non recurring charges ($193.1 million after tax) included in Other (income) expense, net. (See Note 14.) 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 pretax nonrecurring charges included in Other (income) expense, net. (See Note 14.) 4. Joint Ventures In 1982, Merck entered into an agreement with Astra AB (Astra) to develop and market Astra's products under a royalty-bearing license. In 1993, the Company's total sales of Astra products reached a level that triggered the first step in the establishment of a joint venture business carried on by AMI, in which Merck and Astra each owned a 50% share. This joint venture, formed in 1994, developed and marketed most of Astra's new prescription medicines in the United States. Joint venture sales were $1.7 billion for the first six months of 1998, $2.3 billion for 1997, and $1.8 billion for 1996, 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. Merck & Co., Inc. 1998 Annual Report Financial Section 43 On July 1, 1998, the Company and Astra completed the restructuring of the ownership and operations of the joint venture whereby the Company acquired Astra's interest in AMI, renamed KBI Inc. (KBI), for consideration totaling $3.1 billion, including approximately $700.0 million in cash and assumption of a $2.4 billion preferred stock obligation to Astra, which is included in Minority interests in the consolidated financial statements. KBI's net operating assets, excluding certain product rights, were then combined with the net assets of Astra's wholly owned subsidiary, Astra USA, Inc., to form a new U.S. limited partnership named Astra Pharmaceuticals, L.P. (APLP), in which Merck maintains a limited partner interest. For a franchise fee payment of $230.0 million, which is being amortized into income over 10 years on a straight-line basis, APLP became the exclusive distributor of the products for which KBI retained rights. Merck earns certain partnership returns as well as ongoing revenue based on sales of current and future KBI products. The partnership returns include a priority return, a fixed return and certain variable returns which are based, in part, upon sales of certain former Astra USA, Inc. products. The fixed return represents accretion of the carrying value of Merck's limited partnership interest from its initial carrying value up to its liquidating net worth, which is being recognized into income over 10 years on a straight-line basis. For a payment of $443.0 million, which has been deferred, Astra purchased an option to buy Merck's interest in the KBI products in 2008, 2012 or 2016, excluding Merck's interest in the gastrointestinal medicines Prilosec and perprazole. In December 1998, Astra announced plans to merge with Zeneca Group Plc. If this proposed merger is completed, Astra will be required to make one-time payments to Merck totaling approximately $1.8 billion for the relinquishment of certain rights, including option rights to future Astra products with no existing or pending U.S. patents at the time of the merger. This merger would also trigger a partial redemption of Merck's limited partnership interest in 2008. Furthermore, upon completion of the merger, Astra's option to buy Merck's interest in the KBI products would only be exercisable in 2010 and Merck would obtain the right to require Astra to purchase such interest in 2008. The Company's acquisition of Astra's interest in AMI for $3.1 billion was accounted for under the purchase method and, accordingly, 100% of KBI's results of operations have been included with the Company's since July 1, 1998. Pro forma information is not provided as the impact of the transaction does not have a material effect on the Company's results of operations for 1998 and 1997. The purchase price was allocated based upon the fair values of the portion of assets and liabilities acquired as determined by an independent appraisal. Purchase price allocations resulted in the recognition of goodwill and other intangibles, principally U.S. patent rights on in-line products, totaling $1.8 billion, to be amortized on a straight-line basis over periods up to 20 years. The Company also recorded a $1.04 billion charge for acquired research associated with 10 product candidates in Phase II or later stages of development and U.S. rights to future Astra products which have not yet entered Phase II, for which, at the acquisition date, commercial viability had not been established. The product candidates are in various therapeutic categories, principally gastrointestinal, respiratory and neurological, with projected FDA approval dates in the years 1999 through 2005. None of these future products is individually material to the Company. The fair value of the acquired research was determined based upon the present value of each product's projected future cash flows utilizing an income approach. The implied risk adjusted discount rate utilized averaged 26%, with a range of 12% to 37%, depending on the applicable product's stage of completion, as well as its probability of technical and marketing success. A cost approach was also utilized to corroborate the values determined under the income approach. In applying the cost approach, consideration was given to the level of research and development expenditures within Astra, the appropriate required rates of return within the market place and the cost of reproduction for the acquired assets. Both of these approaches are appropriate under generally accepted valuation methods and yielded similar results. The future products considered in the valuation are all subject to the normal risks and uncertainties associated with demonstrating the safety and efficacy required to obtain timely FDA approval. Pursuant to agreements with Astra, the Company anticipates that APLP and Astra will bear all costs to complete the development of these products. 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 $514.2 million for 1998, $483.7 million for 1997 and $530.2 million for 1996. In 1991, Merck and 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 provided administrative services. Merck contributed cash and European marketing rights to several of its prescription medicines, and provided research and development and international industry expertise. Joint venture sales were $686.2 million for the first six months of 1998 and $1.3 billion for 1997 and 1996, consisting primarily of cardiovascular, radiopharmaceutical and central nervous system products. On July 1, 1998, the Company sold its one-half interest in the joint venture to DuPont for $2.6 billion in cash. (See Note 3.) In 1994, Merck and Pasteur Merieux Connaught 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 $560.4 million for 1998, $581.3 million for 1997 and $663.0 million for 1996. 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 formation of Merial has not had a material impact on comparability of net income. Merial sales were $1.8 billion for 1998 and $746.3 million for 1997. Animal health sales reported in Merck's 1997 consolidated sales were $448.3 million prior to August 1. 44 Merck & Co., Inc. 1998 Annual Report Financial Section 5. Affiliates Accounted for Using the Equity Method Investments in affiliates accounted for using the equity method are included in Other assets and were $1.1 billion at December 31, 1998 and $693.7 million at December 31, 1997. This increase primarily reflects the restructuring of the Company's investment in AMI into APLP, partially offset by the sale of the Company's one-half interest in DMPC. (See Notes 3 and 4.) Dividends and distributions received from these affiliates were $919.3 million in 1998, $791.0 million in 1997 and $476.2 million in 1996. Summarized information for these affiliates is as follows: Years Ended December 31 1998 1997 1996 - -------------------------------------------------------------------------------- Sales ................................... $7,095.6 $5,655.8 $4,441.4 Materials and production costs .......... 2,191.1 1,349.3 959.4 Other expense, net ...................... 2,757.8 1,852.9 1,725.2 Income before taxes ..................... 2,146.7 2,453.6 1,756.8 ================================================================================ December 31 1998 1997 - ------------------------------------------------------------------- Current assets........................... $2,693.0 $2,475.9 Noncurrent assets........................ 2,036.6 2,824.0 Current liabilities...................... 2,280.2 1,920.1 Noncurrent liabilities................... 281.4 699.8 =================================================================== 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 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 $12.6 million and $45.3 million at December 31, 1998 and $95.4 million and $5.9 million at December 31, 1997, 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, 1998 and 1997, 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: 1998 1997 - -------------------------------------------------------------------------------- Purchased currency options ................... $4,583.5 $1,462.7 Forward sale contracts ....................... 1,972.3 1,500.9 Forward purchase contracts ................... 542.8 412.1 ================================================================================ 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 $231.3 million at December 31, 1998 and $313.6 million at December 31, 1997 and, in 1997, a seven-year interest rate and currency swap contract with a notional amount of $344.1 million at December 31, 1998 and $334.2 million at December 31, 1997. In 1998, a portion of the 1995 swap contract was terminated in conjunction with the sale of a portion of the related asset with an immaterial impact on net income. These swaps convert two different variable rate Dutch guilder investments to variable rate U.S. dollar investments. The market values Merck & Co., Inc. 1998 Annual Report Financial Section 45 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 Accumulated other comprehensive income. 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. Fair Value of Financial Instruments Summarized below are the carrying values and fair values of the Company's financial instruments at December 31, 1998 and 1997. Fair values were estimated based on market prices, where available, or dealer quotes. 1998 1997 ------------------ ------------------ Carrying Fair Carrying Fair Value Value Value Value - -------------------------------------------------------------------------------- Assets - -------------------------------------------------------------------------------- Cash and cash equivalents .............. $2,606.2 $2,606.2 $1,125.1 $1,125.1 Short-term investments ................. 749.5 749.5 1,184.2 1,184.2 Long-term investments .................. 3,607.7 3,604.3 2,533.4 2,531.8 Purchased currency options .............................. 170.2 137.5 54.6 144.1 Forward exchange contracts and currency swaps ................... 72.8 72.8 197.0 197.0 Interest rate swaps .................... -- -- .1 .3 - -------------------------------------------------------------------------------- Liabilities - -------------------------------------------------------------------------------- Loans payable and current portion of long-term debt ....................... $ 624.2 $ 654.7 $ 902.5 $ 900.5 Long-term debt ......................... 3,220.8 3,336.5 1,346.5 1,387.0 Forward exchange contracts and currency swap .................... 86.1 86.1 22.0 22.0 ================================================================================ A summary of the carrying values and fair values of the Company's investments at December 31 is as follows: 1998 1997 ------------------ ------------------ Carrying Fair Carrying Fair Value Value Value Value - -------------------------------------------------------------------------------- Available-for-sale Debt securities ...................... $2,639.0 $2,639.0 $1,947.2 $1,947.2 Equity securities .................... 1,000.6 1,000.6 887.6 887.6 Held-to-maturity securities ............ 717.6 714.2 882.8 881.2 ================================================================================ A summary of gross unrealized gains and losses on the Company's investments at December 31 is as follows:
1998 1997 ------------------ ------------------ Gross Unrealized Gross Unrealized ------------------ ------------------ Gains Losses Gains Losses - ------------------------------------------------------------------------------------ Available-for-sale Debt securities .................. $ 22.1 $(12.5) $ 11.1 $ (2.8) Equity securities ................ 124.1 (64.2) 111.3 (91.9) Held-to-maturity securities ........ .6 (4.0) 2.9 (4.5) ====================================================================================
Gross unrealized gains and losses with respect to available-for-sale investments are recorded, net of tax and minority interests, in Accumulated other comprehensive (loss) income. Available-for-sale debt securities and held-to-maturity securities maturing within one year totaled $535.5 million and $214.0 million, respectively, at December 31, 1998. Of the remaining debt securities, $1.8 billion mature within six years. At December 31, 1998, $507.3 million of held-to-maturity securities maturing within five years set off $507.3 million of 5.0% nontransferable note obligations due by 2003 issued by the Company. Concentrations of Credit Risk As part of its ongoing control procedures, the Company monitors concentrations of credit risk associated with 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: 1998 1997 - -------------------------------------------------------------------------------- Finished goods ................................. $1,701.2 $1,230.6 Raw materials and work in process .............. 851.6 849.7 Supplies ....................................... 71.1 64.8 - -------------------------------------------------------------------------------- Total (approximates current cost) .............. 2,623.9 2,145.1 Reduction to LIFO cost ......................... -- -- - -------------------------------------------------------------------------------- $2,623.9 $2,145.1 ================================================================================ Inventories valued under the LIFO method comprised approximately 37% and 42% of inventories at December 31, 1998 and 1997, respectively. 8. Loans Payable and Long-Term Debt Loans payable at December 31, 1998 consisted primarily of $500.0 million of 5.8% notes due 2037 that are subject to repayment at par at the option of the holders beginning May 1999. 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 in both years was principally borrowings by foreign subsidiaries. The weighted average interest rate for these borrowings was 6.6% and 6.4% at December 31, 1998 and 1997, respectively. Long-term debt at December 31 consisted of: 1998 1997 - -------------------------------------------------------------------------------- 6.0% note due 2038 ......................... $1,380.0 $ -- 6.8% euronotes due 2005 .................... 499.2 499.0 6.4% debentures due 2028 ................... 499.0 -- 6.0% debentures due 2028 ................... 495.8 -- 6.3% debentures due 2026 ................... 246.8 246.7 5.8% notes due 2037 ........................ -- 500.0 Other ...................................... 100.0 100.8 - -------------------------------------------------------------------------------- $3,220.8 $1,346.5 ================================================================================ 46 Merck & Co., Inc. 1998 Annual Report Financial Section The note due 2038 issued to Astra is subject to repayment at par upon certain events in which Astra acquires product rights held by KBI. If the proposed merger between Astra and Zeneca Group Plc is completed (see Note 4 for further information), the note would become payable in 2008. Other consisted primarily of pollution control, industrial revenue financing and foreign borrowings at varying rates up to 8.6%. The aggregate maturities of long-term debt for each of the next five years are as follows: 1999, $7.9 million; 2000, $9.4 million; 2001, $9.5 million; 2002, $6.8 million; 2003, $8.6 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 1996, the Company and several other defendants finalized an agreement to settle the federal class action alleging conspiracy, which represents the single largest group of retail pharmacy claims, pursuant to which the Company paid $51.8 million. Since that time, the Company has entered into other settlements on satisfactory terms. The Company has not engaged in any conspiracy, and no admission of wrongdoing was made nor was included in the final agreements. 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 connection with the restructuring of AMI (see Note 4), the Company assumed a $2.4 billion par value preferred stock obligation with a dividend rate of 5% per annum which is carried by KBI. The preferred stock is included in Minority interests in the consolidated financial statements at December 31, 1998. 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 PECs were redeemed by the Company at par in September 1997. 11. Stockholders' Equity On November 24, 1998, the Board of Directors approved an increase in authorized common shares from 2.7 billion with no par value to 5.4 billion with one cent par value, effective January 25, 1999. Amounts have been reclassified from Common stock to Other paid-in capital to reflect the change in par value. Additionally, the Board of Directors approved a two-for-one stock split of the Company's common stock, effective February 17, 1999. All share and per share amounts for current and prior periods presented in these financial statements reflect the stock split. In 1998, 1997 and 1996, Other paid-in capital increased by $390.1 million, $286.5 million and $225.0 million, respectively, principally as a result of issuances of treasury stock for exercises of stock options. A summary of treasury stock transactions (shares in millions) is as follows:
1998 1997 1996 ------------------ ------------------ ------------------ Shares Cost Shares Cost Shares Cost - -------------------------------------------------------------------------------------- Balance, Jan. 1 ... 580.6 $ 9,959.9 554.0 $ 7,814.7 509.2 $ 5,747.4 Purchases ......... 56.9 3,625.5 55.0 2,572.8 76.8 2,493.3 Issuances(1) ...... (30.1) (577.6) (28.4) (427.6) (32.0) (426.0) - -------------------------------------------------------------------------------------- Balance, Dec. 31 ......... 607.4 $13,007.8 580.6 $ 9,959.9 554.0 $ 7,814.7 ======================================================================================
(1) Issued primarily under stock option plans. At December 31, 1998 and 1997, 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's stock option plan for employees also provides for the granting of performance-based stock awards. Summarized information relative to the Company's stock option plans (shares in thousands) is as follows: Number Average of Shares Price(1) - -------------------------------------------------------------------------------- Outstanding at December 31, 1995 .............. 182,842.0 $ 16.33 Granted ....................................... 26,037.2 32.64 Exercised ..................................... (31,671.3) 13.96 Forfeited ..................................... (4,989.9) 18.84 Equivalent Options Assumed .................... 200.6 51.63 - -------------------------------------------------------------------------------- Outstanding at December 31, 1996 .............. 172,418.6 19.19 Granted ....................................... 31,877.9 48.74 Exercised ..................................... (27,994.7) 14.77 Forfeited ..................................... (5,390.6) 24.30 - -------------------------------------------------------------------------------- Outstanding at December 31, 1997 .............. 170,911.2 25.27 Granted ....................................... 34,802.8 63.43 Exercised ..................................... (29,727.4) 16.49 Forfeited ..................................... (3,645.9) 39.06 - -------------------------------------------------------------------------------- Outstanding at December 31, 1998 .............. 172,340.7 $ 34.20 ================================================================================ (1) Weighted average exercise price. Merck & Co., Inc. 1998 Annual Report Financial Section 47 The number of shares and average price of options exercisable at December 31, 1998, 1997 and 1996 were 45.3 million shares at $17.75, 47.3 million shares at $16.49 and 64.8 million shares at $15.50, respectively. At December 31, 1998 and 1997, 83.0 million shares and 114.4 million 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 $192.4 million, or $.08 per share in 1998, $102.5 million, or $.04 per share in 1997 and $46.6 million, or $.02 per share in 1996. 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 1998, 1997 and 1996 was $20.13, $15.82 and $9.56, respectively. This fair value was estimated using the Black-Scholes option-pricing model based on the weighted average market price at grant date of $63.43 in 1998, $48.74 in 1997 and $32.64 in 1996 and the following weighted average assumptions: Years Ended December 31 1998 1997 1996 - -------------------------------------------------------------------------------- Dividend yield ....................... 1.5% 1.7% 2.1% Risk-free interest rate .............. 5.6% 6.4% 5.9% Volatility ........................... 25% 24% 24% Expected life (years) ................ 6.5 6.6 6.7 ================================================================================ Summarized information about stock options outstanding and exercisable at December 31, 1998 (shares in thousands) is as follows: Outstanding Exercisable Exercise ---------------------------------- --------------------- Price Number Average Average Number Average Range of Shares Life(1) Price(2) of Shares Price(2) - -------------------------------------------------------------------------------- Under $15 15,156,960 6.75 $ 12.10 13,317,376 $ 11.72 $15 to 20 38,046,286 5.11 16.80 18,204,736 17.06 $20 to 25 28,737,046 5.10 21.40 9,857,762 21.64 $25 to 40 27,453,352 6.71 32.06 2,994,136 26.56 $40 to 50 26,752,622 8.17 48.46 554,248 45.85 $50 to 65 33,609,928 8.85 62.30 361,674 51.79 Over $65 2,584,524 7.31 71.78 8,984 69.62 - -------------------------------------------------------------------------------- 172,340,718 45,298,916 ================================================================================ (1) Weighted average contractual life remaining in years. (2) Weighted average exercise price. 13. Pension and Other Postretirement Benefit Plans In 1998, the Company adopted Statement No. 132, Employers' Disclosures About Pensions and Other Postretirement Benefits (OPEB), which revises disclosures about pension and other postretirement benefit plans. The following information is provided in accordance with the requirements of this Statement. The net cost for the Company's pension plans consisted of the following components: Years Ended December 31 1998 1997 1996 - -------------------------------------------------------------------------------- Service cost ............................ $ 134.8 $ 105.9 $ 104.1 Interest cost ........................... 158.7 149.4 144.2 Expected return on plan assets .......... (199.2) (175.5) (155.4) Net amortization ........................ 15.0 4.7 13.7 - -------------------------------------------------------------------------------- Net pension cost ........................ $ 109.3 $ 84.5 $ 106.6 ================================================================================ The net pension cost attributable to international plans included in the above table was $58.8 million in 1998, $49.9 million in 1997 and $51.8 million in 1996. The net cost of postretirement benefits other than pensions consisted of the following components: Years Ended December 31 1998 1997 1996 - -------------------------------------------------------------------------------- Service cost ............................ $ 33.7 $ 24.7 $ 25.2 Interest cost ........................... 53.6 48.2 45.7 Expected return on plan assets .......... (64.2) (53.5) (46.9) Net amortization ........................ (20.0) (18.0) (14.6) - -------------------------------------------------------------------------------- Net postretirement benefit cost ......... $ 3.1 $ 1.4 $ 9.4 ================================================================================ The cost of health care and life insurance benefits for active employees was $183.4 million in 1998, $163.8 million in 1997 and $148.9 million in 1996. Summarized information about the changes in plan assets and benefit obligation is as follows: Other Postretirement Pension Benefits Benefits -------------------- ------------------- 1998 1997 1998 1997 - ------------------------------------------------------------------------------- Fair value of plan assets at January 1 ................... $2,349.5 $2,053.6 $ 647.4 $ 541.6 Actual return on plan assets ..... 334.5 249.0 93.3 104.3 Company contributions ............ 198.7 181.5 .1 7.2 Benefits paid from plan assets .................... (166.6) (139.1) (5.8) (5.7) Other ............................ 4.8 4.5 -- -- - ------------------------------------------------------------------------------- Fair value of plan assets at December 31 ................. $2,720.9 $2,349.5 $ 735.0 $ 647.4 =============================================================================== Benefit obligation at January 1 ................... $2,388.7 $2,159.4 $ 734.9 $ 663.7 Service cost ..................... 134.8 105.9 33.7 24.7 Interest cost .................... 158.7 149.4 53.6 48.2 Actuarial (gains) losses ......... 258.0 125.8 98.3 44.8 Benefits paid .................... (183.7) (147.8) (38.2) (39.0) Other ............................ 29.4 (4.0) (15.8) (7.5) - ------------------------------------------------------------------------------- Benefit obligation at December 31 ................. $2,785.9 $2,388.7 $ 866.5 $ 734.9 =============================================================================== The fair value of international pension plan assets included in the above table was $793.2 million in 1998 and $676.4 million in 1997. The pension benefit obligation of international plans included in this table was $998.2 million in 1998 and $827.1 million in 1997. 48 Merck & Co., Inc. 1998 Annual Report Financial Section A reconciliation of the plans' funded status to the net asset (liability) recognized at December 31 is as follows: Other Postretirement Pension Benefits Benefits ----------------- ------------------ 1998 1997 1998 1997 - -------------------------------------------------------------------------------- Funded status (benefit obligation in excess of plan assets) ............ $ (65.0) $ (39.2) $(131.5) $ (87.5) Unrecognized net loss (gain) ........... 380.6 269.1 (95.7) (171.8) Unrecognized plan changes .............. 78.8 60.9 (130.3) (128.3) Unrecognized transitional net asset ............................ (39.4) (55.2) -- -- - -------------------------------------------------------------------------------- Net asset (liability) .................. $ 355.0 $ 235.6 $(357.5) $(387.6) - -------------------------------------------------------------------------------- Recognized as: Other assets ......................... $ 513.4 $ 387.8 $ -- $ -- Accounts payable and accrued liabilities ................. (7.9) (11.0) (24.8) (25.6) Deferred income taxes and noncurrent liabilities .............. (284.3) (217.2) (332.7) (362.0) Accumulated other compre- hensive loss ........................ 133.8 76.0 -- -- ================================================================================ For pension plans with benefit obligations in excess of plan assets at December 31, 1998 and 1997, the fair value of plan assets was $402.6 million and $472.6 million, respectively, and the benefit obligation was $871.1 million and $836.4 million, respectively. For those plans with accumulated benefit obligations in excess of plan assets at December 31, 1998 and 1997, the fair value of plan assets was $332.2 million and $197.3 million, respectively, and the accumulated benefit obligation was $551.0 million and $360.8 million, respectively. Assumptions used in determining U.S. plan information are as follows: Other Postretirement Pension Benefits Benefits ----------------------- ----------------------- December 31 1998 1997 1996 1998 1997 1996 - -------------------------------------------------------------------------------- Discount rate .......... 6.75% 7.0% 7.5% 6.75% 7.0% 7.5% Expected rate of return on plan assets ........ 10.0 10.0 10.0 10.0 10.0 10.0 Salary growth rate ..... 4.5 4.5 4.5 4.5 4.5 4.5 ================================================================================ For the three years presented, international pension plan assumptions ranged from 4.0% to 8.0% for the discount rate, 5.5% to 10.0% for the expected rate of return on plan assets and 2.0% to 6.0% for the salary growth rate. The health care cost trend rate for other postretirement benefit plans was 7.5% at December 31, 1998. The rate will gradually decline to 5.0% over a 5-year period. A one percentage point change in the health care cost trend rate would have had the following effects: One Percentage Point -------------------- Increase Decrease - -------------------------------------------------------------------------------- Effect on total service and interest cost components .......................................... $ 16.7 $(13.9) Effect on benefit obligation .......................... 138.3 (119.2) ================================================================================ 14. Other (Income) Expense, Net Years Ended December 31 1998 1997 1996 - -------------------------------------------------------------------------------- Interest income ...................... $(307.7) $(221.4) $(205.4) Interest expense ..................... 205.6 129.5 138.6 Exchange gains ....................... (44.7) (18.0) (27.8) Minority interests ................... 162.4 131.8 144.2 Amortization of goodwill and other intangibles .............. 264.3 197.2 196.2 Other, net ........................... 219.8 123.6 (5.0) - -------------------------------------------------------------------------------- $ 499.7 $ 342.7 $ 240.8 ================================================================================ 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 paid to Astra on $2.4 billion par value preferred stock of a subsidiary beginning in July 1998 and, in 1997 and 1996, dividends on the PECs, which were issued in December 1995 and redeemed in September 1997. (See Note 10.) Increased amortization of goodwill and other intangibles in 1998 reflects amortization of goodwill and other intangibles associated with the restructuring of AMI in July 1998. (See Note 4.) In 1998, other, net, includes $338.6 million of nonrecurring charges, primarily for environmental remediation costs and asset write-offs, principally deferred start-up costs. In 1997, other, net, includes $207.3 million of nonrecurring charges primarily for the loss on sale of assets, endowment of The Merck Company Foundation and environmental remediation costs. Interest paid was $192.3 million in 1998, $130.5 million in 1997 and $117.4 million in 1996. 15. Taxes on Income A reconciliation between the Company's effective tax rate and the U.S. statutory rate is as follows: Tax Rate 1998 ------------------------- Amount 1998 1997 1996 - -------------------------------------------------------------------------------- U.S. statutory rate applied to pretax income .................. $2,846.6 35.0% 35.0% 35.0% Differential arising from: Acquired research ................. 363.8 4.5 -- -- Foreign earnings .................. 141.4 1.7 (.3) (1.4) State taxes ....................... 129.4 1.6 1.0 .1 Tax exemption for Puerto Rico operations .................. (133.1) (1.6) (1.9) (1.9) Equity income from affiliates ..... (135.6) (1.7) (2.4) (1.9) Other ............................. (327.6) (4.0) (2.8) .1 - -------------------------------------------------------------------------------- $2,884.9 35.5% 28.6% 30.0% ================================================================================ The increase in the effective tax rate in 1998 primarily reflects the nondeductibility of the charge for acquired research in connection with the restructuring of AMI and the state tax impact of the gain on the sale of the Company's one-half interest in DMPC. 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. The reduced benefit in 1998 reflects the impact of the AMI restructuring, resulting in pretax partnership returns recorded in equity income. Merck & Co., Inc. 1998 Annual Report Financial Section 49 Domestic companies contributed approximately 74% in 1998, 71% in 1997 and 73% in 1996 to consolidated pretax income. Taxes on income consisted of: Years Ended December 31 1998 1997 1996 - ------------------------------------------------------------------------------- Current provision Federal ......................... $1,750.5 $1,322.2 $1,106.2 Foreign ......................... 699.5 476.8 410.3 State ........................... 264.7 90.5 (14.6) - -------------------------------------------------------------------------------- 2,714.7 1,889.5 1,501.9 - -------------------------------------------------------------------------------- Deferred provision Federal ......................... 226.2 (48.1) 136.9 Foreign ......................... (21.0) (6.4) (15.4) State ........................... (35.0) 13.2 36.1 - -------------------------------------------------------------------------------- 170.2 (41.3) 157.6 - -------------------------------------------------------------------------------- $2,884.9 $1,848.2 $1,659.5 ================================================================================ Deferred income taxes at December 31 consisted of:
1998 1997 ------------------------ ------------------------ Assets Liabilities Assets Liabilities - --------------------------------------------------------------------------------------- Other intangibles .............. $ -- $1,434.6 $ -- $1,173.4 Accelerated depreciation ....... -- 606.6 -- 591.2 Inventory related .............. 546.6 210.5 629.0 235.4 Investment related ............. -- 210.0 -- -- Environmental related .......... 131.0 -- 87.0 -- Compensation related ........... 110.6 -- 91.3 -- Restructuring charge ........... 107.9 -- 123.1 -- Pensions and OPEB .............. 176.9 140.1 172.7 105.5 Equity investments ............. 57.8 91.7 -- 173.1 Other .......................... 836.8 477.1 899.0 498.3 - --------------------------------------------------------------------------------------- Subtotal ....................... 1,967.6 3,170.6 2,002.1 2,776.9 Valuation allowance ............ (9.1) -- (4.4) -- - --------------------------------------------------------------------------------------- Total deferred taxes ........... $1,958.5 $3,170.6 $1,997.7 $2,776.9 - --------------------------------------------------------------------------------------- Net deferred tax liabilities .................. $1,212.1 $ 779.2 - --------------------------------------------------------------------------------------- Recognized as: Prepaid expenses and taxes ....................... $ (666.3) $ (704.4) Other assets ................. (48.2) (111.3) Income taxes payable ......... 163.5 164.8 Deferred income taxes and noncurrent liabilities ................. 1,763.1 1,430.1 =======================================================================================
Income taxes paid in 1998, 1997 and 1996 were $2.1 billion, $1.3 billion and $1.1 billion, respectively. The increase in 1998 primarily reflects taxes paid on the gain on the sale of the Company's one-half interest in DMPC and on APLP partnership returns, resulting from the AMI restructuring. At December 31, 1998, foreign earnings of $5.8 billion and domestic earnings of $880.9 million have been retained indefinitely by subsidiary companies for reinvestment. No provision is made for income taxes that would be payable upon the distribution of such earnings, and it is not practicable to determine the amount of the related unrecognized deferred income tax liability. These earnings include income from manufacturing operations in Ireland, which were tax-exempt through 1990 and are taxed at 10% thereafter. In addition, the Company has domestic subsidiaries operating in Puerto Rico under a tax incentive grant that expires in 2008. The Company's federal income tax returns have been audited through 1992. 16. Earnings per Share The weighted average common shares used in the computations of basic earnings per common share and earnings per common share assuming dilution (shares in millions) are as follows: Years Ended December 31 1998 1997 1996 - -------------------------------------------------------------------------------- Average common shares outstanding .......... 2,378.8 2,409.0 2,427.2 Common shares issuable(1) .................. 62.3 60.5 62.4 - -------------------------------------------------------------------------------- Average common shares outstanding assuming dilution ........................ 2,441.1 2,469.5 2,489.6 ================================================================================ (1) Issuable primarily under stock option plans. 17. Comprehensive Income Effective January 1, 1998, the Company adopted the provisions of Statement No. 130, Reporting Comprehensive Income, which modifies the financial statement presentation of comprehensive income and its components. In accordance with this Statement, a Consolidated Statement of Comprehensive Income is included in the consolidated financial statements to present all changes in Stockholders' equity in the periods presented other than changes resulting from transactions relating to the Company's stock. Upon adoption, accumulated other comprehensive income of $9.0 million at December 31, 1997 was reclassified from Retained earnings to a separate component of Stockholders' equity. The components of Other comprehensive loss are as follows: After Pretax(1) Tax Tax - ------------------------------------------------------------------------------- Year Ended December 31, 1998 - ------------------------------------------------------------------------------- Net unrealized gain on investments ........... $ 20.6 $ (4.8) $ 15.8 Net income realization ....................... (41.9) 20.5 (21.4) - ------------------------------------------------------------------------------- Subtotal ..................................... $ (21.3) $ 15.7 $ (5.6) Minimum pension liability .................... (47.2) 22.5 (24.7) - ------------------------------------------------------------------------------- $ (68.5) $ 38.2 $(30.3) - ------------------------------------------------------------------------------- Year Ended December 31, 1997 - ------------------------------------------------------------------------------- Net unrealized loss on investments ........... $ (74.6) $ 57.0 $(17.6) Minimum pension liability .................... (37.8) 25.4 (12.4) - ------------------------------------------------------------------------------- $(112.4) $ 82.4 $(30.0) - ------------------------------------------------------------------------------- Year Ended December 31, 1996 - ------------------------------------------------------------------------------- Net unrealized loss on investments ........... $ (36.1) $ 25.3 $(10.8) Minimum pension liability .................... (19.9) 13.4 (6.5) - ------------------------------------------------------------------------------- $ (56.0) $ 38.7 $(17.3) =============================================================================== (1) Net of minority interest. The components of Accumulated other comprehensive (loss) income are as follows: December 31 1998 1997 - ------------------------------------------------------------------------------- Net unrealized gain on investments ............... $ 22.3 $ 27.9 Minimum pension liability ........................ (43.6) (18.9) - ------------------------------------------------------------------------------- $ (21.3) $ 9.0 =============================================================================== 50 Merck & Co., Inc. 1998 Annual Report Financial Section 18. Segment Reporting In 1998, the Company adopted Statement No. 131, Disclosures about Segments of an Enterprise and Related Information, which revises reporting and disclosure requirements for operating segments. The following information is provided in accordance with the requirements of this Statement. The Company's operations are principally managed on a products and services basis and are comprised of two reportable segments: Merck Pharmaceutical and Merck-Medco. Merck Pharmaceutical products consist of therapeutic agents, sold by prescription, for the treatment of human disorders. Merck-Medco revenues are derived from the filling and management of prescriptions and health management programs. All Other includes non-reportable human and animal health segments. Revenues and profits for these segments are as follows: Merck Pharm- Merck- All aceutical Medco Other Total - ------------------------------------------------------------------------------- Year Ended December 31, 1998 - ------------------------------------------------------------------------------- Segment revenues ................ $12,839.9 $14,338.0 $ 2,274.4 $29,452.3 Segment profits ................. 7,637.3 475.8 2,390.5 10,503.6 Included in segment profits: Equity income (loss) from affiliates .............. 12.7 (.4) 850.0 862.3 Depreciation and amor- tization expenses ............ (103.6) (91.9) (47.6) (243.1) - ------------------------------------------------------------------------------- Year Ended December 31, 1997 - ------------------------------------------------------------------------------- Segment revenues ................ $12,122.2 $11,996.0 $ 1,851.8 $25,970.0 Segment profits ................. 7,396.2 333.9 1,895.1 9,625.2 Included in segment profits: Equity income (loss) from affiliates .............. 15.0 (.5) 894.6 909.1 Depreciation and amor- tization expenses ............ (89.0) (74.8) (31.5) (195.3) - ------------------------------------------------------------------------------- Year Ended December 31, 1996 - ------------------------------------------------------------------------------- Segment revenues ................ $10,700.1 $ 9,306.8 $ 1,797.3 $21,804.2 Segment profits ................. 6,649.0 249.1 1,553.1 8,451.2 Included in segment profits: Equity income (loss) from affiliates .............. 15.5 (.5) 650.5 665.5 Depreciation and amor- tization expenses ............ (85.3) (44.1) (9.0) (138.4) =============================================================================== Segment profits are comprised of segment revenues less certain elements of materials and production costs and operating expenses, including components of equity income (loss) from joint ventures and depreciation and amortization expenses. The vast majority of indirect production costs, research and development expenses and general and administrative expenses, all predominantly related to the Merck pharmaceutical business, as well as the cost of financing these activities, are not included in the marketing segment profits. The vast majority of goodwill and other intangibles amortization, as well as the cost of financing capital employed, are not included in Merck-Medco segment profits. A reconciliation of total segment revenues to consolidated sales is as follows: Years Ended December 31 1998 1997 1996 - ------------------------------------------------------------------------------- Segment revenues .................. $29,452.3 $25,970.0 $21,804.2 Other revenues .................... 182.2 222.6 169.6 Adjustments ....................... (2,736.3) (2,555.7) (2,145.1) - ------------------------------------------------------------------------------- $26,898.2 $23,636.9 $19,828.7 =============================================================================== Other revenues primarily represent sales related to divested products or businesses. Adjustments represent the elimination of receipts reported as revenues in the internal management system which are not reportable as revenues under generally accepted accounting principles. Consolidated revenues by country where derived are as follows: Years Ended December 31 1998 1997 1996 - ------------------------------------------------------------------------------- United States ........................ $20,199.3 $16,984.9 $13,636.8 Japan ................................ 1,160.6(1) 1,235.1(1) 1,316.1(1) Other ................................ 5,538.3 5,416.9 4,875.8 - ------------------------------------------------------------------------------- $26,898.2 $23,636.9 $19,828.7 =============================================================================== (1) Exceeds 5% of consolidated sales. A reconciliation of total segment profits to consolidated income before taxes is as follows: Years Ended December 31 1998 1997 1996 - ------------------------------------------------------------------------------- Segment profits ..................... $10,503.6 $ 9,625.2 $ 8,451.2 Other profits ....................... 86.7 137.3 105.2 Adjustments ......................... 180.5 145.6 155.4 Unallocated: Gains on sales of businesses ....................... 2,147.7 213.4 -- Interest income ................... 307.7 221.4 205.4 Interest expense .................. (205.6) (129.5) (138.6) Equity income (loss) from affiliates .................. 22.0 (181.2) (64.8) Depreciation and amortization expenses ............ (772.0) (641.8) (592.5) Acquired research ................. (1,039.5) -- -- Research and development expenses ......................... (1,821.1) (1,683.7) (1,487.3) Other expenses, net ............... (1,276.9) (1,244.4) (1,093.2) - ------------------------------------------------------------------------------- $ 8,133.1 $ 6,462.3 $ 5,540.8 =============================================================================== Other profits primarily represent operating income related to divested products or businesses. Adjustments represent the elimination of the effect of double counting certain items of income and expense. Equity income (loss) from affiliates includes taxes paid at the joint venture level and a portion of equity income that is not reported in segment profits. Other expenses, net, include expenses from corporate and manufacturing cost centers and other miscellaneous income (expense), net. Net property, plant and equipment (PP&E) by country where located are as follows: December 31 1998 1997 1996 - ------------------------------------------------------------------------------- United States ............... $5,888.3 $5,017.9 $4,536.8 Japan ....................... 388.5 365.4(2) 343.9(2) Other ....................... 1,567.0 1,226.1 1,046.0 - ------------------------------------------------------------------------------- $7,843.8 $6,609.4 $5,926.7 =============================================================================== (2) Exceeds 5% of consolidated net PP&E. The Company does not disaggregate assets on a products and services basis for internal management reporting and, therefore, such information is not presented. Merck & Co., Inc. 1998 Annual Report Financial Section 51 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, 1998, 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, 1998 and 1997, and the related consolidated statements of income, retained earnings, comprehensive income and cash flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP New York, New York ARTHUR ANDERSEN LLP January 26, 1999 52 Merck & Co., Inc. 1998 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 1998. 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 1998. 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 Merck & Co., Inc. 1998 Annual Report Financial Section 53 Selected Financial Data(1) - -------------------------------------------------------------------------------- Merck & Co., Inc. and Subsidiaries
($ in millions except per share amounts) 1998 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------- Results for Year: Sales ......................... $ 26,898.2 $ 23,636.9 $ 19,828.7 $ 16,681.1 $ 14,969.8 $ 10,498.2 Materials and production costs ....................... 13,925.4 11,790.3 9,319.2 7,456.3 5,962.7 2,497.6 Marketing/administrative expenses .................... 4,511.4 4,299.2 3,841.3 3,297.8 3,177.5 2,913.9 Research/development expenses.. 1,821.1 1,683.7 1,487.3 1,331.4 1,230.6 1,172.8 Acquired research ............. 1,039.5 -- -- -- -- -- Equity (income) loss from affiliates ............. (884.3) (727.9) (600.7) (346.3) (56.6) 26.1 Gains on sales of businesses .. (2,147.7) (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 ... 499.7 342.7 240.8 827.6 232.8 10.1 Income before taxes ........... 8,133.1 6,462.3 5,540.8 4,797.2 4,415.2 3,102.7 Taxes on income ............... 2,884.9 1,848.2 1,659.5 1,462.0 1,418.2 936.5 Net income .................... 5,248.2 4,614.1 3,881.3 3,335.2 2,997.0 2,166.2 Basic earnings per common share(3) ............. $ 2.21 $ 1.92 $ 1.60 $ 1.35 $ 1.19 $ .94 Earnings per common share assuming dilution(3) ........ $ 2.15 $ 1.87 $ 1.56 $ 1.32 $ 1.17 $ .93 Dividends declared ............ 2,353.0 2,094.8 1,793.4 1,578.0 1,463.1 1,239.0 Dividends paid per common share(3) ............. $ .95 $ .85 $ .71 $ .62 $ .57 $ .52 Capital expenditures .......... 1,973.4 1,448.8 1,196.7 1,005.5 1,009.3 1,012.7 Depreciation .................. 700.0 602.4 521.7 463.3 475.6 348.4 - ---------------------------------------------------------------------------------------------------------------------- Year-End Position: Working capital ............... $ 4,159.7 $ 2,644.4 $ 2,897.4 $ 3,870.2 $ 2,291.4 $ 541.6 Property, plant and equipment (net) ............. 7,843.8 6,609.4 5,926.7 5,269.1 5,296.3 4,894.6 Total assets .................. 31,853.4 25,735.9 24,266.9 23,831.8 21,856.6 19,927.5 Long-term debt ................ 3,220.8 1,346.5 1,155.9 1,372.8 1,145.9 1,120.8 Stockholders' equity .......... 12,801.8 12,594.6 11,964.0 11,735.7 11,139.0 10,021.7 - ---------------------------------------------------------------------------------------------------------------------- Financial Ratios: Net income as a % of: Sales ....................... 19.5% 19.5% 19.6% 20.0% 20.0% 20.6% Average total assets ........ 18.2% 18.5% 16.1% 14.6% 14.3% 14.0% - ---------------------------------------------------------------------------------------------------------------------- Year-End Statistics: Average common shares outstanding (millions)(3) ... 2,378.8 2,409.0 2,427.2 2,472.3 2,514.3 2,313.0 Average common shares outstanding assuming dilution (millions)(3) ............... 2,441.1 2,469.5 2,489.6 2,527.3 2,557.7 2,332.0 Number of stockholders of record ................... 269,600 263,900 247,300 243,000 244,700 231,300 Number of employees ........... 57,300 53,800 49,100 45,200 47,500 47,100(4) ==========================================================================================================================
($ in millions except per share amounts) 1992(2) 1991 1990 1989 1988 - ------------------------------------------------------------------------------------------------------- Results for Year: Sales ......................... $ 9,662.5 $ 8,602.7 $ 7,671.5 $ 6,550.5 $ 5,939.5 Materials and production costs ....................... 2,096.1 1,934.9 1,778.1 1,550.3 1,526.1 Marketing/administrative expenses .................... 2,963.3 2,570.3 2,388.0 2,013.4 1,880.3 Research/development expenses.. 1,111.6 987.8 854.0 750.5 668.8 Acquired research ............. -- -- -- -- -- Equity (income) loss from affiliates ............. (25.8) 21.1 22.4 11.5 (2.5) Gains on sales of businesses .. -- -- -- -- -- Restructuring charge .......... -- -- -- -- -- Gain on joint venture formation ................... -- -- -- -- -- Provision for joint venture obligation .......... -- -- -- -- -- Other (income) expense, net ... (46.3) (78.1) (69.8) (58.2) (4.2) Income before taxes ........... 3,563.6 3,166.7 2,698.8 2,283.0 1,871.0 Taxes on income ............... 1,117.0 1,045.0 917.6 787.6 664.2 Net income .................... 2,446.6 2,121.7 1,781.2 1,495.4 1,206.8 Basic earnings per common share(3) ............. $ 1.06 $ .91 $ .76 $ .63 $ .51 Earnings per common share assuming dilution(3) ........ $ 1.05 $ .91 $ .75 $ .62 $ .50 Dividends declared ............ 1,106.9 920.3 788.1 681.5 546.3 Dividends paid per common share(3) ............. $ .46 $ .39 $ .32 $ .28 $ .22 Capital expenditures .......... 1,066.6 1,041.5 670.8 433.0 372.7 Depreciation .................. 290.3 242.7 231.4 206.4 189.0 - --------------------------------------------------------------------------------------------------------- Year-End Position: Working capital ............... $ 1,241.1 $ 1,496.5 $ 939.2 $ 1,502.5 $ 1,480.3 Property, plant and equipment (net) ............. 4,271.1 3,504.5 2,721.7 2,292.5 2,070.7 Total assets .................. 11,086.0 9,498.5 8,029.8 6,756.7 6,127.5 Long-term debt ................ 495.7 493.7 124.1 117.8 142.8 Stockholders' equity .......... 5,002.9 4,916.2 3,834.4 3,520.6 2,855.8 - --------------------------------------------------------------------------------------------------------- Financial Ratios: Net income as a % of: Sales ....................... 25.3% 24.7% 23.2% 22.8% 20.3% Average total assets ........ 24.1% 24.2% 24.1% 23.2% 20.4% - --------------------------------------------------------------------------------------------------------- Year-End Statistics: Average common shares outstanding (millions)(3) ... 2,307.0 2,319.8 2,344.1 2,376.6 2,373.8 Average common shares outstanding assuming dilution (millions)(3) ............... 2,330.6 2,343.3 2,363.7 2,401.6 2,398.2 Number of stockholders of record ................... 161,200 91,100 82,300 75,600 68,500 Number of employees ........... 38,400 37,700 36,900 34,400 32,000 =======================================================================================================
(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) All share and per share amounts for current and prior periods reflect the two-for-one stock split effective February 1999. (4) Increase in 1993 is due to the inclusion of 10,300 Merck-Medco employees. 54 Merck & Co., Inc. 1998 Annual Report Financial Section EX-21 5 MERCK & CO., INC. SUBSIDIARIES AS OF 12/31/98 Exhibit 21 MERCK & CO., INC. SUBSIDIARIES as of 12/31/98 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 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 Investments, Inc. Delaware Merck Capital Resources, Inc. Delaware MSD Technology, L.P./1/ Delaware Merck Finance Co., Inc. Delaware Merck Liability Management Company Delaware Merck Enterprises Canada, Ltd. Canada Merck Foreign Sales Corporation Ltd. Bermuda Merck Hamilton, Inc. California Merck Holdings, Inc. Delaware Chugai MSD Co., Ltd./1/ /L.L.C. Japan/Delaware Frosst Laboratories, Inc. Delaware Frosst Portuguesa - Produtos Farmaceuticos, Lda. Portugal Istituto Gentili S.p.A./Inc. Italy/Delaware KBI Inc. Delaware KBI Sub Inc. Delaware
Country or State Name of Incorporation - ---- ---------------- KBI-E Inc. Delaware KBI-P Inc. Delaware Merck-Medco Holdings II Corp. Delaware Cloverleaf International Holdings S.A. Luxembourg Coordinated Patient Care Scandinavia AS Norway Medco Holdings S. de R.L. de C.V. Mexico Medco de Mexico Managed Care S. de R.L. de C.V. Mexico Medco Servicios de Mexico, S. de R.L. de C.V. Mexico Medidoc AB Sweden Coordination Medicale et Pharmaceutique, S.A. France Fontelabor-Produtos Farmaceuticos, Lda. Portugal Merck Frosst Canada & Co. Canada Maple Leaf Holdings SRL Barbados 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 MSD (Nippon Holdings) BV Amsterdam Chibret Pharmazeutische GmbH Germany Laboratoires Martin-Johnson & Johnson-MSD 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 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
2
Country or State Name of Incorporation - ---- ---------------- Varipharm Arzneimittel GmbH Germany Sharp & Dohme, S.A. Spain 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 Britain 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 Tradewinds Manufacturing SRL Barbados 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 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 Farmaceutica Ltda. Brazil Prodome Quimica e Farmaceutica Ltda./1/ Brazil
3
Country or State Name of Incorporation - ---- ---------------- 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 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 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. 10, L.L.C. Delaware MW Holdings, L.L.C. Delaware NJRE, L.L.C. New Jersey
4
Country or State Name of Incorporation - ---- ---------------- NRx Federal Corp. Delaware 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 The Institute for Effectiveness Research, L.L.C. Delaware Systemed, L.L.C. Delaware Systemed Pharmacy of Iowa, L.L.C. Delaware Systemed Pharmacy of Ohio, Ltd. Ohio 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 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 O'Hare Group, Inc./1/ Delaware
____________ /1/ own less than 100% 5 EX-24 6 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, l998 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 23rd day of February, l999. MERCK & CO., Inc. By /s/ Raymond V. Gilmartin --------------------------------- Raymond V. Gilmartin (Chairman of the Board, President and Chief Executive Officer) /s/ Raymond V. Gilmartin Chairman of the Board, President - ------------------------------- and Chief Executive Officer Raymond V. Gilmartin (Principal Executive Officer; Director) /s/ Judy C. Lewent Senior Vice President and Chief Financial - ------------------------------- Officer (Principal Financial Officer) Judy C. Lewent /s/ Richard C. Henriques, Jr. Vice President, Controller - ------------------------------- (Principal Accounting Officer) Richard C. Henriques, Jr. DIRECTORS /s/ H. Brewster Atwater, Jr. /s/ Lloyd C. Elam - ---------------------------------- ---------------------------------- H. Brewster Atwater, Jr. Lloyd C. Elam /s/ Derek Birkin /s/ Charles E. Exley, Jr. - ---------------------------------- ---------------------------------- Derek Birkin Charles E. Exley, Jr. /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 /s/ Dennis Weatherstone - ---------------------------------- --------------------------------- Carolyne K. Davis Dennis Weatherstone 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 23, l999, 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. 5 - 1999 ------------------------------- RESOLVED, that the proposed form of Form l0-K Annual Report of the Company for the fiscal year ended December 3l, l998 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 16th day of March, l999. [Corporate Seal] /s/ Nancy V. Van Allen ------------------------------- Nancy V. Van Allen Assistant Secretary EX-27.A 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR-ENDED DECEMBER 31, 1998 AND THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 12-MOS DEC-31-1998 DEC-31-1998 2,606 750 3,374 0 2,624 10,229 11,887 (4,043) 31,853 6,069 3,221 0 0 30 12,772 31,853 26,898 26,898 13,925 13,925 1,821 0 206 8,133 2,885 5,248 0 0 0 5,248 2.21 2.15 NOT MATERIAL TO THE CONSOLIDATED FINANCIAL STATEMENTS.
EX-27.B 8 RESTATED FINANCIAL DATA SCHEDULE
5 RESTATED FINANCIAL DATA SCHEDULE INCLUDING COLUMNS FOR THE THREE REPORTING PERIODS ENDED MARCH 31, 1997, JUNE 30, 1997 AND SEPTEMBER 30, 1997; AND FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996. 1,000,000 12-MOS 3-MOS 6-MOS 9-MOS DEC-31-1996 DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1996 MAR-31-1997 JUN-30-1997 SEP-30-1997 1,352 1,737 1,587 1,282 829 862 1,129 885 2,656 2,722 2,697 2,966 0 0 0 0 2,149 2,088 2,171 2,227 7,727 8,217 8,419 8,210 8,726 8,968 9,270 9,485 2,800 (2,994) (3,134) (3,189) 24,267 24,706 25,602 25,872 4,829 4,795 4,603 5,335 1,156 1,232 1,727 1,690 0 0 0 0 0 0 0 0 30 30 30 30 11,934 12,396 12,785 12,797 24,267 24,706 25,602 25,872 19,829 5,568 11,477 17,405 19,829 5,568 11,477 17,405 9,319 2,786 5,731 8,722 9,319 2,786 5,731 8,722 1,487 369 765 1,190 0 0 0 0 139 25 56 90 5,541 1,463 3,096 4,791 1,660 443 921 1,419 3,881 1,020 2,175 3,372 0 0 0 0 0 0 0 0 0 0 0 0 3,881 1,020 2,175 3,372 1.60 .42 .90 1.40 1.56 .41 .88 1.36 NOT MATERIAL TO THE CONSOLIDATED FINANCIAL STATEMENTS.
EX-27.C 9 RESTATED FINANCIAL DATA SCHEDULE
5 RESTATED FINANCIAL DATA SCHEDULE INCLUDING COLUMNS FOR THE THREE REPORTING PERIODS ENDED MARCH 31, 1998, JUNE 30, 1998 AND SEPTEMBER 30, 1998; AND FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997. 1,000,000 12-MOS 3-MOS 6-MOS 9-MOS DEC-31-1997 DEC-31-1998 DEC-31-1998 DEC-31-1998 DEC-31-1997 MAR-31-1998 JUN-30-1998 SEP-30-1998 1,125 1,597 1,425 2,429 1,184 1,213 1,369 1,585 2,877 2,574 2,874 3,086 0 0 0 0 2,145 2,079 2,329 2,367 8,213 8,387 8,897 10,333 10,033 10,329 10,726 11,208 (3,423) (3,584) (3,700) (3,884) 25,736 26,324 27,418 31,081 5,569 4,879 6,000 5,797 1,347 1,845 1,344 2,726 0 0 0 0 0 0 0 0 30 30 30 30 12,565 13,097 13,615 12,512 25,736 26,324 27,418 31,081 23,637 6,059 12,529 19,368 23,637 6,059 12,529 19,368 11,790 3,236 6,619 10,163 11,790 3,236 6,619 10,163 1,684 389 830 1,280 0 0 0 0 130 39 82 139 6,462 1,635 3,461 6,177 1,848 471 981 2,329 4,614 1,164 2,480 3,848 0 0 0 0 0 0 0 0 0 0 0 0 4,614 1,164 2,480 3,848 1.92 .49 1.04 1.61 1.87 .47 1.01 1.57 NOT MATERIAL TO THE CONSOLIDATED FINANCIAL STATEMENTS.
-----END PRIVACY-ENHANCED MESSAGE-----