Description of Merck's Business

Merck is a global research-driven pharmaceutical company that discovers, develops, manufactures and markets a broad range of innovative products to improve human and animal health. The Company's operations are principally managed on a products basis and are comprised of two reportable segments: the Pharmaceutical segment and the Vaccines and Infectious Diseases segment. The Pharmaceutical segment includes human health pharmaceutical products marketed either directly by Merck or through joint ventures. These products consist of therapeutic and preventive agents, sold by prescription, for the treatment of human disorders. Merck sells these human health pharmaceutical products primarily to drug wholesalers and retailers, hospitals, government agencies and managed health care providers such as health maintenance organizations, pharmacy benefit managers and other institutions. The Vaccines and Infectious Diseases segment includes human health vaccine and infectious disease products marketed either directly by Merck or, in the case of vaccines, also through a joint venture. Vaccine products consist of preventative pediatric, adolescent and adult vaccines, primarily administered at physician offices. Merck sells these human health vaccines primarily to physicians, wholesalers, physician distributors and government entities. Infectious disease products consist of therapeutic agents for the treatment of infection sold primarily to drug wholesalers and retailers, hospitals and government agencies. The Company's professional representatives communicate the effectiveness, safety and value of its pharmaceutical and vaccine products to health care professionals in private practice, group practices and managed care organizations.

Overview

During 2008, the Company continued to address business challenges in the midst of an evolving pharmaceutical industry environment. Revenue declined by 1% in 2008 driven largely by lower sales of Fosamax for the treatment and prevention of osteoporosis. Fosamax and Fosamax Plus D lost market exclusivity for substantially all formulations in the United States in February 2008 and April 2008, respectively, and as a result the Company is experiencing a significant decline in sales in the United States within the Fosamax franchise. Also contributing to the decline were lower sales of Zocor, the Company's statin for modifying cholesterol which lost U.S. market exclusivity in 2006. Partially offsetting these declines were higher sales of Januvia and Janumet for the treatment of type 2 diabetes and Isentress, an antiretroviral therapy for the treatment of HIV infection.

To address the business and industry challenges that Merck faces, the Company remains focused on innovation and customer value in order to drive the growth of its business and help position Merck for future success.

The Company has made significant progress with re-engineering its operations through research and development initiatives, the roll-out of a new commercial model and the continuation of Merck's supply strategy. These activities should enable the Company to optimize its product portfolio and invest in growth opportunities, such as emerging markets, Merck BioVentures and business development.

Merck continues its efforts to diversify the Company's scientific portfolio both through internal programs and external research collaborations. The Company is focused on developing novel, best-in-class or follow-on treatments for patients in primary care, specialty care, and hospital settings. Additionally, Merck Research Laboratories is pursuing a portfolio of treatment modalities that not only includes small molecules and vaccines, but also biologics, peptides and RNA interference ("RNAi"). Further, Merck is moving to diversify its portfolio by creating a new division, Merck BioVentures, which leverages a unique technology platform for both follow-on and novel biologics.

The Company has numerous active clinical programs across the Company's major research franchises: bone, respiratory, immunology and endocrine; cardiovascular; diabetes and obesity; infectious diseases; neuroscience; oncology and vaccines. The Company currently has nine candidates in Phase III clinical development and anticipates submitting two New Drug Applications ("NDA") with the U.S. Food and Drug Administration ("FDA") with respect to two of the candidates in 2009: MK-0974, telcagepant, an investigational compound for the treatment of migraines, and MK-7418, rolofylline, an investigational compound for the treatment of acute heart failure. In addition, the Company anticipates submitting an NDA in 2009 for MK-0653C, ezetimibe combined with

atorvastatin, an investigational medication for the treatment of dyslipidemia being developed by the Merck/Schering-Plough joint venture. Also, the Company anticipates regulatory action in 2009 on two supplemental filings that have been submitted to the FDA: one for Gardasil, Merck's HPV vaccine, for use in males; and one for Isentress, a first-in-class integrase inhibitor for the treatment of HIV-1 infection, for an expanded indication for use in treatment-naïve patients.

On the commercial side, the Company is rolling out a more customer-centric selling model that is designed to provide a competitive advantage, help build trust with customers, and improve patient outcomes. The strategy employs the use of new marketing technologies to complement a new, more customer-centered approach; and moves away from the traditional frequency-based sales and marketing approach; it also creates efficiencies by eliminating redundancies in core functions and across the sales organization.

On the manufacturing side, Merck has made significant progress in the three years since it began re-engineering to create a lean, flexible, cost-effective capability. The Company continues to address its manufacturing issues and it is working to build additional capacity in vaccines and biologics, as well as to support Merck's expansion into emerging markets. To assist this goal, the Company is shifting investments from developed markets into emerging markets commensurate with the size and strategic importance of the opportunity.

In October 2008, the Company announced a global restructuring program (the "2008 Restructuring Program") to reduce its cost structure, increase efficiency, and enhance competitiveness. As discussed above, Merck is rolling out a new, more customer-centric selling model. Additionally, the Company will make greater use of outside technology resources, centralize common sales and marketing activities, and consolidate and streamline its operations. Merck's manufacturing division will further focus its capabilities on core products and outsource non-core manufacturing. Also, Merck is expanding its access to worldwide external science through a basic research global operating strategy, which is designed to provide a sustainable pipeline and is focused on translating basic research productivity into late-stage clinical success. To increase efficiencies, basic research operations will consolidate work in support of a given therapeutic area into one of four locations. This will provide a more efficient use of research facilities and result in the closure of three basic research sites located in Tsukuba, Japan; Pomezia, Italy; and Seattle by the end of 2009. As part of the 2008 Restructuring Program, the Company expects to eliminate approximately 7,200 positions - 6,800 active employees and 400 vacancies - across all areas of the Company worldwide by the end of 2011, approximately 1,750 of which the Company eliminated in 2008. About 40% of the total reductions will occur in the United States. As part of the 2008 Restructuring Program, the Company is streamlining management layers by reducing its total number of senior and mid-level executives globally by approximately 25%. The Company, however, continues to hire new employees as the business requires. The 2008 Restructuring Program is expected to be completed by the end of 2011 with the total pretax costs estimated to be $1.6 billion to $2.0 billion. In 2008, the Company recorded pretax restructuring costs of $921.3 million related to the 2008 Restructuring Program. The Company estimates that two-thirds of the cumulative pretax costs will result in future cash outlays, primarily from employee separation expense. Approximately one-third of the cumulative pretax costs are non-cash, relating primarily to the accelerated depreciation of facilities to be closed or divested. Merck expects the 2008 Restructuring Program to yield cumulative pretax savings of $3.8 billion to $4.2 billion from 2008 to 2013.

During 2008, in connection with certain transactions with AstraZeneca LP ("AZLP"), the Company recorded an aggregate pretax gain of $2.2 billion which is included in Other (income) expense, net and received net proceeds from AZLP of $2.6 billion. See Note 8 to the consolidated financial statements for further information.

Earnings per common share ("EPS") assuming dilution for 2008 were $3.64, including the impact of the gain on distribution from AZLP of $0.66 per share and restructuring costs of $(0.44) per share. In addition, EPS in 2008 reflects the favorable impact of certain tax items. All of these items are discussed more fully in the notes to the consolidated financial statements.

Competition and the Health Care Environment

The markets in which the Company conducts its business are highly competitive and often highly regulated. Global efforts toward health care cost containment continue to exert pressure on product pricing and access.

In the United States, the government expanded health care access by enacting the Medicare Prescription Drug Improvement and Modernization Act of 2003, which was signed into law in December 2003. Prescription drug coverage began on January 1, 2006. This legislation supports the Company's goal of improving access to medicines by expanding insurance coverage, while preserving market-based incentives for pharmaceutical innovation. At the same time, the legislation will ensure that prescription drug costs will be controlled by competitive pressures and by encouraging the appropriate use of medicines. The U.S. Congress has considered, and may consider again, proposals to increase the government's role in pharmaceutical pricing in the Medicare program. These proposals may include removing the current legal prohibition against the Secretary of the Health and Human Services intervening in price negotiations between Medicare drug benefit program plans and pharmaceutical companies. They may also include mandating the payment of rebates for some or all of the pharmaceutical utilization in Medicare drug benefit plans. In addition, Congress may again consider proposals to allow, under certain conditions, the importation of medicines from other countries.

In addressing cost-containment pressure, the Company has made a continuing effort to demonstrate that its medicines provide value to patients and those who pay for health care. In addition, pricing flexibility across the Company's product portfolio has encouraged growing use of its medicines and mitigated the effects of increasing cost pressures.

Outside the United States, in difficult environments encumbered by government cost-containment actions, the Company has worked in partnership with payers to encourage them to allocate scarce resources to optimize health care outcomes, limiting the potentially detrimental effects of government policies on sales growth and access to innovative medicines and vaccines, and to support the discovery and development of innovative products to benefit patients. The Company also is working with governments in many emerging markets in Eastern Europe, Latin America and Asia to encourage them to increase their investments in health and thereby improve their citizens' access to medicines. In addition, certain countries within the EU, recognizing the economic importance of the research-based pharmaceutical industry and the value of innovative medicines to society, are working with industry representatives to improve the competitive climate through a variety of means including market deregulation.

In order to advance the related policy debate, the EC launched the High Level Pharmaceutical Forum ("HLPF") during the period 2005 through 2008. The initiative aimed at improving the prospects of the research-based pharmaceutical industry in Europe and thus the health prospects of all patients who will benefit from innovative therapies. Through an active dialogue among all stakeholders in the health care system (from payers to patients), this initiative was an attempt to tackle key policy issues in Europe: (i) promoting greater pricing flexibility for medicines; (ii) ensuring that health authorities apply best practices for the evaluation of the relative effectiveness of medicines; and (iii) improving greater access to information on medicines for patients in Europe. The Company was actively engaged with the EC and other stakeholders and was broadly in agreement with the recommendations from the HLPF.

In January 2008, the EC launched a sector inquiry in the pharmaceutical markets under the rules of EU competition law. As part of this inquiry, the Company's offices in Germany were inspected by the authorities beginning in January 2008. The Preliminary Report of the EC was issued on November 28, 2008, in which the EC stated it had confirmed its original hypothesis that competition in the pharmaceutical sector may be restricted or distorted, as indicated by a decline in innovation measured by the number of novel medicines reaching the market, and by alleged instances of delayed market entry of generic medicines. The public consultation period with respect to the Preliminary Report expired on January 31, 2009, and the EC has issued further inquiries in respect of the subject of the investigation. The EC has not alleged that the Company or any of its subsidiaries have engaged in any unlawful practices. The final report is planned for later in 2009. The Company is cooperating with the EC in this sector inquiry.

The Company is committed to improving access to medicines and enhancing the quality of life for people around the world. The African Comprehensive HIV/AIDS Partnerships in Botswana, a partnership between the government of Botswana, the Bill & Melinda Gates Foundation and The Merck Company Foundation/Merck & Co., Inc., is supporting Botswana's response to HIV/AIDS through a comprehensive and sustainable approach to HIV prevention, care, treatment and support.

To further catalyze access to HIV medicines in developing countries, under price reduction guidelines that the Company announced in 2001, Merck makes no profit on the sale of its current HIV/AIDS medicines in the world's poorest countries and those hardest hit by the pandemic, and offers its HIV/AIDS medicines at significantly reduced prices to medium-income countries. In February 2007, Merck announced that it had again reduced the price of Stocrin in the least developed countries of the world and those hardest hit by the pandemic. By the end of 2008, approximately 725,000 people living with HIV and AIDS in 125 developing countries and territories were estimated to be on treatment with antiretroviral regimens containing Crixivan, Stocrin or Atripla. Through these and other actions, Merck is working independently and with partners in the public and private sectors alike to focus on the most critical barriers to access to medicines in the developing world: the need for sustainable financing, increased international assistance and additional investments in education, training and health infrastructure and capacity in developing countries.

In October 2008, Merck announced that RotaTeq has been awarded pre-qualification status by the World Health Organization ("WHO"). WHO pre-qualification allows for expanded access to RotaTeq and provides a greater opportunity to help protect millions of infants from rotavirus gastroenteritis. Because RotaTeq is pre-qualified by the WHO, the vaccine is eligible for procurement by the Pan American Health Organization, UNICEF and other United Nations' agencies for use in national vaccination programs. RotaTeq is the only ready-to-use oral liquid rotavirus vaccine to receive WHO pre-qualification. Merck has committed to providing RotaTeq to the Global Alliance for Vaccines and Immunization-eligible countries at prices at which it does not profit.

The Company is subject to a number of privacy and data protection laws and regulations globally. The legislative and regulatory landscape for privacy and data protection continues to evolve, and there has been an increasing amount of focus on privacy and data protection issues with the potential to affect directly the Company's business, including recently enacted laws in a majority of U.S. states requiring security breach notification.

Although no one can predict the outcome of these and other legislative, regulatory and advocacy initiatives, the Company is well positioned to respond to the evolving health care environment and market forces.

The Company anticipates that the worldwide trend toward cost-containment will continue, resulting in ongoing pressures on health care budgets. As the Company continues to successfully launch new products, contribute to health care debates and monitor reforms, its new products, policies and strategies should enable it to maintain a strong position in the changing economic environment.

Acquisitions

In September 2007, Merck completed the acquisition of NovaCardia, Inc. ("NovaCardia") for $366.4 million which was paid through the issuance of Merck common stock. NovaCardia is a clinical-stage pharmaceutical company focused on cardiovascular disease. This acquisition added rolofylline (MK-7418), NovaCardia's investigational Phase III compound for acute heart failure, to Merck's pipeline. In connection with the acquisition, the Company recorded a charge of $325.1 million for acquired research associated with rolofylline as at the acquisition date, technological feasibility had not been established and no alternative future use existed. The charge was not deductible for tax purposes. The ongoing activity with respect to the future development of rolofylline continues and the costs have not been and are not expected to be material to the Company's research and development expenses.

In December 2006, Merck completed the acquisition of Sirna Therapeutics, Inc. ("Sirna") for approximately $1.1 billion. Sirna is a biotechnology company that is developing a new class of medicines based on RNAi technology, which could significantly alter the treatment of disease. In connection with the acquisition, the Company recorded a charge of $466.2 million for acquired research associated with Sirna's compounds currently under development, which related to the development of treatments for both the hepatitis B and hepatitis C viruses, which were in preclinical development, as well as licensing agreements held by Sirna. The charge was not deductible for tax purposes. The ongoing activity with respect to each of these compounds under development continues and the costs have not been and are not expected to be material to the Company's research and development expenses. The acquisition of Sirna has increased Merck's ability to use RNAi technology to turn off a targeted gene in a human cell, potentially rendering inoperative a gene responsible for triggering a specific disease.

In June 2006, Merck acquired GlycoFi, Inc. ("GlycoFi") a privately-held biotechnology company in the field of yeast glycoengineering, which is the addition of specific carbohydrate modifications to the proteins in yeast, and optimization of biologic drug molecules, for $373 million in cash ($400 million purchase price net of $25 million of shares already owned and net transaction costs). The Company recorded a $296.3 million charge for acquired research in connection with the acquisition which was not deductible for tax purposes. In May 2006, Merck acquired Abmaxis, Inc. ("Abmaxis") a privately-held biopharmaceutical company dedicated to the discovery and optimization of monoclonal antibody products for human therapeutics and diagnostics, for $80 million in cash. Substantially all of the purchase price was allocated to an intangible asset relating to Abmaxis' technology platform. While each of the acquisitions has independent scientific merits, the combination of the GlycoFi and Abmaxis platforms is potentially synergistic, giving Merck the ability to operate across the entire spectrum of therapeutic antibody discovery, development and commercialization.

See Note 4 to the consolidated financial statements for further discussion of these acquisitions.

Operating Results

Sales
Worldwide sales totaled $23.9 billion for 2008, a decline of 1% compared with 2007, primarily attributable to a 4% volume decrease, partially offset by a 3% favorable effect from foreign exchange. The revenue decline over 2007 largely reflects lower sales of Fosamax for the treatment and prevention of osteoporosis. Fosamax and Fosamax Plus D lost market exclusivity for substantially all formulations in the United States in February 2008 and April 2008, respectively. Also contributing to the decline were lower sales of Zocor, the Company's statin for modifying cholesterol which lost U.S. market exclusivity in 2006, lower sales of Vasotec/Vaseretic for the treatment of hypertension and/or heart failure which lost patent protection in certain foreign markets and lower sales of certain vaccines, including hepatitis and Haemophilus influenzae type b ("HIB") vaccines. Partially offsetting these declines were higher sales of Januvia and Janumet for the treatment of type 2 diabetes, Isentress, an antiretroviral therapy for the treatment of HIV infection, Cozaar/Hyzaar for the treatment of hypertension, RotaTeq, a vaccine to help protect against rotavirus gastroenteritis in infants and children, and Singulair, a medicine indicated for the chronic treatment of asthma and the relief of symptoms of allergic rhinitis.

Domestic sales declined 9% compared with 2007, while foreign sales rose 10%. Foreign sales represented 44% of total sales in 2008. The domestic sales decline was largely driven by lower sales of Fosamax and Fosamax Plus D, vaccines and Singulair, partially offset by higher sales of Januvia, Janumet and Isentress. Foreign sales growth reflects the strong performance of Januvia, Janumet, Singulair, Cozaar/Hyzaar and Isentress, partially offset by lower sales of Vasotec/Vaseretic and Zocor.

Worldwide sales for 2007 increased 7% in total compared with 2006 reflecting a 4% volume increase, a 2% favorable effect from foreign exchange and a less than 1% favorable effect from price changes. Sales growth was primarily driven by growth of the Company's vaccines, including Gardasil, a vaccine to help prevent cervical, vulvar and vaginal cancers, precancerous or dysplastic lesions, and genital warts caused by HPV types 6, 11, 16 and 18, Varivax, a vaccine to help prevent chickenpox, RotaTeq and Zostavax, a vaccine to help prevent shingles (herpes zoster). Also contributing to sales growth during this period was strong performance of Singulair, higher sales of Januvia and sales of Janumet, as well as increased sales of Cozaar/Hyzaar. Sales growth was partially offset by lower sales of Zocor and Proscar, a urology product for the treatment of symptomatic benign prostate enlargement. Merck's U.S. market exclusivity for Proscar expired in June 2006. Also offsetting sales growth in 2007 were lower revenues from the Company's relationship with AZLP and lower sales of Fosamax and Fosamax Plus D. Foreign sales represented 39% of total sales for 2007.

Sales(1) of the Company's products were as follows:

($ in millions)                                                   2008            2007            2006

Pharmaceutical:
Singulair                                                   $  4,336.9      $  4,266.3      $  3,579.0
Cozaar/Hyzaar                                                  3,557.7         3,350.1         3,163.1
Fosamax                                                        1,552.7         3,049.0         3,134.4
Januvia                                                        1,397.1           667.5            42.9
Cosopt/Trusopt                                                   781.2           786.8           697.1
Zocor                                                            660.1           876.5         2,802.7
Maxalt                                                           529.2           467.3           406.4
Propecia                                                         429.1           405.4           351.8
Arcoxia                                                          377.3           329.1           265.4
Vasotec/Vaseretic                                                356.7           494.6           547.2
Janumet                                                          351.1            86.4               -
Proscar                                                          323.5           411.0           618.5
Emend                                                            263.8           204.2           130.8
Other pharmaceutical(2)                                        2,278.9         2,422.9         2,780.5
Vaccine and infectious disease product sales included in
the Pharmaceutical segment(3)                                  2,187.6         1,800.5         1,315.8


Pharmaceutical segment revenues                               19,382.9        19,617.6        19,835.6


Vaccines(4) and Infectious Diseases:
Gardasil                                                       1,402.8         1,480.6           234.8
ProQuad/M-M-R II/Varivax                                       1,268.5         1,347.1           820.1
RotaTeq                                                          664.5           524.7           163.4
Zostavax                                                         312.4           236.0            38.6
Hepatitis vaccines                                               148.3           279.9           248.5
Other vaccines                                                   354.6           409.9           354.0
Primaxin                                                         760.4           763.5           704.8
Cancidas                                                         596.4           536.9           529.8
Isentress                                                        361.1            41.3               -
Crixivan/Stocrin                                                 275.1           310.2           327.3
Invanz                                                           265.0           190.2           139.2
Other infectious disease                                          15.5             1.7               -
Vaccine and infectious disease product sales included in
the Pharmaceutical segment(3)                                 (2,187.6 )      (1,800.5 )      (1,315.8 )


Vaccines and Infectious Diseases segment revenues              4,237.0         4,321.5         2,244.7


Other segment revenues(5)                                         81.8           162.0           162.1


Total segment revenues                                        23,701.7        24,101.1        22,242.4


Other(6)                                                         148.6            96.6           393.6


                                                            $ 23,850.3      $ 24,197.7      $ 22,636.0

(1) Presented net of discounts and returns.

(2) Other pharmaceutical primarily includes sales of other human pharmaceutical . . .