(MARK ONE)
`
` 
`
` 
`
`As filed with the Securities and Exchange Commission on February 27, 2015
`
`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, 2014
`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
`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, 2015: 2,838,192,933.
`Aggregate market value of Common Stock ($0.50 par value) held by non-affiliates on June 30, 2014 based on closing price on
`June 30, 2014: $167,695,000,000.
`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 26, 2015, 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 1058
`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
`18
`28
`29
`29
`30
`30
`30
`
`33
`35
`36
`76
`77
`77
`81
`135
`136
`137
`137
`137
`138
`
`139
`139
`
`140
`140
`140
`
`141
`146
`
`

`

`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 three operating segments, which are the Pharmaceutical, Animal Health 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. 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 and consumer
`care products, were as follows:
`2014
`($ in millions)
`2012
`2013
`42,237
`47,267
`44,033
`Total Sales
`36,042
`40,601
`37,437
`Pharmaceutical
`3,931
`Januvia
`4,086
`4,004
`2,650
`Zetia
`2,567
`2,658
`2,372
`Remicade
`2,076
`2,271
`2,071
`Janumet
`1,659
`1,829
`1,738
`Gardasil
`1,631
`1,831
`1,673
`Isentress
`1,515
`1,643
`1,394
`ProQuad/M-M-R II/Varivax
`1,273
`1,306
`1,099
`Nasonex
`1,268
`1,335
`1,092
`Singulair
`3,853
`1,196
`3,454
`3,399
`3,362
`Animal Health
`Consumer Care(1)
`1,547
`1,952
`1,894
`Other Revenues(2)
`1,194
`1,315
`1,340
`(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 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
`
`

`

`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 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: PegIntron (peginterferon alpha-2b) and Victrelis (boceprevir), medicines for the treatment of
`chronic hepatitis C virus (“HCV”).
`HIV: Isentress (raltegravir), an HIV integrase inhibitor for use in combination with other antiretroviral
`agents for the treatment of HIV-1 infection.
`Acute Care: 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; Primaxin (imipenem and cilastatin sodium), an anti-bacterial product. The Company acquired the following
`products pursuant to the Cubist Pharmaceuticals, Inc. (“Cubist”) acquisition that was consummated in January 2015:
`Cubicin (daptomycin for injection), an I.V. antibiotic for complicated skin and skin structure infections or bacteremia,
`when caused by designated susceptible organisms; and Zerbaxa (ceftolozane/tazobactam), an I.V. combination product
`for the treatment of complicated intra-abdominal infections or complicated urinary tract infections, when caused by
`designated susceptible organisms.
`Immunology: Remicade (infliximab), a treatment for inflammatory diseases, and Simponi (golimumab), a
`once-monthly subcutaneous treatment of certain inflammatory diseases, which the Company markets in Europe, Russia
`and Turkey.
`Other: Cosopt (dorzolamide hydrochloride-timolol maleate ophthalmic solution), which the Company
`markets outside the United States, and Trusopt (dorzolamide hydrochloride ophthalmic solution), ophthalmic products.
`Oncology
`
`Emend (aprepitant) for the prevention of chemotherapy-induced and post-operative nausea and vomiting;
`Temodar (temozolomide) (marketed as Temodal outside the United States), a treatment for certain types of brain tumors;
`and Keytruda (pembrolizumab) for the treatment of advanced melanoma in patients whose disease has progressed after
`other therapies.
`Diversified Brands
`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; 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; Propecia (finasteride), a product for the treatment of male pattern hair loss; Zocor (simvastatin), a statin
`for modifying cholesterol; and Remeron (mirtazapine), an antidepressant.
`
`2
`
`

`

`Table of Contents
`
`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,
`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, 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; 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; Activyl/Scalibor/
`Exspot for protecting against bites from fleas, ticks, mosquitoes and sandflies; and Bravecto (fluralaner), a chewable
`tablet that kills fleas and ticks in dogs for up to 12 weeks, which was approved by the U.S. Food and Drug Administration
`(the “FDA”) in 2014 and launched in approximately 30 countries.
`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 September 2014, Merck announced that the FDA granted accelerated approval of Keytruda at a dose of
`2 mg/kg every three weeks for the treatment of patients with unresectable or metastatic melanoma and disease
`progression following ipilimumab and, if BRAF V600 mutation positive, a BRAF inhibitor. Keytruda is the first anti-
`PD-1 (programmed death receptor-1) therapy approved in the United States.
`In August 2014, Merck announced that the FDA approved Belsomra (suvorexant) for the treatment of adults
`with insomnia who have difficulty falling asleep and/or staying asleep. Belsomra became available in the United States
`in early 2015. Following receipt of marketing approval, Belsomra was launched in Japan in November 2014. The
`Company is continuing with plans to seek approval for suvorexant in other countries around the world.
`In December 2014, the Company announced that the FDA approved Gardasil 9 (Human Papillomavirus 9-
`valent Vaccine, Recombinant), Merck’s 9-valent HPV vaccine, for use in girls and young women 9 to 26 years of age
`for the prevention of cervical, vulvar, vaginal, and anal cancers caused by HPV types 16, 18, 31, 33, 45, 52 and 58,
`pre-cancerous or dysplastic lesions caused by HPV types 6, 11, 16, 18, 31, 33, 45, 52, and 58, and genital warts caused
`by HPV types 6 and 11. Gardasil 9 is also approved for use in boys 9 to 15 years of age for the prevention of anal
`cancer caused by HPV types 16, 18, 31, 33, 45, 52 and 58, precancerous or dysplastic lesions caused by HPV types 6,
`11, 16, 18, 31, 33, 45, 52 and 58, and genital warts caused by HPV types 6 and 11. Gardasil 9 includes the greatest
`number of HPV types in any available HPV vaccine.
`
`3
`
`

`

`Table of Contents
`
`In April 2014, Merck announced that the FDA approved Grastek (Timothy Grass Pollen Allergen Extract)
`and Ragwitek (Short Ragweed Pollen Allergen Extract) tablets for sublingual use. Grastek is an allergen extract indicated
`as immunotherapy for the treatment of grass pollen-induced allergic rhinitis with or without conjunctivitis confirmed
`by positive skin test or in vitro testing for pollen-specific IgE antibodies for Timothy Grass or cross-reactive grass
`pollens. Grastek is approved for use in persons 5 through 65 years of age. Ragwitek is an allergen extract indicated as
`immunotherapy for the treatment of short ragweed pollen-induced allergic rhinitis with or without conjunctivitis
`confirmed by positive skin test or in vitro testing for pollen-specific IgE antibodies for short ragweed pollen. Ragwitek
`is approved for use in adults 18 through 65 years of age. Neither Grastek nor Ragwitek is indicated for the immediate
`relief of allergic symptoms. The prescribing information for Grastek and Ragwitek includes a boxed warning regarding
`severe allergic reactions.
`In May 2014, Merck announced that the FDA approved Zontivity (vorapaxar) for the reduction of thrombotic
`cardiovascular events in patients with a history of myocardial infarction or with peripheral arterial disease. The U.S.
`prescribing information for Zontivity includes a boxed warning regarding bleeding risk. In January 2015, Zontivity was
`approved by the European Commission (the “EC”) for coadministration with acetylsalicylic acid and, where appropriate,
`clopidogrel, to reduce atherothrombotic events in adult patients with a history of myocardial infarction. Merck currently
`plans to launch Zontivity in the European Union (the “EU”) in late 2015 or early 2016.
`In September 2014, Vanihep (vaniprevir), an oral twice-daily protease inhibitor for the treatment of chronic
`HCV was approved in Japan. Vanihep will be available only in Japan.
`Additionally, as part of its acquisition of Cubist, the Company acquired Zerbaxa (ceftolozane/tazobactam),
`a combination product approved by the FDA in December 2014 to treat complicated intra-abdominal infections or
`complicated urinary tract infections, when caused by designated susceptible organisms.
`
`Joint Ventures
`AstraZeneca LP
`On June 30, 2014, AstraZeneca Group Plc (“AstraZeneca”) exercised its option to purchase Merck’s interest
`in Merck’s joint venture with AstraZeneca. As a result of AstraZeneca’s exercise of its option, the Company no longer
`records equity income from AZLP and supply sales to AZLP have terminated.
`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 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 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 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. The Company previously lost market exclusivity for Remicade in certain smaller
`European markets and experienced biosimilar competition and a decline in sales in those markets. In February 2015,
`4
`
`

`

`Table of Contents
`
`the Company lost market exclusivity in major European markets and the Company anticipates a more substantial decline
`in Remicade sales. Additionally, the Company anticipates mandatory price reductions in certain European markets. 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 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 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.
`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 $430 million, $280 million and $210 million was recorded by Merck as a reduction
`to revenue in 2014, 2013 and 2012, 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 2014 and will remain $3.0 billion in 2015. 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 $390 million, $151 million and $190 million of costs within Marketing and administrative expenses in 2014,
`5
`
`

`

`Table of Contents
`
`2013 and 2012, respectively, for the annual health care reform fee. The increase in expenses in 2014 reflects final
`regulations on the annual health care reform fee issued by the Internal Revenue Service (the “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. 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. 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
`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 2014 and the Company anticipates the austerity measures will continue to negatively affect
`revenue performance in 2015. 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 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 2015 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 abil