Summary of MERCK & CO INC - Yahoo! Finance

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Merger Agreement with Schering-Plough Corporation In March 2009, Merck and Schering-Plough Corporation ("Schering-Plough") announced that their Boards of Directors unanimously approved a definitive merger agreement under which Merck and Schering-Plough will combine in a stock and cash transaction. The transaction is structured as a "reverse merger" in which Schering-Plough, renamed Merck, will continue as the surviving public corporation ("New Merck"). Under the terms of the agreement, each issued and outstanding share of Schering-Plough common stock will be converted into the right to receive a combination of $10.50 in cash and 0.5767 of a share of the common stock of New Merck. Each issued and outstanding share of Merck common stock will automatically be converted into a share of the common stock of New Merck. The cash portion of the consideration will be funded with a combination of existing cash, the sale or redemption of short-term investments and the issuance of debt. Upon completion of the merger, each issued and outstanding share of Schering-Plough 6% Mandatory Convertible Preferred Stock not converted in accordance with the preferred stock designations shall remain outstanding as one share of 6% Mandatory Convertible Preferred Stock of the newly combined company having the rights set forth in the New Merck certificate of incorporation. The transaction remains subject to Merck and Schering-Plough shareholder approvals and the satisfaction of customary closing conditions and regulatory approvals. The transaction is expected to close in the fourth quarter of 2009.
On July 29, 2009, Merck and sanofi-aventis signed a definitive agreement under which Merck will sell its 50% interest in the companies' current animal health joint venture, Merial Limited ("Merial"), to sanofi-aventis for $4 billion in cash, subject to adjustment in certain circumstances. Following the close of the transaction, sanofi-aventis will own 100% of Merial. The sale of Merck's interest in the Merial joint venture is subject to clearance by the European antitrust authorities. Merck anticipates it will complete the transaction before its planned merger with Schering-Plough is finalized. In addition to the Merial agreement, Merck, sanofi-aventis and Schering-Plough signed a call option agreement. Under the terms of the call option agreement, following the closing of the Merck/Schering-Plough merger, sanofi-aventis would have an option to require New Merck to contribute Schering-Plough's Intervet/Schering-Plough Animal Health business with Merial to form an animal health joint venture that would be owned equally by New Merck and sanofi-aventis. As part of the call option agreement, the value of Merial has been fixed at $8 billion. The minimum total value received by New Merck and its affiliates for contributing Intervet/Schering-Plough to the combined entity would be $9.25 billion (subject to customary transaction adjustments), consisting of a floor valuation of Intervet/Schering-Plough which is fixed at a minimum of $8.5 billion (subject to potential upward revision based on a valuation exercise by the two parties) and an additional payment by sanoft-aventis of $750 million. Based on the valuation exercise of Intervet/Schering-Plough and the customary transaction adjustments, if Merial and Intervet/Schering-Plough are combined, a true-up payment may be required to be paid by either party to establish a 50/50 joint venture with equal ownership between New Merck and sanofi-aventis. Any formation of a new animal health joint venture with sanofi-aventis is subject to customary closing conditions including antitrust review in the United States and Europe. Between September 30, 2009 and the closing of the merger between Merck and Schering-Plough, the agreements provide Merck with certain rights to terminate the call option for a fee of $400 million or $600 million. Operating Results
Sales
Worldwide sales were $5.90 billion for the second quarter of 2009, a decline of 3% compared with the second quarter of 2008, primarily attributable to a 5% unfavorable effect from foreign exchange, partially offset by a 2% favorable effect from price changes and a less than 1% favorable effect from volume. Worldwide sales were $11.29 billion for the first six months of 2009, a decline of 5% compared with the same period of 2008, primarily attributable to a 4% unfavorable effect from foreign exchange and a 2% unfavorable effect from volume, partially offset by a 2% favorable effect from price changes. The revenue declines largely reflect lower sales of Fosamaxfor 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 declines were lower sales of Cosopt and Trusopt, ophthalmic products which lost U.S. market exclusivity in October 2008, lower sales of 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, and lower revenue from the Company's relationship with AstraZeneca LP ("AZLP"). Revenue was also negatively impacted by lower sales of RotaTeq, a vaccine to help protect against rotavirus gastroenteritis in infants and children, Primaxin for the treatment of bacterial infections, Zocor, the Company's statin for modifying cholesterol, Cozaar/Hyzaar* for the treatment of hypertension and Zostavax, a vaccine to help prevent shingles (herpes zoster). These declines were partially offset by higher sales of Januviaand Janumet for the treatment of type 2 diabetes, Singulair, a medicine indicated for the chronic treatment of asthma and the relief of symptoms of allergic rhinitis, and Isentress, an antiretroviral therapy for the treatment of HIV infection.

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

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Sales of the Company's products were as follows:

                                                      Three Months Ended                      Six Months Ended
                                                           June 30,                               June 30,
($ in millions)                                    2009               2008                2009                2008

Pharmaceutical:
Singulair                                       $ 1,257.4          $ 1,081.6          $  2,314.7          $  2,185.3
Cozaar/Hyzaar                                       905.6              941.1             1,744.8             1,788.0
Januvia                                             462.0              333.8               873.2               605.9
Fosamax                                             277.5              411.2               538.8               881.0
Janumet                                             154.6               72.4               283.1               130.8
Zocor                                               140.8              176.8               278.2               355.9
Maxalt                                              140.8              130.3               274.0               251.9
Cosopt/Trusopt                                      124.9              217.4               246.1               418.8
Propecia                                            105.9              107.6               208.8               212.6
Arcoxia                                              88.0              103.9               169.2               197.3
Vasotec/Vaseretic                                    76.1               93.7               153.2               189.4
Proscar                                              79.2               86.0               151.3               171.0
Emend                                                76.9               65.4               146.0               125.0
Other pharmaceutical (1)                            500.8              625.4               970.0             1,215.2
Vaccine and infectious disease product
sales included in the Pharmaceutical
segment (2)                                         539.5              559.5             1,064.2             1,089.4

Pharmaceutical segment revenues                   4,930.0            5,006.1             9,415.6             9,817.5

Vaccines(3) and Infectious Diseases:
ProQuad/M-M-R II/Varivax                            322.4              317.8               574.3               543.5
Gardasil                                            268.2              325.7               530.2               716.1
RotaTeq                                             125.5              177.8               259.9               367.9
Zostavax                                             42.4               66.1               117.5               139.6
Hepatitis vaccines                                   28.7               37.9                63.2                71.8
Other vaccines                                       53.0               69.5               108.5               142.1
Primaxin                                            160.0              201.3               324.5               404.0
Isentress                                           172.3               77.2               320.4               123.7
Cancidas                                            148.8              160.7               287.4               309.5
Invanz                                               70.6               70.5               132.3               126.0
Crixivan/Stocrin                                     55.5               79.0               104.6               154.3
Other infectious disease                              7.1                2.6                16.1                 3.1
Vaccine and infectious disease product
sales included in the Pharmaceutical
segment (2)                                        (539.5 )           (559.5 )          (1,064.2 )          (1,089.4 )

Vaccines and Infectious Diseases segment
revenues                                            915.0            1,026.6             1,774.7             2,012.2

Other segment revenues(4)                            14.5               19.1                25.5                44.1

Total segment revenues                            5,859.5            6,051.8            11,215.8            11,873.8

Other (5)                                            40.4                  -                69.3                 0.1

                                                $ 5,899.9          $ 6,051.8          $ 11,285.1          $ 11,873.9

(1) Other pharmaceutical primarily includes sales of other human pharmaceutical products and revenue from the Company's relationship with AZLP primarily relating to sales ofNexium, as well as Prilosec. Revenue from AZLP was $386.4 million and $455.8 million for the second quarter of 2009 and 2008, respectively, and was $742.1 million and $860.5 million for the first six months of 2009 and 2008, respectively.

(2) Sales of vaccine and infectious disease products by non-U.S. subsidiaries are included in the Pharmaceutical segment.

(3) These amounts do not reflect sales of vaccines sold in most major European markets through the Company's joint venture, Sanofi Pasteur MSD, the results of which are reflected in Equity income from affiliates. These amounts do, however, reflect supply sales to Sanofi Pasteur
MSD.

(4) Includes other non-reportable human and animal health segments.

(5) Other revenues are primarily comprised of miscellaneous corporate revenues, sales related to divested products or businesses and other supply sales not included in segment results.

Sales by product are presented net of discounts and returns. The provision for discounts includes indirect customer discounts that occur when a contracted customer purchases directly through an intermediary wholesale purchaser, known as chargebacks, as well as

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indirectly in the form of rebates owed based upon definitive contractual agreements or legal requirements with private sector and public sector (Medicaid and Medicare Part D) benefit providers, after the final dispensing of the product by a pharmacy to a benefit plan participant. These discounts, in the aggregate, reduced revenues by $581.7 million and $533.0 million for the three months ended June 30, 2009 and 2008, respectively, and by $1,078.6 million and $1,052.0 million for the six months ended June 30, 2009 and 2008, respectively. Inventory levels at key wholesalers for each of the Company's major pharmaceutical products are generally less than one month. Pharmaceutical Segment Revenues
Sales of the Pharmaceutical segment decreased 2% for the second quarter of 2009 to $4.93 billion, and declined 4% for the first six months of 2009 to $9.42 billion compared with the corresponding periods of 2008. These results reflect declines in Fosamax, Cosopt/Trusopt, lower supply sales to AZLP, and lower sales of Zocor, partially offset by growth in Januvia, Janumet and Singulair. In addition, foreign exchange negatively impacted sales in 2009 as compared with 2008.
Worldwide sales for Singulair were $1.26 billion for the second quarter of 2009, representing an increase of 16% over the second quarter of 2008. Sales for the first six months of 2009 were $2.31 billion, an increase of 6% compared with the first six months of 2008. Sales growth in both periods was driven by higher demand and price increases in the United States and strong performance in Japan. Singulair continues to be the number one prescribed branded product in the U.S. respiratory market.
Global sales of Cozaar and Hyzaar were $905.6 million for the second quarter of 2009, a decrease of 4% compared with the second quarter of 2008. Sales for the first six months of 2009 were $1.74 billion, a decline of 2% compared with the first six months of 2008. The decline in both periods was driven in part by the unfavorable effect of foreign exchange, partially offset by the strong performance of Hyzaar in Japan (marketed as Preminent). Cozaar and Hyzaar are among the leading medicines in the angiotensin receptor blocker class. Global sales of Januvia, Merck's dipeptidyl peptidase-4 ("DPP-4") inhibitor for the treatment of type 2 diabetes, were $462.0 million in the second quarter of 2009, an increase of 38% compared with the second quarter of 2008. Sales for the first six months of 2009 were $873.2 million, an increase of 44% compared with the first six months of 2008. DPP-4 inhibitors represent a class of prescription medications that improve blood sugar control in patients with type 2 diabetes by enhancing a natural body system called the incretin system, which helps to regulate glucose by affecting the beta cells and alpha cells in the pancreas. In June 2009, Merck received a positive opinion from the European Medicines Agency's Committee for Medicinal Products for Human Use ("CHMP") recommending restricted first line use of Januvia for the treatment of type 2 diabetes. With this positive opinion, the CHMP recommends that sitagliptin be indicated to improve glycemic control when diet and exercise alone do not provide adequate glycemic control and when metformin is inappropriate due to contraindications or intolerance. If this opinion is accepted by the European Commission, sitagliptin will be the only diabetes treatment in the DPP-4 inhibitor class to have a restricted first line indication.
Also in June 2009, two investigational studies evaluating the efficacy and tolerability of Januviawere presented at the American Diabetes Association ("ADA") 69th Annual Scientific Session which showed that Januvia significantly improved blood sugar control. One study evaluated Januvia as an addition to ongoing insulin therapy, with or without metformin, and the second evaluated Januvia in combination with pioglitazone as an initial treatment regimen. Applications to use Januvia in these combinations and Janumet in combination with insulin have been accepted by the U.S. Food and Drug Administration ("FDA") and are currently under review.
Worldwide sales of Janumet, Merck's oral antihyperglycemic agent that combines sitagliptin (Merck's DPP-4 inhibitor, Januvia) with metformin in a single tablet to target all three key defects of type 2 diabetes, were $154.6 million for the second quarter of 2009 compared with $72.4 million for the second quarter of 2008. Sales for the first six months of 2009 were $283.1 million compared with $130.8 million for the same period of 2008. Janumet was initially approved as an adjunct to diet and exercise, to improve blood sugar control in adult patients with type 2 diabetes who are not adequately controlled on metformin or sitagliptin alone, or in patients already being treated with the combination of sitagliptin and metformin. In February 2008, Merck received FDA approval to market Janumet as an initial treatment for type 2 diabetes. In July 2008, Janumet was approved for marketing in the European Union ("EU"), Iceland and Norway.
The Januvia/Janumet franchise remains the fastest growing family of oral diabetes products in both the United States and EU. In all European markets where more than one DPP-4 inhibitor exists, sitagliptin is the market leader. In June 2009, data presented at the ADA 69th Annual Scientific Sessions showed that initial treatment with Janumet provided greater blood sugar improvements in drug-na�ve patients with type 2 diabetes, compared with metformin alone. In separate post-hoc analyses, data pooled from studies of 104 weeks in duration showed Januvia, when taken alone (two studies) or in combination with metformin (two studies), provided significant blood sugar lowering, which was sustained over two years.

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Global sales for Fosamax and Fosamax Plus D (marketed as Fosavance throughout the EU and as Fosamacin Japan) were $277.5 million for the second quarter of 2009 and were $538.8 million for the first six months of 2009, representing declines of 33% and 39%, respectively, over the comparable periods of 2008. Since substantially all formulations of these medicines have lost U.S. market exclusivity, the Company is experiencing a significant decline in sales in the United States within the Fosamax franchise and the Company expects such declines to continue.
Sales of Cosopt and Trusopt declined 43% and 41% in the second quarter and first six months of 2009, respectively, compared with the corresponding periods of 2008. The patent that provided U.S. market exclusivity for Cosopt and Trusopt expired in October 2008. Cosopt has also lost market exclusivity in a number of major European markets. Trusopt will lose market exclusivity in a number of major European markets in April 2012.
Worldwide sales of Zocor declined 20% and 22% in the second quarter and first six months of 2009, respectively, compared with the corresponding periods of 2008. Zocor lost U.S. market exclusivity in June 2006 and has also lost market exclusivity in all major international markets.
The patents that provide U.S. marketing exclusivity for Cozaar and Hyzaar expire in April 2010 and February 2010, respectively, and the patent that provides U.S. marketing exclusivity for Singulairexpires in August 2012. The Company expects that within the two years following each product's respective patent expiration, it will lose substantially all U.S. sales of that product, with most of those declines coming in the first full year following patent expiration. Full year 2008 U.S. sales of Cozaar/Hyzaar were $1.2 billion and full year 2008 U.S. sales of Singulair were $2.8 billion. In addition, the Company anticipates that the patents for Cozaar, Hyzaar and Singulairwill expire in a number of major European markets in September 2009, February 2010, and August 2012, respectively, and the Company expects sales of these products in those markets will decline significantly thereafter.
During the first quarter of 2009, Merck divested its U.S. marketing rights to the Timopticfranchise to Aton Pharma, Inc. The Timoptic franchise includes ophthalmic products to treat elevated intraocular pressure in patients with ocular hypertension or open-angle glaucoma.
In June 2009, Merck began launching Tredaptive (extended-release niacin/laropiprant) in international markets (Ireland, Norway and Finland). The Company will continue launches in the third quarter of 2009 including Mexico, the United Kingdom and Germany. Tredaptive is a lipid-modifying therapy for patients with mixed dyslipidemia and primary hypercholesterolemia. Tredaptive, also known by the trademark of Cordaptive in some places, is now approved in 40 countries outside the United States. In the United States, it remains investigational.
Vaccines and Infectious Diseases Segment Revenues Sales of the Vaccines and Infectious Diseases segment declined 11% to $915.0 million in the second quarter of 2009 and declined 12% to $1.77 billion in the first six months of 2009 compared with the same periods of 2008 primarily due to lower sales of Gardasil and RotaTeq, partially offset by higher sales of Isentress.
The following discussion of vaccine and infectious disease product sales includes total vaccine and infectious disease product sales, the majority of which are included in the Vaccines and Infectious Diseases segment and the remainder, representing sales of these products by non-U.S. subsidiaries, are included in the Pharmaceutical segment. These amounts do not reflect sales of vaccines sold in most major European markets through Sanofi Pasteur MSD ("SPMSD"), the Company's joint venture with Sanofi Pasteur, the results of which are reflected in Equity income from affiliates (see "Selected Joint Venture and Affiliate Information" below). Supply sales to SPMSD, however, are reflected in Vaccines and Infectious Diseases segment revenues.
Worldwide sales of Gardasil, as recorded by Merck, were $268.2 million for the second quarter of 2009, a decline of 18% compared with the second quarter of 2008 and were $530.2 million for the first six months of 2009, a decline of 26% over the comparable period of 2008. Gardasil, the world's top-selling HPV vaccine and only HPV vaccine available for use in the United States, currently is indicated for girls and women nine through 26 years of age for the prevention of cervical, vulvar and vaginal cancers, precancerous or dysplastic lesions, and genital warts caused by HPV types 6, 11, 16 and 18. Sales performance was driven largely by declines in the United States which continues to be affected by the saturation of the 13 to18 year-old cohort due to rapid early uptake, and ongoing challenges to vaccinating the 19 to 26 age group.
In December 2008, the Company submitted a supplemental biologics license application ("sBLA") for the use of Gardasil in males which has been accepted by the FDA. The Company expects FDA action in the fourth quarter of 2009. In January 2009, the FDA issued a second complete response letter regarding the sBLA for the use of Gardasil in women ages 27 though 45. The agency completed its review of the response that Merck provided in July 2008 to the FDA's first complete response letter issued in June 2008 and has recommended that Merck submit additional data when the 48 month study has been completed. The initial sBLA included data collected through an average of 24 months from enrollment into the study, which is when the number of pre-specified endpoints had been met. Following a review of the final results of the study, Merck anticipates providing a response to the FDA in the fourth

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quarter of 2009. The complete response letter does not affect current indications for Gardasil in females ages nine through 26 nor does the letter relate to the sBLA for the use of Gardasil in males.
In May 2009, studies of Gardasil and the HPV 16 vaccine component of Gardasil were presented at the International Papillomavirus Conference. In a study of an extended follow up of 290 women na�ve to HPV type 16, the HPV 16 component of Gardasil was efficacious against HPV 16 infection for an average of 8.5 years after administration. The women enrolled in this study are a subset of the original Phase II HPV 16 proof-of-concept study published in 2002. Follow up ranged from 7.2 years to up to 9.5 years. In a different investigational study, in women ages 16 to 26 who were na�ve to 14 common HPV types, Gardasil reduced the number of abnormal Pap test results by 17 to 45%, depending on the abnormality, and reduced colposcopies by 20%, cervical biopsies by 22% and reduced surgery and other invasive treatments by 42%.
Also, in May 2009, the Company announced Gardasil had been awarded World Health Organization ("WHO") pre-qualification. Gardasil is the first cervical cancer vaccine to receive WHO pre-qualification. WHO pre-qualification means that Gardasil is now eligible for procurement by the United Nations Children's Fund and other United Nations agencies, including the Pan American Health Organization, for use in national immunization programs.
The Company has received regulatory approvals in the United States and certain other markets to increase its manufacturing capacity for varicella zoster virus ("VZV")-containing vaccines. The Company is manufacturing bulk varicella and is producing doses of Varivax and Zostavax consistent with product demand. ProQuad, the Company's combination vaccine that helps protect against measles, mumps, rubella and chickenpox, one of the VZV-containing vaccines, is currently not available for ordering; however, orders have been transitioned, as appropriate, to M-M-R II and Varivax. Total sales as recorded by Merck for ProQuad were $9.6 million for the first six months of 2008.
Merck's sales of Varivax, the Company's vaccine for the prevention of chickenpox (varicella), were $229.5 million for the second quarter of 2009 compared with $225.3 million for the second quarter of 2008 and were $420.9 million for the first six months of 2009 compared with $374.0 million for the first six months of 2008. Varivax is currently the only vaccine available in the United States to help protect against chickenpox due to the unavailability of ProQuad. Merck's sales of M-M-RII, a vaccine to help protect against measles, mumps, and rubella, were $93.7 million for the second quarter of 2009 compared with $93.0 million for the second quarter of 2008 and were $155.4 million for the first six months of 2009 compared with $159.8 million for the first six months of 2008. Combined sales of ProQuad, M-M-R II and Varivax increased 1% in the second quarter of 2009 and increased 6% for the first six months of 2009 compared with the same periods of 2008.
RotaTeq achieved worldwide sales as recorded by Merck of $125.5 million for the second quarter of 2009, a decline of 29% compared with the second quarter of 2008 and were $259.9 million for the first six months of 2009, a decrease of 29% compared with the same period in 2008. During the three and six months ended June 30, 2008, the Company recorded $14 million and $54 million, respectively, in revenue as a result of government purchases for the U.S. Centers for Disease Control and Prevention's Strategic National Stockpile. RotaTeq is experiencing moderate impact from competition in the United States, with a greater impact in the public sector.
Sales of Zostavax, as recorded by Merck, were $42.4 million for the second quarter of 2009 as compared with $66.1 million in the second quarter of 2008. Sales for the first six months of 2009 were $117.5 million compared with $139.6 million for comparable period of 2008. Sales performance in 2009 was affected by supply issues. In early June 2009, the Company resumed normal shipping schedules for Zostavax.
Sales of Primaxin were $160.0 million in the second quarter of 2009, a decline of 21% compared with the second quarter of 2008 and were $324.5 million for the . . .