(MARK ONE)
`
` 
`
` 
`
`As filed with the Securities and Exchange Commission on February 27, 2014
`
`UNITED STATES
`SECURITIES AND EXCHANGE COMMISSION
`WASHINGTON, D. C. 20549
`FORM 10-K
`
`_________________________________
`
`Annual Report Pursuant to Section 13 or 15(d)
`of the Securities Exchange Act of 1934
`For the Fiscal Year Ended December 31, 2013
`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.
`
`One Merck Drive
`Whitehouse Station, N. J. 08889-0100
`(908) 423-1000
`
`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
`on which Registered
`Title of Each Class
` 
`New York Stock Exchange
`Common Stock ($0.50 par value)
` 
`Number of shares of Common Stock ($0.50 par value) outstanding as of January 31, 2014: 2,940,622,461.
`Aggregate market value of Common Stock ($0.50 par value) held by non-affiliates on June 30, 2013 based on closing price on
`June 30, 2013: $135,893,000,000.
`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
`12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  
`      No  
`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:
`
`Document
`Proxy Statement for the Annual Meeting of
`Shareholders to be held May 27, 2014, 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
`
`      No  
`
`MYLAN - EXHIBIT 1057
`Mylan et al. v. AstraZeneca
`IPR2015-01340
`
`

`

`Table of Contents
`
` 
`
` 
`
` 
`
`Table of Contents
`
`Part I
`
`Item 1.
`Item 1A.
`
`Item 1B.
`Item 2.
`Item 3.
`Item 4.
`
`Item 5.
`
`Item 6.
`Item 7.
`Item 7A.
`Item 8.
`
`Item 9.
`Item 9A.
`
`Item 9B.
`
`Item 10.
`Item 11.
`Item 12.
`
`Item 13.
`Item 14.
`
`Item 15.
`
`Business
`Risk Factors
`Cautionary Factors that May Affect Future Results
`Unresolved Staff Comments
`Properties
`Legal Proceedings
`Mine Safety Disclosures
`Executive Officers of the Registrant
`
`Part II
`Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
`Equity Securities
`Selected Financial Data
`Management’s Discussion and Analysis of Financial Condition and Results of Operations
`Quantitative and Qualitative Disclosures About Market Risk
`Financial Statements and Supplementary Data
`(a)
`Financial Statements
`Notes to Consolidated Financial Statements
`Report of Independent Registered Public Accounting Firm
`Supplementary Data
`(b)
`Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
`Controls and Procedures
`Management’s Report
`Other Information
`
`Part III
`Directors, Executive Officers and Corporate Governance
`Executive Compensation
`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
`
`Part IV
`Exhibits and Financial Statement Schedules
`Signatures
`
`Page
`
`1
`17
`27
`28
`28
`29
`29
`29
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`32
`34
`35
`73
`74
`74
`78
`130
`131
`132
`132
`132
`133
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`134
`134
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`135
`135
`135
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`136
`142
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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, animal health, and consumer care
`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, which are the Pharmaceutical, Animal Health,
`Consumer Care and Alliances segments, and one reportable segment, which is the Pharmaceutical 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. Additionally, the Company has consumer care operations that develop, manufacture and market over-the-
`counter, foot care and sun care products, which are sold through wholesale and retail drug, food chain and mass
`merchandiser outlets, as well as club stores and specialty channels. 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 and consumer
`care products, were as follows:
`2013
`($ in millions)
`2011
`2012
`44,033
`48,047
`47,267
`Total Sales
`37,437
`41,289
`40,601
`Pharmaceutical
`4,004
`Januvia
`3,324
`4,086
`2,658
`Zetia
`2,428
`2,567
`2,271
`Remicade
`2,667
`2,076
`1,831
`Gardasil
`1,209
`1,631
`1,829
`Janumet
`1,363
`1,659
`1,643
`Isentress
`1,359
`1,515
`1,643
`Vytorin
`1,882
`1,747
`1,335
`Nasonex
`1,286
`1,268
`1,306
`ProQuad/M-M-R II/Varivax
`1,202
`1,273
`1,196
`Singulair
`5,479
`3,853
`3,362
`3,253
`3,399
`Animal Health
`1,894
`1,840
`1,952
`Consumer Care
`Other Revenues(1)
`1,340
`1,665
`1,315
`(1) Other revenues are primarily comprised of alliance revenue, miscellaneous corporate revenues and third-party manufacturing sales. On October 1,
`2013, the Company divested a substantial portion of its third-party manufacturing sales.
`
`$
`
`1
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`

`

`Table of Contents
`
`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 outside the United States); and Vytorin (ezetimibe/
`simvastatin) (marketed as Inegy outside the United States), cholesterol modifying medicines.
`Diabetes and Obesity: Januvia (sitagliptin) and Janumet (sitagliptin/metformin HCl) for the treatment of
`type 2 diabetes.
`Respiratory: Nasonex (mometasone furoate monohydrate), an inhaled nasal corticosteroid for the treatment
`of nasal allergy symptoms; Singulair (montelukast), a medicine indicated for the chronic treatment of asthma and the
`relief of symptoms of allergic rhinitis; Dulera Inhalation Aerosol (mometasone furoate/formoterol fumarate dihydrate),
`a combination medicine for the treatment of asthma; and Asmanex Twisthaler (mometasone furoate inhalation powder),
`an inhaled corticosteroid for first-line maintenance treatment of asthma in patients 4 years of age and older.
`Women’s Health and Endocrine: NuvaRing (etonogestrel/ethinyl estradiol vaginal ring), a vaginal
`contraceptive ring; Fosamax (alendronate sodium) for the treatment and prevention of osteoporosis; Follistim AQ
`(follitropin beta injection), a fertility treatment; Implanon (etonogestrel implant), a single-rod subdermal contraceptive
`implant; and Cerazette (desogestrel), a progestin only oral contraceptive.
`Other: Arcoxia (etoricoxib) for the treatment of arthritis and pain, which the Company markets outside the
`United States; and Avelox (moxifloxacin), a broad-spectrum fluoroquinolone antibiotic for the treatment of certain
`respiratory and skin infections, which the Company only markets in the United States.
`Hospital and Specialty
`Immunology: Remicade (infliximab) and Simponi (golimumab) for the treatment of inflammatory diseases,
`which the Company markets in Europe, Russia and Turkey.
`Infectious Disease: Isentress (raltegravir), an antiretroviral therapy for use in combination therapy for the
`treatment of HIV-1 infection; Cancidas (caspofungin acetate), an anti-fungal product; PegIntron (peginterferon
`alpha-2b), a treatment for chronic hepatitis C; Invanz (ertapenem sodium) for the treatment of certain infections; Victrelis
`(boceprevir), a treatment for chronic hepatitis C; and Noxafil (posaconazole) for the prevention of invasive fungal
`infections.
`
`Oncology: Temodar (temozolomide) (marketed as Temodal outside the United States), a treatment for certain
`types of brain tumors; and Emend (aprepitant) for the prevention of chemotherapy-induced and post-operative nausea
`and vomiting.
`Other: Cosopt (dorzolamide hydrochloride-timolol maleate ophthalmic solution), which the Company
`markets outside the United States, and Trusopt (dorzolamide hydrochloride ophthalmic solution), ophthalmic products;
`Bridion (sugammadex sodium injection), a medication for the reversal of certain muscle relaxants used during surgery;
`and Integrilin (eptifibatide), a treatment for patients with acute coronary syndrome.
`Diversified Brands
`Cozaar (losartan potassium) and Hyzaar (losartan potassium and hydrochlorothiazide), treatments for
`hypertension; Primaxin (imipenem and cilastatin sodium), an anti-bacterial product; Zocor (simvastatin), a statin for
`modifying cholesterol; Propecia (finasteride), a product for the treatment of male pattern hair loss; Clarinex
`(desloratadine), a non-sedating antihistamine; Remeron (mirtazapine), an antidepressant; Claritin Rx (loratadine) for
`treatment of seasonal outdoor allergies and year-round indoor allergies; Proscar (finasteride), a urology product for
`the treatment of symptomatic benign prostate enlargement; and Maxalt (rizatriptan benzoate), a product for acute
`treatment of migraine.
`Vaccines
`
`Gardasil (Human Papillomavirus Quadrivalent [Types 6, 11, 16 and 18] Vaccine, Recombinant), a vaccine
`to help prevent certain diseases caused by four types of human papillomavirus (“HPV”); ProQuad (Measles, Mumps,
`Rubella and Varicella Virus Vaccine Live), a pediatric combination vaccine to help protect against measles, mumps,
`
`2
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`

`

`Table of Contents
`
`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); Pneumovax 23 (pneumococcal vaccine
`polyvalent), a vaccine to help prevent pneumococcal disease; and RotaTeq (Rotavirus Vaccine, Live Oral, Pentavalent),
`a vaccine to help protect against rotavirus gastroenteritis in infants and children.
`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; Regumate/Matrix fertility management for swine and horses; Resflor 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; M+Pac swine pneumonia vaccine; and
`Porcilis vaccine line for infectious diseases in swine.
`Poultry Products: Nobilis/Innovax, vaccine lines for poultry; and Paracox and Coccivac coccidiosis
`
`vaccines.
`
`Companion Animal Products: 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; 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.
`Consumer Care
`The Consumer Care segment develops, manufactures and markets over-the-counter, foot care and sun care
`products. Principal products in this segment include:
`Over-the-Counter Products: Claritin non-drowsy antihistamines; MiraLAX for relief of occasional
`constipation; Coricidin HBP decongestant-free cold/flu medicine for people with high blood pressure; Afrin nasal
`decongestant spray; Zegerid OTC treatment for frequent heartburn; and Oxytrol For Women, a treatment for overactive
`bladder in women.
`Foot Care: Dr. Scholl’s foot care products; Lotrimin topical antifungal products; and Tinactin topical
`antifungal products and foot and sneaker odor/wetness products.
`Sun Care: Coppertone sun care lotions, sprays and dry oils.
`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.
`
`Joint Ventures
`AstraZeneca LP
`In 1982, Merck entered into an agreement with Astra AB (“Astra”) to develop and market Astra products
`in the United States. In 1994, Merck and Astra formed an equally owned joint venture that developed and marketed
`most of Astra’s new prescription medicines in the United States including Prilosec (omeprazole), the first in a class of
`medications known as proton pump inhibitors, which slows the production of acid from the cells of the stomach lining.
`In 1998, Merck and Astra restructured the joint venture whereby Merck acquired Astra’s interest in the joint
`venture, renamed KBI Inc. (“KBI”), and contributed KBI’s operating assets to a new U.S. limited partnership named
`Astra Pharmaceuticals, L.P. (the “Partnership”), in exchange for a 1% limited partner interest. Astra contributed the
`net assets of its wholly owned subsidiary, Astra USA, Inc., to the Partnership in exchange for a 99% general partner
`interest. The Partnership, renamed AstraZeneca LP (“AZLP”) upon Astra’s 1999 merger with Zeneca Group Plc, became
`the exclusive distributor of the products for which KBI retained rights.
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`The Company earns certain Partnership returns as well as ongoing revenue based on sales of KBI products.
`The Partnership returns include a priority return provided for in the Partnership Agreement, a preferential return
`representing the Company’s share of undistributed Partnership AZLP generally accepted accounting principles
`(“GAAP”) earnings, and a variable return related to the Company’s 1% limited partner interest.
`In 2014, AstraZeneca has the option to purchase Merck’s interest in KBI based in part on the value of Merck’s
`interest in Nexium and Prilosec. AstraZeneca’s option is exercisable between March 1, 2014 and April 30, 2014. If
`AstraZeneca chooses to exercise this option, the closing date is expected to be June 30, 2014. Under the amended
`agreement, AstraZeneca will make a payment to Merck upon closing of $327 million, reflecting an estimate of the fair
`value of Merck’s interest in Nexium and Prilosec. This portion of the exercise price is subject to a true-up in 2018 based
`on actual sales from closing in 2014 to June 2018. The exercise price will also include an additional amount equal to
`a multiple of ten times Merck’s average 1% annual profit allocation in the partnership for the three years prior to
`exercise. The Company believes that it is likely that AstraZeneca will exercise its option in 2014. If AstraZeneca
`exercises its option, the Company will no longer record equity income from AZLP and supply sales to AZLP will
`terminate. In addition, the Company will recognize a non-cash pretax gain of approximately $700 million.
`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.). 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 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 exclusive marketing rights to both products throughout Europe, Russia and
`Turkey. In December 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. On October 6, 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. All profits derived from Merck’s
`exclusive 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 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, and generic drug and consumer and animal
`health care manufacturers. 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 positions 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
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`associated with certain products. Competitive pressures have intensified as pressures in the industry have grown. The
`effect on operations of competitive factors and patent disputes cannot be predicted.
`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 joint ventures and licenses, and has been refining 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 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.
`The Company’s consumer care operations face competition from other consumer health care businesses as
`well as retailers who carry their own private label brands. The Company’s competitive position is affected by several
`factors, including regulatory and legislative issues, scientific and technological advances, the quality and price of the
`Company’s products, promotional efforts and the growth of lower cost private label brands.
`Health Care Environment
`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, which began
`to be implemented in 2010. Various insurance market reforms have advanced and will continue through full
`implementation in 2014. The law is expected to expand access to health care to about 32 million Americans by the end
`of the decade 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 $280 million,
`$210 million and $150 million was recorded by Merck as a reduction to revenue in 2013, 2012 and 2011, respectively,
`related to the donut hole provision. Also, pharmaceutical manufacturers are now required to pay an annual health care
`reform fee. The total annual industry fee was $2.8 billion in 2013 and will be $3.0 billion in 2014. The fee is assessed
`on each company in proportion to its share of sales to certain government programs, such as Medicare and Medicaid.
`The Company recorded $151 million, $190 million and $162 million of costs within Marketing and administrative
`expenses in 2013, 2012 and 2011, respectively, for the annual health care reform fee. The full impact of U.S. health
`care reform cannot be predicted at this time.
`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 groups, 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 of 2010. 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.
`
`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
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`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
`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 2013 and the Company anticipates the austerity measures will continue to negatively affect
`revenue performance in 2014. 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. 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 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 and share of revenue from 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 2014 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.
`Government Regulation
`The pharmaceutical industry is subject to regulation by regional, country, state and local agencies around
`the world. Governmental regulation and legislation tend to focus on standards and processes for determining drug safety
`and effectiveness, as well as conditions for sale or reimbursement, especially related to the pricing of products.
`Of particular importance is the U.S. Food and Drug Administration (the “FDA”), which administers
`requirements covering the testing, approval, safety, effectiveness, manufacturing, labeling, and marketing of prescription
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