As filed with the Securities and Exchange Commission on February 26, 2016
`
`UNITED STATES
`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 Exchange Act of 1934
`For the Fiscal Year Ended December 31, 2015
`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. 1-6571
`
`_________________________________
`
`Merck & Co., Inc.
`
`2000 Galloping Hill Road
`Kenilworth, N. J. 07033
`(908) 740-4000
`
`Incorporated in New Jersey
`
`I.R.S. Employer
` 
`Identification No. 22-1918501
`Securities Registered pursuant to Section 12(b) of the Act:
`
` 
` 
`
`Act.    Yes  
`
`Act.    Yes  
`
`Name of Each Exchange
`Title of Each Class
`on which Registered
`New York Stock Exchange
`Common Stock ($0.50 par value)
`New York Stock Exchange
`1.125% Notes due 2021
`New York Stock Exchange
`1.875% Notes due 2026
`New York Stock Exchange
`2.500% Notes due 2034
`Number of shares of Common Stock ($0.50 par value) outstanding as of January 31, 2016: 2,775,258,591.
`Aggregate market value of Common Stock ($0.50 par value) held by non-affiliates on June 30, 2015 based on closing price on
`June 30, 2015: $160,710,000,000.
`Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
`      No  
`Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
`      No  
`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  
`      No  
`Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
`Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding
`      No  
`12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  
`Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) 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.    
`Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
`reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
`Exchange Act. (Check One):
`
`Large accelerated filer
`
`        Accelerated filer    
`
`Smaller reporting company
`Non-accelerated filer
`(Do not check if a smaller reporting company)        
`Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  
`Documents Incorporated by Reference:
`
`      No  
`
`Document
`Proxy Statement for the Annual Meeting of Shareholders to be held May 24, 2016,
`to be filed with the Securities and Exchange Commission within 120 days after the
`close of the fiscal year covered by this report
`
` 
`
` 
`
`Part of Form 10-K
`Part III
`
`AstraZeneca Exhibit 2142
`Mylan v. AstraZeneca
`IPR2015-01340
`
`Page 1 of 146
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`

`

`Table of Contents
`
` 
`
` 
`
` 
`
`Table of Contents
`
`Part I
`
`Business
`Item 1.
`Item 1A. Risk Factors
`Cautionary Factors that May Affect Future Results
`Item 1B. Unresolved Staff Comments
`Item 2.
`Properties
`Item 3.
`Legal Proceedings
`Item 4.
`Mine Safety Disclosures
`Executive Officers of the Registrant
`
`Item 5.
`
`Part II
`Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
`Equity Securities
`Selected Financial Data
`Item 6.
`Item 7.
`Management’s Discussion and Analysis of Financial Condition and Results of Operations
`Item 7A. Quantitative and Qualitative Disclosures About Market Risk
`Item 8.
`Financial Statements and Supplementary Data
`(a) Financial Statements
`Notes to Consolidated Financial Statements
`Report of Independent Registered Public Accounting Firm
`(b) Supplementary Data
`Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
`Item 9.
`Item 9A. Controls and Procedures
`Management’s Report
`Item 9B. Other Information
`
`Part III
`Item 10. Directors, Executive Officers and Corporate Governance
`Item 11.
`Executive Compensation
`Item 12.
`Security Ownership of Certain Beneficial Owners and Management and Related
`Stockholder Matters
`Certain Relationships and Related Transactions, and Director Independence
`Principal Accountant Fees and Services
`
`Item 13.
`Item 14.
`
`Item 15.
`
`Part IV
`Exhibits and Financial Statement Schedules
`Signatures
`
`Page
`
`1
`18
`27
`28
`28
`28
`28
`29
`
`31
`33
`34
`74
`75
`75
`79
`133
`134
`135
`135
`135
`136
`
`137
`137
`
`138
`138
`138
`
`139
`144
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`Table of Contents
`
`PART I
`
` 
`Item 1. Business.
`Merck & Co., Inc. (Merck or the Company) is a global health care company that delivers innovative health
`solutions through its prescription medicines, vaccines, biologic therapies and animal health products, which it markets
`directly and through its joint ventures. The Company’s operations are principally managed on a products basis and are
`comprised of four operating segments, the Pharmaceutical, Animal Health, Alliances and Healthcare Services segments.
`The Pharmaceutical segment is the only reportable segment. The Pharmaceutical segment includes human health
`pharmaceutical and vaccine products marketed either directly by the Company or through joint ventures. Human health
`pharmaceutical products consist of therapeutic and preventive agents, generally sold by prescription, for the treatment
`of human disorders. The Company 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. Vaccine products consist of preventive pediatric,
`adolescent and adult vaccines, primarily administered at physician offices. The Company sells these human health
`vaccines primarily to physicians, wholesalers, physician distributors and government entities. The Company also has
`animal health operations that discover, develop, manufacture and market animal health products, including vaccines,
`which the Company sells to veterinarians, distributors and animal producers. Merck’s Alliances segment primarily
`includes results from the Company’s relationship with AstraZeneca LP until the termination of that relationship on June
`30, 2014. The Company’s Healthcare Services segment provides services and solutions that focus on engagement,
`health analytics and clinical services to improve the value of care delivered to patients. On October 1, 2014, the Company
`divested its Consumer Care segment that developed, manufactured and marketed over-the-counter, foot care and sun
`care products. The Company was incorporated in New Jersey in 1970.
`For financial information and other information about the Company’s segments, see Item 7. “Management’s
`Discussion and Analysis of Financial Condition and Results of Operations” and Item 8. “Financial Statements and
`Supplementary Data” below.
`All product or service marks appearing in type form different from that of the surrounding text are trademarks
`or service marks owned, licensed to, promoted or distributed by Merck, its subsidiaries or affiliates, except as noted.
`All other trademarks or services marks are those of their respective owners.
`
`$
`
`$
`
`Product Sales
`Sales of the Company’s top pharmaceutical products, as well as total sales of animal health products,
`were as follows:
`2015
`($ in millions)
`2013
`2014
`39,498
`44,033
`42,237
`Total Sales
`34,782
`37,437
`36,042
`Pharmaceutical
`3,863
`Januvia
`4,004
`3,931
`2,526
`Zetia
`2,658
`2,650
`2,151
`Janumet
`1,829
`2,071
`1,908
`Gardasil/Gardasil 9
`1,831
`1,738
`1,794
`Remicade
`2,271
`2,372
`1,511
`Isentress
`1,643
`1,673
`1,505
`ProQuad/M-M-R II/Varivax
`1,306
`1,394
`1,251
`Vytorin
`1,643
`1,516
`1,127
`Cubicin
`24
`25
`931
`Singulair
`1,196
`1,092
`3,324
`3,362
`3,454
`Animal Health
`3
`1,894
`1,547
`Consumer Care(1)
`1,389
`1,340
`1,194
`Other Revenues(2)
`(1) On October 1, 2014, the Company divested its Consumer Care segment that developed, manufactured and marketed over-the-counter, foot care
`and sun care products.
`(2) Other revenues are primarily comprised of miscellaneous corporate revenues, including revenue hedging activities, and third-party manufacturing
`sales.
`
`$
`
`1
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`Pharmaceutical
`The Company’s pharmaceutical products include therapeutic and preventive agents, generally sold by
`prescription, for the treatment of human disorders. Certain of the products within the Company’s franchises are as
`follows:
`Primary Care and Women’s Health
`Cardiovascular: Zetia (ezetimibe) (marketed as Ezetrol in most countries outside the United States); and
`Vytorin (ezetimibe/simvastatin) (marketed as Inegy outside the United States), cholesterol modifying medicines.
`Diabetes: Januvia (sitagliptin) and Janumet (sitagliptin/metformin HCl) for the treatment of type 2 diabetes.
`General Medicine and Women’s Health: NuvaRing (etonogestrel/ethinyl estradiol vaginal ring), a vaginal
`contraceptive product; Implanon (etonogestrel implant), a single-rod subdermal contraceptive implant/Nexplanon
`(etonogestrel implant), a single, radiopaque, rod-shaped subdermal contraceptive implant; Dulera Inhalation Aerosol
`(mometasone furoate/formoterol fumarate dihydrate), a combination medicine for the treatment of asthma; and Follistim
`AQ (follitropin beta injection) (marketed as Puregon in most countries outside the United States), a fertility treatment.
`Hospital and Specialty
`Hepatitis: Zepatier (elbasvir and grazoprevir), approved by the U.S. Food and Drug Administration (FDA)
`in January 2016, for the treatment of adult patients with chronic hepatitis C virus (HCV) genotype (GT) 1 or GT4
`infection, with or without ribavirin; and PegIntron (peginterferon alpha-2b) and Victrelis (boceprevir), medicines for
`the treatment of chronic HCV.
`HIV: Isentress (raltegravir), an HIV integrase inhibitor for use in combination with other antiretroviral
`agents for the treatment of HIV-1 infection.
`Hospital Acute Care: Cubicin (daptomycin for injection), an I.V. antibiotic for complicated skin and skin
`structure infections or bacteremia, when caused by designated susceptible organisms; Cancidas (caspofungin acetate),
`an anti-fungal product; Invanz (ertapenem sodium) for the treatment of certain infections; Noxafil (posaconazole) for
`the prevention of invasive fungal infections; Bridion (sugammadex) Injection, a medication for the reversal of two
`types of neuromuscular blocking agents used during surgery; and Primaxin (imipenem and cilastatin sodium), an anti-
`bacterial product.
`Immunology: Remicade (infliximab), a treatment for inflammatory diseases, and Simponi (golimumab), a
`once-monthly subcutaneous treatment for certain inflammatory diseases, which the Company markets in Europe, Russia
`and Turkey.
`Oncology
`
`Keytruda (pembrolizumab) for the treatment of advanced melanoma and metastatic non-small-cell lung
`cancer (NSCLC) in patients whose tumors express PD-L1 with disease progression following other therapies; Emend
`(aprepitant) for the prevention of chemotherapy-induced and post-operative nausea and vomiting; and Temodar
`(temozolomide) (marketed as Temodal outside the United States), a treatment for certain types of brain tumors.
`Diversified Brands
`Respiratory: Singulair (montelukast), a medicine indicated for the chronic treatment of asthma and the
`relief of symptoms of allergic rhinitis; Nasonex (mometasone furoate monohydrate), an inhaled nasal corticosteroid
`for the treatment of nasal allergy symptoms; and Clarinex (desloratadine), a non-sedating antihistamine.
`Other: Cozaar (losartan potassium) and Hyzaar (losartan potassium and hydrochlorothiazide), treatments
`for hypertension; Arcoxia (etoricoxib) for the treatment of arthritis and pain, which the Company markets outside the
`United States; Fosamax (alendronate sodium) (marketed as Fosamac in Japan) for the treatment and prevention of
`osteoporosis; Zocor (simvastatin), a statin for modifying cholesterol; and Propecia (finasteride), a product for the
`treatment of male pattern hair loss.
`
`2
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`Vaccines
`
`Gardasil (Human Papillomavirus Quadrivalent [Types 6, 11, 16 and 18] Vaccine, Recombinant)/Gardasil 9
`(Human Papillomavirus 9-valent Vaccine, Recombinant), vaccines to help prevent certain diseases caused by certain
`types of human papillomavirus (HPV); ProQuad (Measles, Mumps, Rubella and Varicella Virus Vaccine Live), a
`pediatric combination vaccine to help protect against measles, mumps, rubella and varicella; M-M-R II (Measles, Mumps
`and Rubella Virus Vaccine Live), a vaccine to help prevent measles, mumps and rubella; Varivax (Varicella Virus
`Vaccine Live), a vaccine to help prevent chickenpox (varicella); Zostavax (Zoster Vaccine Live), a vaccine to help
`prevent shingles (herpes zoster); RotaTeq (Rotavirus Vaccine, Live Oral, Pentavalent), a vaccine to help protect against
`rotavirus gastroenteritis in infants and children; and Pneumovax 23 (pneumococcal vaccine polyvalent), a vaccine to
`help prevent pneumococcal disease.
`Animal Health
`The Animal Health segment discovers, develops, manufactures and markets animal health products,
`including vaccines. Principal products in this segment include:
`Livestock Products: Nuflor antibiotic range for use in cattle and swine; Bovilis/Vista vaccine lines for
`infectious diseases in cattle; Banamine bovine and swine anti-inflammatory; Estrumate for the treatment of fertility
`disorders in cattle; Matrix fertility management for swine; Resflor, a combination broad-spectrum antibiotic and non-
`steroidal anti-inflammatory drug for bovine respiratory disease; Zuprevo for bovine respiratory disease; Zilmax and
`Revalor to improve production efficiencies in beef cattle; Safe-Guard de-wormer for cattle; M+Pac swine pneumonia
`vaccine; and Porcilis and Circumvent vaccine lines for infectious diseases in swine.
`Poultry Products: Nobilis/Innovax, vaccine lines for poultry; and Paracox and Coccivac coccidiosis
`
`vaccines.
`
`Companion Animal Products: Bravecto, a chewable tablet that kills fleas and ticks in dogs for up to 12
`weeks; Nobivac vaccine lines for flexible dog and cat vaccination; Otomax/Mometamax/Posatex ear ointments for
`acute and chronic otitis; Caninsulin/Vetsulin diabetes mellitus treatment for dogs and cats; Panacur/Safeguard broad-
`spectrum anthelmintic (de-wormer) for use in many animals; Regumate fertility management for horses; Prestige
`vaccine line for horses; and Activyl/Scalibor/Exspot for protecting against bites from fleas, ticks, mosquitoes and
`sandflies.
`
`Aquaculture Products: Slice parasiticide for sea lice in salmon; Aquavac/Norvax vaccines against bacterial
`and viral disease in fish; Compact PD vaccine for salmon; and Aquaflor antibiotic for farm-raised fish.
`For a further discussion of sales of the Company’s products, see Item 7. “Management’s Discussion and
`Analysis of Financial Condition and Results of Operations” below.
`
`Product Approvals
`In January 2016, Merck announced that the FDA approved Zepatier for the treatment of adult patients with
`chronic HCV GT1 or GT4 infection, with or without ribavirin.
`In December 2015, Merck announced that the FDA approved an expanded age indication for Gardasil 9,
`Merck’s 9-valent HPV vaccine, to include use in males 16 through 26 years of age for the prevention of anal cancers,
`precancerous or dysplastic lesions and genital warts caused by certain HPV types. Gardasil 9 includes the greatest
`number of HPV types in any available HPV vaccine.
`Also, in December 2015, the Company announced that the FDA approved an expanded indication for
`Keytruda, an anti-PD-1 (programmed death receptor-1) therapy, to include the first-line treatment of patients with
`unresectable or metastatic melanoma. Additionally, the FDA approved an update to the product labeling for Keytruda
`for the treatment of patients with ipilimumab-refractory advanced melanoma.
`In October 2015, the FDA granted accelerated approval of Keytruda at a dose of 2mg/kg every three weeks
`for the treatment of patients with metastatic NSCLC whose tumors express PD-L1 as determined by an FDA-approved
`test and who have disease progression on or after platinum-containing chemotherapy. Patients with EGFR or ALK
`genomic tumor aberrations should have disease progression on FDA-approved therapy for these aberrations prior to
`receiving Keytruda. In addition to approving Keytruda for NSCLC, the FDA approved the first companion diagnostic
`that will enable physicians to determine the level of PD-L1 expression in a patient’s tumor.
`3
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`In September 2015, Merck announced that the Japanese Pharmaceuticals and Medical Devices Agency
`approved Marizev (omarigliptin) 25 mg and 12.5 mg tablets, an oral, once-weekly dipeptidyl peptidase-4 (DPP-4)
`inhibitor indicated for the treatment of adults with type 2 diabetes. Japan is the first country to have approved
`omarigliptin.
`
`Joint Ventures
`
`Sanofi Pasteur MSD
`In 1994, Merck and Pasteur Mérieux Connaught (now Sanofi Pasteur S.A.) formed a joint venture to market
`human vaccines in Europe and to collaborate in the development of combination vaccines for distribution in the then-
`existing European Union (EU) and the European Free Trade Association. Merck and Sanofi Pasteur contributed, among
`other things, their European vaccine businesses for equal shares in the joint venture, known as Pasteur Mérieux MSD,
`S.N.C. (now Sanofi Pasteur MSD, S.N.C.) (SPMSD). The joint venture maintains a presence, directly or through
`affiliates or branches, in Belgium, Italy, Germany, Spain, France, Austria, Ireland, Sweden, Portugal, the Netherlands,
`Switzerland and the United Kingdom (UK) and through distributors in the rest of its territory.
`
`Licenses
`
`In 1998, a subsidiary of Schering-Plough Corporation (Schering-Plough) entered into a licensing agreement
`with Centocor Ortho Biotech Inc. (Centocor), a Johnson & Johnson (J&J) company, to market Remicade, which is
`prescribed for the treatment of inflammatory diseases. In 2005, Schering-Plough’s subsidiary exercised an option under
`its contract with Centocor for license rights to develop and commercialize Simponi, a fully human monoclonal antibody.
`The Company has marketing rights to both products throughout Europe, Russia and Turkey. In 2007, Schering-Plough
`and Centocor revised their distribution agreement regarding the development, commercialization and distribution of
`both Remicade and Simponi, extending the Company’s rights to exclusively market Remicade to match the duration of
`the Company’s exclusive marketing rights for Simponi. In addition, Schering-Plough and Centocor agreed to share
`certain development costs relating to Simponi’s auto-injector delivery system. In 2009, the European Commission (EC)
`approved Simponi as a treatment for rheumatoid arthritis and other immune system disorders in two presentations —
`a novel auto-injector and a prefilled syringe. As a result, the Company’s marketing rights for both products extend for
`15 years from the first commercial sale of Simponi in the EU following the receipt of pricing and reimbursement
`approval within the EU. Remicade lost market exclusivity in major European markets in February 2015 and the Company
`no longer has market exclusivity in any of its marketing territories. The Company continues to have market exclusivity
`for Simponi in all of its marketing territories. All profits derived from Merck’s distribution of the two products in these
`countries are equally divided between Merck and J&J.
`
`Competition and the Health Care Environment
`Competition
`The markets in which the Company conducts its business and the pharmaceutical industry in general are
`highly competitive and highly regulated. The Company’s competitors include other worldwide research-based
`pharmaceutical companies, smaller research companies with more limited therapeutic focus, generic drug manufacturers
`and animal health care companies. The Company’s operations may be adversely affected by generic and biosimilar
`competition as the Company’s products mature, as well as technological advances of competitors, industry consolidation,
`patents granted to competitors, competitive combination products, new products of competitors, the generic availability
`of competitors’ branded products, and new information from clinical trials of marketed products or post-marketing
`surveillance. In addition, patent rights are increasingly being challenged by competitors, and the outcome can be highly
`uncertain. An adverse result in a patent dispute can preclude commercialization of products or negatively affect sales
`of existing products and could result in the recognition of an impairment charge with respect to intangible assets
`associated with certain products. Competitive pressures have intensified as pressures in the industry have grown.
`Pharmaceutical competition involves a rigorous 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 positioned to compete in the search for technological innovations. Additional resources required to meet market
`challenges include quality control, flexibility to meet customer specifications, an efficient distribution system and a
`strong technical information service. The Company is active in acquiring and marketing products through external
`alliances, such as licensing arrangements, and has been refining its sales and marketing efforts to further address
`
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`changing industry conditions. However, the introduction of new products and processes by competitors may result in
`price reductions and product displacements, even for products protected by patents. For example, the number of
`compounds available to treat a particular disease typically increases over time and can result in slowed sales growth
`or reduced sales for the Company’s products in that therapeutic category.
`The highly competitive animal health business is affected by several factors including regulatory and
`legislative issues, scientific and technological advances, product innovation, the quality and price of the Company’s
`products, effective promotional efforts and the frequent introduction of generic products by competitors.
`Health Care Environment and Government Regulation
`Global efforts toward health care cost containment continue to exert pressure on product pricing and market
`access. In the United States, federal and state governments for many years also have pursued methods to reduce the
`cost of drugs and vaccines for which they pay. For example, federal laws require the Company to pay specified rebates
`for medicines reimbursed by Medicaid and to provide discounts for outpatient medicines purchased by certain Public
`Health Service entities and hospitals serving a disproportionate share of low income or uninsured patients.
`Against this backdrop, the United States enacted major health care reform legislation in 2010 (the Patient
`Protection and Affordable Care Act), which began to be implemented in 2010. Various insurance market reforms have
`advanced and state and federal insurance exchanges were launched in 2014. By the end of the decade, the law is expected
`to expand access to health care to about 32 million Americans who did not previously have insurance coverage. With
`respect to the effect of the law on the pharmaceutical industry, the law increased the mandated Medicaid rebate from
`15.1% to 23.1%, expanded the rebate to Medicaid managed care utilization, and increased the types of entities eligible
`for the federal 340B drug discount program. The law also requires pharmaceutical manufacturers to pay a 50% point
`of service discount to Medicare Part D beneficiaries when they are in the Medicare Part D coverage gap (i.e., the so-
`called “donut hole”). Approximately $550 million, $430 million and $280 million was recorded by Merck as a reduction
`to revenue in 2015, 2014 and 2013, respectively, related to the donut hole provision. Also, pharmaceutical manufacturers
`are now required to pay an annual non-tax deductible health care reform fee. The total annual industry fee was $3.0
`billion in 2015 and will remain $3.0 billion in 2016. The fee is assessed on each company in proportion to its share of
`prior year branded pharmaceutical sales to certain government programs, such as Medicare and Medicaid. The Company
`recorded $173 million, $390 million and $151 million of costs within Marketing and administrative expenses in 2015,
`2014 and 2013, respectively, for the annual health care reform fee. The higher expenses in 2014 reflect final regulations
`on the annual health care reform fee issued by the Internal Revenue Service (IRS) on July 28, 2014. The final IRS
`regulations accelerated the recognition criteria for the fee obligation by one year to the year in which the underlying
`sales used to allocate the fee occurred rather than the year in which the fee was paid. As a result of this change, Merck
`recorded an additional year of expense of $193 million in 2014. On January 21, 2016, the Centers for Medicare &
`Medicaid Services issued the Medicaid Rebate Final Rule that implements provisions of the Patient Protection and
`Affordable Care Act effective April 1, 2016. The rule provides comprehensive guidance on the calculation of Average
`Manufacturer Price and Best Price; two metrics utilized to determine the rebates drug manufacturers are required to
`pay to state Medicaid programs. Merck is still evaluating the rule to determine whether it will have a material impact
`on Merck’s Medicaid rebate liability.
`The Company also faces increasing pricing pressure globally from managed care organizations, government
`agencies and programs that could negatively affect the Company’s sales and profit margins. In the United States, these
`include (i) practices of managed care organizations, federal and state exchanges, and institutional and governmental
`purchasers, and (ii) U.S. federal laws and regulations related to Medicare and Medicaid, including the Medicare
`Prescription Drug Improvement and Modernization Act of 2003 and the Patient Protection and Affordable Care Act.
`Changes to the health care system enacted as part of health care reform in the United States, as well as increased
`purchasing power of entities that negotiate on behalf of Medicare, Medicaid, and private sector beneficiaries, could
`result in further pricing pressures. As an example, health care reform is contributing to an increase in the number of
`patients in the Medicaid program under which sales of pharmaceutical products are subject to substantial rebates.
`In addition, in the effort to contain the U.S. federal deficit, the pharmaceutical industry could be considered
`a potential source of savings via legislative proposals that have been debated but not enacted. These types of revenue
`generating or cost saving proposals include additional direct price controls in the Medicare prescription drug program
`(Part D). In addition, Congress may again consider proposals to allow, under certain conditions, the importation of
`
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`medicines from other countries. It remains very uncertain as to what proposals, if any, may be included as part of future
`federal budget deficit reduction proposals that would directly or indirectly affect the Company.
`Efforts toward health care cost containment remain intense in several European countries. Many countries
`have continued to announce and execute austerity measures, which include the implementation of pricing actions to
`reduce prices of generic and patented drugs and mandatory switches to generic drugs. While the Company is taking
`steps to mitigate the impact in these countries, the austerity measures continued to negatively affect the Company’s
`revenue performance in 2015 and the Company anticipates the austerity measures will continue to negatively affect
`revenue performance in 2016. In addition, a majority of countries attempt to contain drug costs by engaging in reference
`pricing in which authorities examine pre-determined markets for published prices of drugs by brand. The authorities
`then use price data from those markets to set new local prices for brand-name drugs, including the Company’s. Guidelines
`for examining reference pricing are usually set in local markets and can be changed pursuant to local regulations.
`In addition, in Japan, the pharmaceutical industry is subject to government-mandated biennial price
`reductions of pharmaceutical products and certain vaccines, which will occur again in 2016. Furthermore, the
`government can order repricings for classes of drugs if it determines that it is appropriate under applicable rules.
`Certain markets outside of the United States have also implemented other cost management strategies, such
`as health technology assessments, which require additional data, reviews and administrative processes, all of which
`increase the complexity, timing and costs of obtaining product reimbursement and exert downward pressure on available
`reimbursement.
`The Company’s focus on emerging markets has increased. Governments in many emerging markets are also
`focused on constraining health care costs and have enacted price controls and related measures, such as compulsory
`licenses, that aim to put pressure on the price of pharmaceuticals and constrain market access. The Company anticipates
`that pricing pressures and market access challenges will continue in 2016 to varying degrees in the emerging markets.
`Beyond pricing and market access challenges, other conditions in emerging market countries can affect the
`Company’s efforts to continue to grow in these markets, including potential political instability, significant currency
`fluctuation and controls, financial crises, limited or changing availability of funding for health care, and other
`developments that may adversely impact the business environment for the Company. Further, the Company may engage
`third-party agents to assist in operating in emerging market countries, which may affect its ability to realize continued
`growth and may also increase the Company’s risk exposure.
`In addressing cost containment pressures, the Company engages in public policy advocacy with
`policymakers and continues to work to demonstrate that its medicines provide value to patients and to those who pay
`for health care. The Company advocates with government policymakers to encourage a long-term approach to
`sustainable health care financing that ensures access to innovative medicines and does not disproportionately target
`pharmaceuticals as a source of budget savings. In markets with historically low rates of health care spending, the
`Company encourages those governments to increase their investments and adopt market reforms in order to improve
`their citizens’ access to appropriate health care, including medicines.
`Operating conditions have become more challenging under the global pressures of competition, industry
`regulation and cost containment efforts. Although no one can predict the effect of these and other factors on the
`Company’s business, the Company continually takes measures to evaluate, adapt and improve the organization and its
`business practices to better meet customer needs and believes that it is well positioned to respond to the evolving health
`care environment and market forces.
`The pharmaceutical industry is also subject to regulation by regional, country, state and local agencies around
`the world focused on standards and processes for determining drug safety and effectiveness, as well as conditions for
`sale or reimbursement.
`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.