Back to GetFilings.com

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

           For the quarterly period ended September 30, 2003

OR

           For the transition period from _______ to _______

Commission File No. 1-3305

MERCK & CO., INC.

The number of shares of common stock outstanding as of the close of business on October 31, 2003:

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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Table of Contents

Part I - Financial Information

Item 1. Financial Statements

MERCK & CO., INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited, $ in millions except per share amounts)

*Amount does not add as a result of rounding.

The accompanying notes are an integral part of this consolidated financial statement.

- 1 -

Table of Contents

MERCK & CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
(Unaudited, $ in millions)

The accompanying notes are an integral part of this consolidated financial statement.

- 2 -

Table of Contents

MERCK & CO., INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited, $ in millions)

The accompanying notes are an integral part of this consolidated financial statement.

Notes to Consolidated Financial Statements

1.		The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and disclosures required by accounting principles generally accepted in the United States for complete consolidated financial statements are not included herein. The interim statements should be read in conjunction with the financial statements and notes thereto included in the Company’s latest Annual Report on Form 10-K.
		The results of operations of any interim period are not necessarily indicative of the results of operations for the full year. In the Company’s opinion, all adjustments necessary for a fair presentation of these interim statements have been included and are of a normal and recurring nature.
		Certain reclassifications have been made to prior year amounts to conform with current year presentation.

- 3 -

Table of Contents

Notes to Consolidated Financial Statements (continued)

2.		Employee stock-based compensation is recognized using the intrinsic value method. Generally, employee stock options are granted to purchase shares of Company stock at the fair market value at the time of grant. Accordingly, no compensation expense is recognized for the Company’s stock-based compensation plans other than for its employee performance-based awards and options granted to employees of certain equity method investees, the total of which is not significant.
		The effect on net income and earnings per common share if the Company had applied the fair value method for recognizing employee stock-based compensation is as follows:

		In connection with the Medco Health Solutions, Inc. (“Medco Health”) spin-off, options granted to Medco Health employees prior to February 2002 and some options granted after February 2002 became fully vested in accordance with the original terms of the grants. As a result, pro forma compensation expense for the three and nine months ended September 30, 2003 reflects the accelerated vesting of these options. In addition, certain stock options granted to Medco Health employees in 2002 and 2003 were converted to Medco Health options with terms and amounts that maintained the option holders’ positions. Therefore, pro forma compensation expense for these options is only reflected through the date of the spin-off.
3.		During the second quarter 2003, Merck announced that its Board of Directors had approved the 100 percent spin-off of Medco Health, Merck’s wholly owned subsidiary. On August 5, 2003, Merck declared a special dividend of all the outstanding shares of common stock of Medco Health. The declaration and payment of the dividend was contingent upon Medco Health’s registration statements on Form 10 and Form S-1 being declared effective by the Securities and Exchange Commission and Medco Health’s payment to Merck of cash dividends in an aggregate amount of $2.0 billion.
		On August 19, 2003, Merck completed the spin-off of Medco Health. The spin-off was effected by way of the pro rata dividend to Merck stockholders described above. Holders of Merck common stock at the close of business on August 12, 2003, received a dividend of .1206 shares of Medco Health common stock for every one share of Merck common stock held on that date. No fractional shares of Medco Health common stock were issued. Shareholders entitled to a fractional share of Medco Health common stock in the distribution received the cash value instead. Based on a letter ruling Merck received from the U.S. Internal Revenue Service, receipt of Medco Health shares in the distribution was tax-free for U.S. federal income tax purposes, but any cash received in lieu of fractional shares was taxable.

- 4 -

Table of Contents

Notes to Consolidated Financial Statements (continued)

		Prior to the spin-off, Merck received the $2.0 billion dividend from Medco Health and Merck paid $564.7 million in settlement of the net intercompany payable to Medco Health. In addition, at the date of the spin-off, $247.4 million of cash and cash equivalents were included in the net assets of Medco Health which were spun off.
		Following the August 19 distribution, the Company’s prior period Consolidated Statements of Income and Cash Flows have been restated to present the results of Medco Health separately as discontinued operations. The December 31, 2002 Consolidated Balance Sheet has not been restated.
		Summarized financial information for discontinued operations is as follows (dollars in millions):

		*includes operations up through August 19, 2003 (date of spin-off)
		The following is a summary of the assets and liabilities of discontinued operations which were spun off (dollars in millions):

4.		In January 2003, the Company, through its wholly owned subsidiary, MSD (Japan) Co., Ltd., launched a tender offer to acquire the remaining 49% of the common shares of Banyu Pharmaceutical Co., Ltd. (“Banyu”) that it did not already own. In March 2003, the Company received tenders for 116.5 million shares, bringing its ownership to 95% of outstanding Banyu common stock, for an aggregate purchase price approximating $1.4 billion. The acquisition allows the Company to further enhance its position in the Japanese market, which is the world’s second largest pharmaceutical market.
		The Company’s acquisition of the Banyu shares was accounted for under the purchase method and, accordingly, 95% of Banyu’s results of operations have been included in the Company’s consolidated results of operations since March 12, 2003. Pro forma information is not provided as the impact of the transaction does not have a material effect on the Company’s results of operations. The purchase price was allocated based upon the fair values of the portion of assets and liabilities acquired. The allocation of the purchase price resulted in the reversal of $908.5 million of minority interest liability and recognition of $303.3 million in other intangibles, $213.3 million in goodwill, $139.7 million in deferred income tax liabilities and $30.7 million in other net assets, principally property, plant and equipment. Other intangibles included $275.4 million of in-line product rights having a 10-year weighted average useful life and $27.9 million representing a 20-year life tradename. In connection with the transaction, the Company also recorded a $90.4 million charge for acquired research associated with products in development for which, at the acquisition date, technological feasibility had not been established and no alternative future use existed. Approximately $57.9 million of the total acquired research charge related to Merck products that Banyu is developing for sale in the Japanese market, the most significant of which is ‘Vioxx’. For any of these products, Merck can choose not to exclusively license the rights to Banyu and, in that event, generally would reimburse Banyu for its associated research and development expenditures. Accordingly, these

- 5 -

Table of Contents

Notes to Consolidated Financial Statements (continued)

		products were valued using a cost approach, adjusted to reflect the probability of regulatory approval. The remaining portion of the acquired research charge represents Banyu-developed product candidates. The fair value of each product was determined based upon the present value of projected future cash flows utilizing an income approach reflecting the appropriate risk-adjusted discount rate based on the applicable product’s stage of completion and its probability of technical and marketing success.
		In October 2003, the Company completed its tender offer for all remaining shares in Banyu, which brings Merck’s ownership to 99% of outstanding Banyu common stock. This offer was made for an aggregate purchase price approximating $143.0 million. The Company is currently considering the further steps necessary to achieve full ownership in the near future.
5.		Inventories consisted of:

		The reduction in finished goods is primarily attributable to the absence of the inventory held by Medco Health, which was spun off in August 2003.
6.		Aggregate amortization expense from continuing operations for the three months ended September 30, 2003 and 2002 totaled $47.1 million and $40.8 million, respectively. Aggregate amortization expense from continuing operations for the nine months ended September 30, 2003 and 2002 totaled $137.1 million and $122.7 million, respectively. Amortization expense is recorded in Materials and production expense and Other (income) expense, net. The estimated aggregate amortization expense for each of the next five years is as follows: 2003, $183.5 million; 2004, $184.3 million; 2005, $155.1 million; 2006, $134.4 million; and 2007, $131.4 million. Other intangibles consisted of:

7.		In August 2003, the Company entered into a ten-year $500.0 million notional amount pay-floating, receive-fixed interest rate swap contract designated as a hedge of the fair value changes in $500.0 million of ten-year fixed rate notes attributable to changes in the benchmark London Interbank Offered Rate (LIBOR) swap rate. The swap effectively converts fixed rate obligations to floating rate instruments. The fair value changes in the notes are fully offset in Interest expense by the fair value changes in the swap contract.
8.		The Company is involved in various claims and legal proceedings of a nature considered normal to its business, including product liability, intellectual property and commercial litigation, as well as additional matters such as antitrust actions.

- 6 -

Table of Contents

Notes to Consolidated Financial Statements (continued)

		As previously reported, the Company is party to a number of antitrust suits, certain of which have been certified as class actions, instituted by most of the nation’s retail pharmacies and consumers in several states, alleging conspiracies in restraint of trade and challenging the pricing and/or purchasing practices of the Company. A significant number of other pharmaceutical companies and wholesalers have also been sued in the same or similar litigation. In 1996, the Company and several other defendants finalized an agreement to settle the federal class action alleging conspiracy, which represents the single largest group of retail pharmacy claims. Since that time, the Company has entered into other settlements on satisfactory terms. The Company has not engaged in any conspiracy and no admission of wrongdoing was made nor was included in any settlement agreements. While it is not feasible to predict the final outcome of the remaining proceedings, in the opinion of the Company, such proceedings should not ultimately result in any liability which would have a material adverse effect on the Company’s financial position, results of operations or liquidity.
		As previously reported, a number of lawsuits, involving individual claims as well as putative class actions, have been filed against the Company with respect to ‘Vioxx’. Certain of the lawsuits include allegations regarding gastrointestinal bleeding, cardiovascular events, and kidney damage. The lawsuits have been filed in federal courts as well as in a number of state courts. While cases in other jurisdictions are proceeding separately, the actions filed in the state courts of California and New Jersey have been transferred to a single judge in each state for coordinated proceedings. The Company anticipates that one or more of the lawsuits in various jurisdictions may go to trial in the first half of 2004. Litigation is inherently subject to uncertainties and no assurance can be given on the outcome of any given trial. However, the Company believes that these lawsuits are without merit, and will vigorously defend against them.
		As previously disclosed, the Company is a party in claims brought under the Consumer Protection Act of 1987 in the United Kingdom which allege that certain children suffer from a variety of conditions as a result of being vaccinated with various bivalent vaccines for measles and rubella and/or trivalent vaccines for measles, mumps and rubella, including the Company’s M-M-R II. In connection with those claims, eight lead cases had been selected for a trial scheduled to commence in April 2004: two against the Company, and six against other pharmaceutical companies. The trial of the eight cases was initially to be limited to issues of causation and defect on the conditions of autistic spectrum disorders, with or without inflammatory bowel disease. In early September 2003, the Legal Services Commission announced its decision to withdraw public funding of the litigation brought by the claimants. This decision was confirmed on appeal by the Funding Review Committee on September 30, 2003. The April 2004 trial date has been vacated and the claims stayed pending the outcome of any application for judicial review of the funding withdrawal decision. The Company believes that the lawsuits are without merit and will vigorously defend against them.
		As previously reported, the Company is a party to a number of proceedings brought under the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund. The Company is also remediating environmental contamination resulting from past industrial activity at certain of its sites and takes an active role in identifying and providing for these costs. In management’s opinion, the liabilities for all environmental matters which are probable and reasonably estimable have been accrued and totaled $166.2 million at September 30, 2003. These liabilities are undiscounted, do not consider potential recoveries from insurers or other parties and will be paid out over the periods of remediation for the applicable sites, which are expected to occur primarily over the next 15 years. Although it is not possible to predict with certainty the outcome of these matters, or the ultimate costs of remediation, management does not believe that any reasonably possible expenditures that may be incurred in excess of the liabilities accrued should exceed $100.0 million in the aggregate. Management also does not believe that these expenditures should result in a material adverse effect on the Company’s financial position, results of operations, liquidity or capital resources for any year.
		As previously disclosed, on July 31, 2003, a shareholder derivative complaint in federal court in the District of New Jersey, which was originally filed in May 2003, was amended to add Arthur Andersen LLP as a defendant and to add certain new allegations. The lawsuit is based on previously-disclosed allegations relating to the Company’s revenue recognition practices for retail co-payments and further alleges that certain individual defendants breached their fiduciary duty by failing to prevent the conduct at issue in the previously-disclosed Gruer cases, the antitrust claims pending in the Northern District of Illinois, and the qui tam actions in which the U.S. Attorney’s office for the Eastern District of Pennsylvania has intervened against Medco Health. The complaint seeks monetary damages from those Merck directors who are defendants in the lawsuit in an unspecified amount as well as injunctive and other relief.

- 7 -

Table of Contents

Notes to Consolidated Financial Statements (continued)

9.

Net sales consisted of:

		Sales by individual therapeutic class are presented net of rebates and discounts. Other primarily includes sales of other human pharmaceuticals, also net of rebates and discounts, and pharmaceutical and animal health supply sales to the Company’s joint ventures and AstraZeneca LP.
10.		Other (income) expense, net, consisted of:

		Minority interests include third parties’ share of exchange gains and losses arising from translation of the financial statements into U.S. dollars.
		The change in Other, net for the nine months ended September 30, 2003 reflects second quarter realized gains on the Company’s investment portfolios reflecting the favorable interest rate environment.
		Interest paid from continuing operations for the nine-month periods ended September 30, 2003 and 2002 was $302.2 million and $332.0 million, respectively.
11.		The weighted average common shares used in the computations of basic earnings per common share and earnings per common share assuming dilution (shares in millions) are as follows:

(1)

Issuable primarily under stock option plans.

12.

Comprehensive income for the three months ended September 30, 2003 and 2002, representing all changes in stockholders’ equity during the period other than changes resulting from the Company’s stock, was $1,884.3 million and $2,022.4 million, respectively. Comprehensive income for the nine months ended September 30, 2003 and 2002 was $5,389.1 million and $5,434.7 million, respectively.

- 8 -

Table of Contents

Notes to Consolidated Financial Statements (continued)

13.		The Company’s operations are principally managed on a product basis. The Merck Pharmaceutical segment includes products marketed either directly or through joint ventures. These products consist of therapeutic and preventative agents, sold by prescription, for the treatment of human disorders. All Other includes non-reportable human and animal health segments.
		As a result of the 100% spin-off of Medco Health, Merck’s financial results from continuing operations exclude the results of Medco Health, which are reported separately as income (loss) from discontinued operations net of taxes. Accordingly, the segment information included in this note reflects Merck’s financial results from continuing operations. In addition, product sales now reflect sales to Medco Health as third-party sales based upon the net selling price from Merck to Medco Health. Prior year amounts have been restated to conform to the current year presentation.
		Revenues and profits for these segments are as follows: