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<SEC-DOCUMENT>0000950130-02-001788.txt : 20020415
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ACCESSION NUMBER: 0000950130-02-001788
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 8
CONFORMED PERIOD OF REPORT: 20011231
FILED AS OF DATE: 20020321
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: MERCK & CO INC
CENTRAL INDEX KEY: 0000064978
STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834]
IRS NUMBER: 221109110
STATE OF INCORPORATION: NJ
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-03305
FILM NUMBER: 02581673
BUSINESS ADDRESS:
STREET 1: ONE MERCK DR
STREET 2: P O BOX 100
CITY: WHITEHOUSE STATION
STATE: NJ
ZIP: 08889-0100
BUSINESS PHONE: 9084234044
MAIL ADDRESS:
STREET 1: ONE MERCK DR
STREET 2: PO BOX 100 WS3AB-05
CITY: WHITEHOUSE STATION
STATE: NJ
ZIP: 08889-0100
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<FILENAME>d10k405.txt
<DESCRIPTION>FORM 10-K405
<TEXT>
<PAGE>
As filed with the Securities and Exchange Commission on March 21, 2002
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
________________
FORM 10-K
(MARK ONE)
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2001
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. 1-3305
________________
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. 22-1109110
Securities Registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
------------------- ---------------------
Common Stock New York and Philadelphia Stock Exchanges
($0.01 par value)
Number of shares of Common Stock ($0.01 par value) outstanding as of
February 28, 2002: 2,271,094,459.
Aggregate market value of Common Stock ($0.01 par value) held by
non-affiliates on December 31, 2001 based on closing price on February 28, 2002:
$139,327,000,000.
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 [X]. No __________
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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. [X]
Documents Incorporated by Reference:
Document Part of Form 10-K
-------- -----------------
Annual Report to stockholders for the fiscal year Parts I and II
ended December 31, 2001
Proxy Statement for the Annual Meeting of Part III
Stockholders to be held April 23, 2002
================================================================================
<PAGE>
PART I
Item 1. Business.
Merck & Co., Inc. (the "Company") is a global research-driven
pharmaceutical company that discovers, develops, manufactures and markets a
broad range of human and animal health products, directly and through its joint
ventures, and provides pharmaceutical benefit services through Merck-Medco
Managed Care, L.L.C. ("Merck-Medco"). The Company's operations are principally
managed on a products and services basis and are comprised of two reportable
segments: Merck Pharmaceutical, which includes products marketed either directly
or through joint ventures, and Merck-Medco. Merck Pharmaceutical products
consist of therapeutic and preventive agents, sold by prescription, for the
treatment of human disorders. Merck-Medco revenues are derived from the filling
and management of prescriptions and health management programs.
The following table shows the sales of various categories of the
Company's products and services:
<TABLE>
<CAPTION>
($ in millions) 2001 2000 1999
--------------- ---- ---- ----
<S> <C> <C> <C>
Atherosclerosis .............................. $ 7,179.6 $ 5,805.2 $ 5,093.2
Hypertension/heart failure ................... 4,255.6 4,629.1 4,563.8
Anti-inflammatory/analgesics ................. 2,630.5 2,251.7 578.5
Osteoporosis ................................. 1,759.2 1,275.3 1,043.1
Respiratory .................................. 1,375.7 862.2 501.8
Vaccines/biologicals ......................... 1,022.4 952.0 860.0
Anti-bacterial/anti-fungal ................... 795.4 783.3 772.3
Ophthalmologicals ............................ 672.2 656.2 670.0
Human immunodeficiency virus ("HIV") ......... 411.0 528.8 664.4
Anti-ulcerants ............................... 354.2 849.4 913.9
Other Merck products ......................... 891.2 1,629.7 1,820.6
Merck-Medco .................................. 26,368.7 20,140.3 15,232.4
-------- -------- --------
Total ................................... $47,715.7 $40,363.2 $32,714.0
========= ========= =========
</TABLE>
Human health products include therapeutic and preventive agents,
generally sold by prescription, for the treatment of human disorders. Among
these are atherosclerosis products, which include Zocor (simvastatin) and
Mevacor (lovastatin); hypertension/heart failure products, which include Cozaar
(losartan potassium), Hyzaar (losartan potassium and hydrochlorothiazide),
Prinivil (lisinopril), Vasotec (enalapril maleate) and Vaseretic (enalapril
maleate and hydrochlorothiazide); anti-inflammatory/analgesics, of which Vioxx
(rofecoxib), an agent that specifically inhibits COX-2, is the largest-selling;
an osteoporosis product, Fosamax (alendronate sodium), for treatment and
prevention of osteoporosis; a respiratory product, Singulair (montelukast
sodium), a leukotriene receptor antagonist; vaccines/biologicals, of which M-M-R
II (measles, mumps and rubella virus vaccine live), Varivax (varicella virus
vaccine live), a live virus vaccine for the prevention of chickenpox, and
Recombivax HB (hepatitis B vaccine [recombinant]) are the largest-selling;
anti-bacterial/anti-fungal products, of which Primaxin (imipenem and cilastatin
sodium), Noroxin (norfloxacin) and Cancidas (caspofungin acetate) are the
largest-selling; ophthalmologicals, of which Timoptic (timolol maleate),
Timoptic-XE (timolol maleate ophthalmic gel forming solution), Trusopt
(dorzolamide hydrochloride ophthalmic solution) and Cosopt (dorzolamide
hydrochloride and timolol maleate ophthalmic solution) are the largest selling;
HIV products, which include Crixivan (indinavir sulfate), a protease inhibitor
for the treatment of human immunodeficiency viral infection in adults; and
anti-ulcerants, which include Pepcid (famotidine).
Other Merck products include sales of Proscar (finasteride), which
provides for the treatment of symptomatic benign prostatic hyperplasia in men
with enlarged prostates, Maxalt (rizatriptan benzoate), an anti-migraine
treatment, Propecia (finasteride), which treats male pattern hair loss and
Aggrastat (tirofiban hydrochloride), a platelet blocker for treatment of acute
coronary syndrome, and other human pharmaceuticals; continuing sales to divested
businesses; pharmaceutical and animal health supply sales to the Company's joint
ventures; and supply sales to AstraZeneca LP. Also included in this category are
rebates and discounts on the Company's pharmaceutical products.
Merck-Medco primarily includes Merck-Medco sales of non-Merck products
and Merck-Medco pharmaceutical benefit services, principally sales of
prescription drugs through managed prescription drug programs, as well as
services provided through programs to manage patient health and drug
utilization.
2
<PAGE>
In January 2002, the Company announced plans to establish Merck-Medco
as a separate, publicly-traded company. The Company plans an initial public
offering of a portion of the new company by mid-2002, subject to market
conditions. Alternatives for the distribution of the remaining shares in the new
company are under evaluation. The full separation of Merck-Medco should be
completed within 12 months of the initial public offering, subject to receipt of
an Internal Revenue Service ruling that such an event would be tax-free to
shareholders and to other customary conditions.
On January 10, 2001, the Antiviral Advisory Committee of the U.S. Food
and Drug Administration ("FDA") recommended that the FDA clear Cancidas, the
Company's investigational intravenous anti-fungal medicine, for marketing. On
January 26, 2001, the FDA cleared Cancidas for marketing in the United States
for the treatment of invasive aspergillosis in patients who do not respond to or
are intolerant of other anti-fungal therapies. In February 2001, the once-weekly
formulation of Fosamax was approved for treatment to increase bone mass in men
with osteoporosis. In November 2001, the FDA cleared Invanz (ertapenem sodium),
a new once-a-day injectable antibiotic, for marketing in the United States for
the treatment of adults with the following moderate to severe infections caused
by susceptible strains of the designated organisms: complicated intra-abdominal
infections, complicated skin and skin structure infections, community acquired
pneumonia, complicated urinary tract infections, and acute pelvic infections.
In June 2000, Merck-Medco commenced providing pharmaceutical benefit
management services for the UnitedHealth Group, one of the largest managed care
organizations in the United States.
In November 2000, the Company formed a new subsidiary, Merck Capital
Ventures, LLC, to invest up to $100 million in capital in private Internet and
other emerging businesses that focus on areas related to the commercialization,
distribution and delivery of pharmaceuticals and related health care services.
Acquisitions -- In November 1999, the Company acquired SIBIA
Neurosciences, Inc., a publicly-held California based biotechnology firm, which
engages in the discovery and development of novel small molecule therapeutics
for the treatment of neurodegenerative, neuropsychiatric and neurological
disorders.
In June 2000, Merck-Medco acquired ProVantage Health Services, Inc., a
publicly-held Wisconsin based health care benefits management and health
information company that provided pharmacy benefit services to approximately
five million people.
In July 2001, the Company acquired Rosetta Inpharmatics, Inc., a
publicly-held Washington based informational genomics company that designs and
develops unique technologies to efficiently analyze gene data to predict how
medical compounds will interact with different kinds of cells in the body.
Joint Ventures -- In 1982, the Company entered into an agreement with
Astra AB ("Astra") to develop and market Astra products in the United States. In
1993, the Company's total sales of Astra products reached a level that triggered
the first step in the establishment of a joint venture business carried on by
Astra Merck Inc. ("AMI"), in which the Company and Astra each owned a 50% share.
This joint venture, formed in November 1994, developed and marketed most of
Astra's new prescription medicines in the United States including Prilosec
(omeprazole), the first of a class of medications known as proton pump
inhibitors, which slows the production of acid from the cells of the stomach
lining.
In 1998, the Company and Astra completed the restructuring of the
ownership and operations of the joint venture whereby the Company acquired
Astra's interest in AMI, 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 which the Company maintains a limited partner
interest. The Partnership, renamed AstraZeneca LP, became the exclusive
distributor of the products for which KBI retained rights. The Company earns
certain Partnership returns as well as ongoing revenue based on sales of current
and future KBI products. The Partnership returns include a priority return
provided for in the Partnership Agreement, variable returns based, in part, upon
sales of certain former Astra USA, Inc. products, and a preferential return
representing the Company's share of undistributed Partnership GAAP earnings. In
conjunction with the 1998 restructuring, for a payment of $443.0 million, Astra
purchased an option to buy the Company's interest in the KBI products, excluding
the Company's interest in the gastrointestinal medicines Prilosec and Nexium
(esomeprazole magnesium). The Company also granted Astra an option ("the Shares
Option")
3
<PAGE>
to buy the Company's common stock interest in KBI, at an exercise price based on
the net present value of estimated future net sales of Prilosec and Nexium.
In April 1999, Astra merged with Zeneca Group Plc, forming AstraZeneca
AB ("AstraZeneca"). As a result of the merger, Astra was required to make two
one-time payments to the Company totaling approximately $1.8 billion for the
relinquishment of certain rights, including rights to future Astra products with
no existing or pending U.S. patents at the time of the merger. This merger also
triggers a partial redemption of the Company's limited partner interest in 2008.
Furthermore, as a result of the merger, AstraZeneca's option to buy the
Company's interest in the KBI products is exercisable in 2010 and the Company
has obtained the right to require AstraZeneca to purchase such interest in 2008.
In addition, the Shares Option is exercisable two years after Astra's purchase
of the Company's interest in the KBI products.
In 1989, the Company formed a joint venture with Johnson & Johnson to
develop, market and manufacture consumer health care products in the United
States. In April 1995, the joint venture obtained FDA clearance in the United
States for marketing Pepcid AC (famotidine), an over-the-counter form of the
Company's ulcer medication Pepcid. This 50% owned joint venture was expanded
into Europe in 1993, and into Canada in 1996. The European extension currently
markets and sells over-the-counter pharmaceutical products in France, Germany,
Italy, Spain and the United Kingdom.
Effective April 1992, the Company, through the Merck Vaccine Division,
and Connaught Laboratories, Inc. (now Aventis Pasteur), an affiliate of Aventis
A.G., agreed to collaborate on the development and marketing of combination
pediatric vaccines and to promote selected vaccines in the United States. The
research and marketing collaboration enables the companies to pool their
resources to expedite the development of vaccines combining several different
antigens to protect children against a variety of diseases, including
Haemophilus influenzae type b, hepatitis B, diphtheria, tetanus, pertussis and
- ----------- ----------
poliomyelitis.
In 1994, the Company, through the Merck Vaccine Division, and Pasteur
Merieux Connaught (now Aventis Pasteur) formed a joint venture to market human
vaccines in Europe and to collaborate in the development of combination vaccines
for distribution in the European Union ("EU") and the European Free Trade
Association. The Company and Aventis Pasteur contributed, among other things,
their European vaccine businesses for equal shares in the joint venture, known
as Pasteur Merieux MSD, S.N.C. (now Aventis Pasteur MSD, S.N.C.). The joint
venture is subject to monitoring by the EU, to which the partners made certain
undertakings in return for an exemption from European Competition Law, effective
until December 2006. The joint venture is active, directly or through affiliates
in Belgium, Denmark, Italy, Germany, Spain, France, Austria, Ireland and the
United Kingdom, and through distributors in the rest of Europe.
In 1997, the Company and Rhone-Poulenc S.A. combined their respective
animal health and poultry genetics businesses to form Merial Limited ("Merial"),
a fully-integrated animal health company, which is a stand-alone joint venture,
equally owned by each party. Merial provides a comprehensive range of
pharmaceuticals and vaccines to enhance the health, well-being and performance
of a wide range of animal species. In December 1999, Rhone-Poulenc S.A.'s
interest in Merial was acquired by Aventis S.A., a corporation formed by the
merger of Rhone-Poulenc S.A. and Hoechst A.G.
In May 2000, the Company and Schering-Plough Corporation
("Schering-Plough") entered into agreements to create separate partnerships to
develop and market in the United States new prescription medicines in the
cholesterol-management and respiratory therapeutic areas. These partnerships are
pursuing the development and marketing of Zetia (ezetimibe), an investigational
cholesterol absorption inhibitor discovered by Schering-Plough, as a once-daily
monotherapy and in co-administration with statins; Zetia as a once-daily
combination tablet with Zocor; and a once-daily combination tablet of Singulair
and Claritin, Schering-Plough's nonsedating antihistamine, for the treatment of
allergic rhinitis and asthma. In December 2001, the Company and Schering-Plough
announced the worldwide expansion (excluding Japan) of the
cholesterol-management partnership.
Also in December 2001, an entity of the Merck/Schering-Plough
Pharmaceuticals partnership submitted a New Drug Application ("NDA") to the FDA
for Zetia tablets, to be administered alone or with statins for the reduction of
elevated cholesterol levels. On February 28, 2002, the FDA accepted for standard
review the NDA for Zetia tablets, to be administered alone or with a statin for
the reduction of elevated cholesterol levels (hypercholesterolemia).
4
<PAGE>
In February 2001, Merck-Medco, Advance PCS and Express Scripts, Inc.
announced the signing of an agreement to form RxHub. RxHub will be an electronic
exchange enabling physicians to link with participating pharmacies, prescription
benefit managers and health plans. RxHub is designed to operate as a utility for
the conduit of information among all parties engaging in electronic prescribing.
Merck-Medco owns one-third of the equity in RxHub.
Competition -- The markets in which the Company's pharmaceutical
business is conducted are highly competitive and, in many cases, highly
regulated. Such competition involves an intensive 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 prepared
to compete in the search for technological innovations. Additional resources to
meet competition include quality control, flexibility to meet exact customer
specifications, an efficient distribution system and a strong technical
information service. The Company is active in acquiring and marketing products
through 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 replacements, even for products protected by patents. For
example, the number of compounds available to treat diseases typically increases
over time and has resulted in slowing the growth in sales of certain of the
Company's products.
In addition, particularly in the area of human pharmaceutical products,
legislation enacted in all states allows, encourages or, in a few instances, in
the absence of specific instructions from the prescribing physician, mandates
the use of "generic" products (those containing the same active chemical as an
innovator's product) rather than "brand-name" products. Governmental and other
pressures toward the dispensing of generic products have significantly reduced
the sales of certain of the Company's products no longer protected by patents,
such as Vasotec, Vaseretic, Pepcid and Mevacor, and slowed the growth of certain
other products.
Merck-Medco's pharmacy benefit management business is highly
competitive. Merck-Medco competes with other pharmacy benefit managers,
insurance companies and other providers of health care and/or administrators of
health care programs. Merck-Medco competes primarily on the basis of its ability
to design and administer innovative programs that help plan sponsors provide
high-quality, affordable prescription drug care and health management services
to health plan members. Merck-Medco dispenses prescription drugs from its
national network of mail service pharmacies, manages prescriptions dispensed
through a national network of participating retail pharmacies and implements
health management programs to help its members with some chronic conditions
better understand their conditions and comply with their prescribed drug
therapies.
Distribution -- The Company sells its human health products primarily
to drug wholesalers and retailers, hospitals, clinics, government agencies and
managed health care providers such as health maintenance organizations and other
institutions. The Company's professional representatives communicate the
effectiveness, safety and value of the Company's products to health care
professionals in private practice, group practices and managed care
organizations. Merck-Medco sells its pharmaceutical benefit management services
to corporations, labor unions, insurance companies, Blue Cross/Blue Shield
organizations, government agencies, federal and state employee plans, health
maintenance and other similar organizations.
Raw Materials -- Raw materials and supplies are normally available in
quantities adequate to meet the needs of the Company's business.
Government Regulation and Investigation -- The pharmaceutical industry
is subject to global regulation by regional, country, state and local agencies.
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. In many
cases, the FDA requirements have increased the amount of time and money
necessary to develop new products and bring them to market in the United States.
In 1997, the Food and Drug Administration Modernization Act was passed and was
the culmination of a comprehensive legislative reform effort designed to
streamline regulatory procedures within the FDA and to improve the regulation of
drugs, medical devices and food. The legislation was principally designed to
ensure the timely availability of safe and effective drugs and biologics by
expediting the premarket review process for new products. A key provision of the
legislation is the re-authorization of the Prescription Drug User Fee Act of
1992, which permits the continued collection of user fees from prescription drug
manufacturers to augment FDA resources earmarked for the review of human drug
5
<PAGE>
applications. This helps provide the resources necessary to ensure the prompt
approval of safe and effective new drugs.
In recent years, an increasing number of legislative proposals have
been introduced or proposed in Congress and in some state legislatures that
would effect major changes in the health care system, either nationally or at
the state level. Such legislative initiatives introduced in Congress include
prescription drug benefit proposals for Medicare beneficiaries. Although a
reform bill has not been enacted at the federal level, some states have passed
reform legislation and further federal and state developments are expected.
Although the Company is well positioned to respond to evolving market forces, it
cannot predict the outcome or effect of legislation resulting from these reform
efforts.
For many years, the pharmaceutical industry and the pharmacy benefits
management business have been under federal and state oversight with the new
drug approval system, drug safety, advertising and promotion, drug purchasing
and reimbursement programs and formularies variously under review. The Company
believes that it will continue to be able to conduct its operations, including
the introduction of new drugs to the market, in this regulatory environment. One
type of federal initiative to contain federal health care spending is the
prospective or "capitated" payment system, first implemented to reduce the rate
of growth in Medicare reimbursement to hospitals. Such a system establishes in
advance a flat rate for reimbursement for health care for those patients for
whom the payer is fiscally responsible. This type of payment system and other
cost containment systems are now widely used by public and private payers and
have caused hospitals, health maintenance organizations and other customers of
the Company to be more cost-conscious in their treatment decisions, including
decisions regarding the medicines to be made available to their patients. The
Company continues to work with private and federal employers to slow increases
in health care costs. Further, the Company's efforts to demonstrate that its
medicines can help save costs in other areas, and pricing flexibility across its
product portfolio, have encouraged the use of the Company's medicines and have
helped offset the effects of increasing cost pressures.
Also, federal and state governments have pursued methods to directly
reduce the cost of drugs for which they pay. For example, federal legislation
requires the Company to pay a specified rebate for medicines reimbursed by
Medicaid, and also to pay rebates similar to the Medicaid rebate for outpatient
medicines purchased by certain Public Health Service entities and
"disproportionate share" hospitals (hospitals meeting certain criteria), and
minimum discounts of 24% off of a defined "non-federal average manufacturer
price" for the Veterans' Administration, Federal Supply Schedule and certain
other federal sector purchasers of medicines.
Initiatives in some states seek rebates beyond the minimum required by
Medicaid legislation, in some cases for patients beyond those who are eligible
for Medicaid. Under the Federal Vaccines for Children entitlement program, the
U.S. Centers for Disease Control and Prevention ("CDC") funds and purchases
recommended pediatric vaccines at a public sector price for the immunization of
Medicaid-eligible, uninsured, native American and certain underinsured children.
The Company was awarded CDC contracts in 2001 for the supply of six pediatric
vaccines for this program (and monovalent components of such vaccines).
Outside the United States, the Company encounters similar regulatory
and legislative issues in most of the countries where it does business. There,
too, the primary thrust of governmental inquiry and action is toward determining
drug safety and effectiveness, often with mechanisms for controlling the prices
of prescription drugs and the profits of prescription drug companies. The EU has
adopted directives concerning the classification, labeling, advertising,
wholesale distribution and approval for marketing of medicinal products for
human use. The Company's policies and procedures are already consistent with the
substance of these directives; consequently, it is believed that they will not
have any material effect on the Company's business.
In addition, certain countries within the EU, recognizing the economic
importance of the research-based pharmaceutical industry and the value of
innovative medicines to society, are working with industry and the European
Commission on proposals for market deregulation.
The Company is subject to the jurisdiction of various regulatory
agencies and is, therefore, subject to potential administrative actions. Such
actions may include seizures of products and other civil and criminal sanctions.
Under certain circumstances, the Company on its own may deem it advisable to
initiate product recalls. Although it is difficult to predict the ultimate
effect of these activities and legislative, administrative and regulatory
6
<PAGE>
requirements and proposals, the Company believes that its development of new and
improved products should enable it to compete effectively within this
environment.
There are extensive federal and state regulations applicable to the
practice of pharmacy and the administration of managed health care programs.
Each state in which Merck-Medco operates a pharmacy has laws and regulations
governing its operation and the licensing of and standards of professional
practice by its pharmacists. These regulations are issued by an administrative
body in each state (typically, a pharmacy board), which is empowered to impose
sanctions for noncompliance. The policies and procedures of the Company comply
with these regulations.
Patents, Trademarks and Licenses -- Patent protection is considered, in
the aggregate, to be of material importance in the Company's marketing of human
health products in the United States and in most major foreign markets. Patents
may cover products per se, pharmaceutical formulations, processes for or
intermediates useful in the manufacture of products or the uses of products.
Protection for individual products extends for varying periods in accordance
with the date of grant and the legal life of patents in the various countries.
The protection afforded, which may also vary from country to country, depends
upon the type of patent and its scope of coverage.
Patent portfolios developed for products introduced by the Company
normally provide market exclusivity. Basic patents are in effect for the
following major products in the United States: Aggrastat, Cancidas, Chibroxin
(norfloxacin), Cosopt, Cozaar, Crixivan, Fosamax, Hyzaar, Invanz, Maxalt,
PedvaxHIB (Haemophilus b conjugate vaccine), Primaxin, Propecia, Proscar,
Recombivax HB, Singulair, Trusopt, Vioxx and Zocor.
In 2001, several U.S. product patents expired, including Mevacor,
Prinivil, Prinzide (lisinopril and hydrochlorothiazide) and Vaseretic. The
product patent for Prilosec (which is supplied exclusively to AstraZeneca LP) in
the United States also expired in 2001. In the aggregate, domestic sales of
these products, as well as Pepcid, for which market exclusivity expired in 2001,
represent 10% of the Company's human health sales for 2001. The Company expects
a significant decline in the sales of these products in 2002 as a result of the
loss of market exclusivity. With the exception of Prilosec, for which the
Company has U.S. rights only, a decline is also expected in the Company's
European sales for these products in the years 2002 through 2005 upon the loss
of market exclusivity in European countries throughout this period. European
sales of these products represent 1% of the Company's human health sales for
2001.
The Company filed a supplemental new drug application with the FDA for
Prinivil, in accordance with the provisions of the FDA Modernization Act of 1997
(the "Modernization Act"). Pursuant to the Modernization Act, the FDA granted an
additional six months of market exclusivity, commencing December 2001, in the
United States to Prinivil and Prinzide for all their uses, based upon pediatric
studies performed by the Company. The FDA also granted an additional six months
of market exclusivity in the United States to Singulair from its February 2012
patent expiration until August 2012, and Zocor from its December 2005 basic
patent expiration until June 2006, in response to supplemental new drug
applications the Company filed on pediatric studies. The market exclusivity
which commenced in the United States for product patents for Prilosec in April
2001, and Mevacor in July 2001, pursuant to the Modernization Act, expired in
October 2001 and December 2001, respectively. Market exclusivity in the United
States also expired for Pepcid in April 2001. The Modernization Act, which was
passed in 1997, includes a Pediatric Exclusivity Provision that may provide an
additional six months of market exclusivity in the United States for indications
of new or currently marketed drugs, if certain agreed upon pediatric studies are
completed by the applicant. These exclusivity provisions were reauthorized until
October 1, 2007 by the "Best Pharmaceuticals for Children Act" passed in January
2002.
While the expiration of a product patent normally results in a loss of
market exclusivity for the covered product, commercial benefits may continue to
be derived from: (i) later-granted patents on processes and intermediates
related to the most economical method of manufacture of the active ingredient of
such product; (ii) patents relating to the use of such product; (iii) patents
relating to novel compositions and formulations; and (iv) in the United States,
market exclusivity that may be available under federal law. The effect of
product patent expiration also depends upon many other factors such as the
nature of the market and the position of the product in it, the growth of the
market, the complexities and economics of the process for manufacture of the
active ingredient of the product and the requirements of new drug provisions of
the Federal Food, Drug and Cosmetic Act or similar laws and regulations in other
countries.
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Additions to market exclusivity are sought in the United States and
other countries through all relevant laws, including laws increasing patent
life. Some of the benefits of increases in patent life have been partially
offset by a general increase in the number of, incentives for and use of generic
products. Additionally, improvements in intellectual property laws are sought in
the United States and other countries through reform of patent and other
relevant laws and implementation of international treaties.
Worldwide, all of the Company's important products are sold under
trademarks that are considered in the aggregate to be of material importance.
Trademark protection continues in some countries as long as used; in other
countries, as long as registered. Registration is for fixed terms and can be
renewed indefinitely.
Royalties received during 2001 on patent and know-how licenses and
other rights amounted to $125.5 million. The Company also paid royalties
amounting to $522.8 million in 2001 under patent and know-how licenses it holds.
Research and Development
The Company's business is characterized by the introduction of new
products or new uses for existing products through a strong research and
development program. Approximately 11,900 people are employed in the Company's
research activities. Expenditures for the Company's research and development
programs were $2.5 billion in 2001, $2.3 billion in 2000 and $2.1 billion in
1999 and will be approximately $2.9 billion in 2002. The Company maintains its
ongoing commitment to research over a broad range of therapeutic areas and
clinical development in support of new products. Total expenditures for the
period 1992 through 2001 exceeded $16.7 billion with a compound annual growth
rate of 10%.
The Company maintains a number of long-term exploratory and fundamental
research programs in biology and chemistry as well as research programs directed
toward product development. Projects related to human health are being carried
on in various fields such as bacterial and viral infections, cardiovascular
functions, cancer, diabetes, pain and inflammation, kidney function, obesity,
mental health, the nervous system, ophthalmic research, prostate therapy, the
respiratory system, fungal diseases, bone diseases, endoparasitic and
ectoparasitic diseases, companion animal diseases and production improvement.
In the development of human health products, industry practice and
government regulations in the United States and most foreign countries provide
for the determination of effectiveness and safety of new chemical compounds
through preclinical tests and controlled clinical evaluation. Before a new drug
may be marketed in the United States, recorded data on preclinical and clinical
experience are included in the NDA or the biological Product License Application
to the FDA for the required approval. The development of certain other products
is also subject to government regulations covering safety and efficacy in the
United States and many foreign countries. There can be no assurance that a
compound that is the result of any particular program will obtain the regulatory
approvals necessary for it to be marketed.
New product candidates resulting from this research and development
program include Arcoxia (etoricoxib), a second COX-2 specific inhibitor
potentially useful for the treatment of osteoarthritis, rheumatoid arthritis,
acute pain, chronic pain and dysmenorrhea, for which the Company filed an NDA
with the FDA on August 8, 2001. The Company plans to submit an expanded NDA for
Arcoxia to the FDA in order to include new efficacy data that will better
position the product to compete successfully in the coxib class, where there
already are three entrants. Accordingly, on March 13, 2002, the Company withdrew
the original U.S. NDA for the investigational medicine. The Company is
submitting the additional efficacy data to support a new indication for
ankylosing spondylitis, which is a chronic, inflammatory disorder primarily
involving the spine. In addition to the indications listed above, the Company is
seeking an indication for acute gouty arthritis. Timing of the expanded
submission has not been determined. The regulatory process for Arcoxia outside
the United States continues uninterrupted.
Other products in development include an oral compound potentially
useful for treatment of chemotherapy-induced emesis; an oral compound
potentially useful for the treatment of depression and other neuropsychiatric
diseases; a compound potentially useful for the treatment of diabetes and
diabetic dyslipidemia; a compound potentially useful for the treatment of
anxiety; a compound potentially useful for the treatment of Chronic Obstructive
Pulmonary Disease and asthma; a compound potentially useful to treat AIDS; and
certain new vaccines including a Human Papillomavirus vaccine ("HPV"),
potentially useful to prevent HPV infection; a rotavirus vaccine potentially
useful for the prevention of infant diarrhea and dehydration caused by
rotavirus; and a vaccine potentially useful for the prevention and treatment of
human immunodeficiency virus.
All product or service marks appearing in type form different from that
of the surrounding text are trademarks or service marks owned by or licensed to
Merck & Co., Inc., its subsidiaries or affiliates (including Zetia, a trademark
owned by an entity of the Merck/Schering-Plough Pharmaceuticals partnership).
Cozaar and Hyzaar are registered trademarks of E.I. du Pont de Nemours and
Company, Wilmington, DE. Claritin is a trademark of Schering Corporation and
Prilosec and Nexium are trademarks of the AstraZeneca group.
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Employees
At the end of 2001, the Company had 78,100 employees worldwide, with
50,400 employed in the United States, including Puerto Rico. Approximately 30%
of worldwide employees of the Merck Pharmaceutical and Merck-Medco segments are
represented by various collective bargaining groups.
Environmental Matters
The Company believes that it is in compliance in all material respects
with applicable environmental laws and regulations. In 2001, the Company
incurred capital expenditures of approximately $197.5 million for environmental
protection facilities. Capital expenditures for this purpose are forecasted to
exceed $500.0 million for the years 2002 through 2006. In addition, the
Company's operating and maintenance expenditures for environmental protection
facilities were approximately $88.7 million in 2001. Expenditures for this
purpose for the years 2002 through 2006 are forecasted to approximate $520.0
million. The Company is also remediating environmental contamination resulting
from past industrial activity at certain of its sites. Expenditures for
remediation and environmental liabilities were $34.2 million in 2001, and are
estimated at $137.0 million for the years 2002 through 2006. These amounts do
not consider potential recoveries from insurers or other parties. The Company
has taken an active role in identifying and providing for these costs, and in
management's opinion, the liabilities for all environmental matters which are
probable and reasonably estimable have been accrued. Although it is not possible
to predict with certainty the outcome of these environmental matters, or the
ultimate costs of remediation, management does not believe that any reasonably
possible expenditures that may be incurred in excess of those provided should
result in a materially adverse effect on the Company's financial position,
results of operations, liquidity or capital resources.
Cautionary Factors that May Affect Future Results
(Cautionary Statements Under the Private Securities Litigation Reform Act of
1995)
This report and other written reports and oral statements made from
time to time by the Company may contain so-called "forward-looking statements,"
all of which are subject to risks and uncertainties. One can identify these
forward-looking statements by their use of words such as "expects," "plans,"
"will," "estimates," "forecasts," "projects" and other words of similar meaning.
One can also identify them by the fact that they do not relate strictly to
historical or current facts. These statements are likely to address the
Company's growth strategy, financial results, product approvals and development
programs, as well as the proposed initial public offering, and eventual
divestiture of our Medco subsidiary. One must carefully consider any such
statement and should understand that many factors could cause actual results to
differ from the Company's forward-looking statements. These factors include
inaccurate assumptions and a broad variety of other risks and uncertainties,
including some that are known and some that are not. No forward-looking
statement can be guaranteed and actual future results may vary materially.
Although it is not possible to predict or identify all such factors, they may
include the following:
. Generic competition as product patents for several products have recently
expired in the United States and other countries, including product patents
for Mevacor (U.S. - 2001), Prinivil and Prinzide (U.S. - 2001) and
Vaseretic (U.S. - 2001). In addition, the product patent for Prilosec,
which is supplied exclusively to AstraZeneca LP, also expired in 2001.
. Increased "brand" competition in therapeutic areas important to the
Company's long-term business performance.
. The difficulties and uncertainties inherent in new product development. The
outcome of the lengthy and complex process of new product development is
inherently uncertain. A candidate can fail at any stage of the process and
one or more late-stage product candidates could fail to receive regulatory
approval. New product candidates may appear promising in development but
fail to reach the market because of efficacy or safety concerns, the
inability to obtain necessary regulatory approvals, the difficulty or
excessive cost to manufacture and/or the infringement of patents or
intellectual property rights of others. Furthermore, the sales of new
products may prove to be disappointing and fail to reach anticipated
levels.
. Pricing pressures, both in the United States and abroad, including rules
and practices of managed care groups, judicial decisions and governmental
laws and regulations related to Medicare, Medicaid and health care reform,
pharmaceutical reimbursement and pricing in general.
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. Changes in government laws and regulations and the enforcement thereof
affecting the Company's pharmaceutical, vaccine and/or pharmaceutical
benefits management businesses.
. Efficacy or safety concerns with respect to marketed products, whether or
not scientifically justified, leading to product recalls, withdrawals or
declining sales.
. Legal factors, including product liability claims, antitrust litigation and
governmental investigations, environmental concerns and patent disputes
with branded and generic competitors, any of which could preclude
commercialization of products or negatively affect the profitability of
existing products.
. Lost market opportunity resulting from delays and uncertainties in the
approval process of the FDA and foreign regulatory authorities.
. Increased focus on privacy issues in countries around the world, including
the United States and the EU. In the United States, federal and state
governments have pursued legislative and regulatory initiatives regarding
patient privacy, including recently issued federal privacy regulations
concerning health information, which could affect the Company's operations,
particularly at Merck-Medco.
. Changes in tax laws including changes related to the taxation of foreign
earnings, as well as the impact of legislation capping and ultimately
repealing Section 936 of the Internal Revenue Code (relating to earnings
from the Company's Puerto Rican operations).
. Changes in accounting standards promulgated by the American Institute of
Certified Public Accountants, the Financial Accounting Standards Board or
the Securities and Exchange Commission that are adverse to the Company.
. The risk that the initial public offering of our Medco subsidiary may not
be completed due to economic and stock market conditions generally and
specifically as such conditions may impact the pharmacy benefit manager
industry. Additionally, if the initial public offering is completed, the
Company may not complete the divestiture of its remaining interest in Medco
due to, among other reasons, the failure to obtain an Internal Revenue
Service ruling that the divestiture to stockholders would be treated as a
tax free distribution, or the failure to meet other customary conditions.
. Economic factors over which the Company has no control, including changes
in inflation, interest rates and foreign currency exchange rates.
This list should not be considered an exhaustive statement of all
potential risks and uncertainties.
Geographic Area and Segment Information
The Company's operations outside the United States are conducted
primarily through subsidiaries. Sales of the Company's human health products by
subsidiaries outside the United States were 37% of the Company's human health
sales in 2001, and 36% and 40% in 2000 and 1999, respectively.
The Company's worldwide business is subject to risks of currency
fluctuations, governmental actions and other governmental proceedings abroad.
The Company does not regard these risks as a deterrent to further expansion of
its operations abroad. However, the Company closely reviews its methods of
operations and adopts strategies responsive to changing economic and political
conditions.
In recent years, the Company has been expanding its operations in
countries located in Latin America, the Middle East, Africa, Eastern Europe and
Asia Pacific where changes in government policies and economic conditions are
making it possible for the Company to earn fair returns. Business in these
developing areas, while sometimes less stable, offers important opportunities
for growth over time.
Financial information about geographic areas and operating segments of
the Company's business is incorporated by reference to page 37 of the Company's
2001 Annual Report to stockholders.
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Item 2. Properties.
The Company's corporate headquarters is located in Whitehouse Station,
New Jersey. The Company's pharmaceutical business is conducted through
divisional headquarters located in Rahway, New Jersey and West Point,
Pennsylvania. Principal research facilities for human health products are
located in Rahway and West Point. The Company also has production facilities for
human health products at nine locations in the United States and Puerto Rico.
Branch warehouses provide services throughout the country. Outside the United
States, through subsidiaries, the Company owns or has an interest in
manufacturing plants or other properties in Australia, Canada, countries in
Western Europe, Central and South America, Africa and Asia. Merck-Medco operates
its primary businesses through its headquarters located in Franklin Lakes, New
Jersey, and through owned or leased facilities in various locations throughout
the United States.
Capital expenditures for 2001 were $2,724.7 million compared with
$2,727.8 million for 2000. In the United States, these amounted to $2,128.6
million for 2001 and $2,139.6 million for 2000. Abroad, such expenditures
amounted to $596.1 million for 2001 and $588.2 million for 2000.
The Company and its subsidiaries own their principal facilities and
manufacturing plants under titles which they consider to be satisfactory. The
Company considers that its properties are in good operating condition and that
its machinery and equipment have been well maintained. Plants for the
manufacture of products are suitable for their intended purposes and have
capacities and projected capacities adequate for current and projected needs for
existing Company products. Some capacity of the plants is being converted, with
any needed modification, to the requirements of newly introduced and future
products.
Item 3. Legal Proceedings.
The Company, including Merck-Medco, 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 and Merck-Medco, respectively. A significant number of
other pharmaceutical companies and wholesalers have also been sued in the same
or similar litigation. These actions, except for several actions pending in
state courts, have been consolidated for pre-trial purposes in the United States
District Court for the Northern District of Illinois. 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. In October 2001, the Judicial Panel on Multi-District
Litigation ("Panel") determined that consolidated pretrial proceedings in
federal district court in Chicago were substantially completed. The Panel
ordered that all of the federal antitrust conspiracy cases, several of which
have not been settled by the Company, be returned to the federal district courts
in which each case was originally filed. The cases have now been returned to
those courts for further proceedings. The Company has not engaged in any
conspiracy and no admission of wrongdoing was made nor 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 materially
adverse effect on the financial position, liquidity or results of operations of
the Company.
In June 2001, the Company received a notice from the Federal Trade
Commission ("FTC") advising the Company that the FTC had closed its
investigation into pricing practices, which commenced in 1996. The Company has
been advised by the U.S. Department of Justice that it is investigating
marketing and selling activities of the Company and other pharmaceutical
manufacturers. The Company will be working with the government to respond
appropriately to informational requests.
In a continuing worldwide dispute between the Company and Pharmacia
Corporation ("Pharmacia") over competing claims to the patent rights to the
class of compounds that include rofecoxib, the active ingredient in Vioxx, the
federal district court in Washington, D.C. recently dismissed a Pharmacia claim
for damages for the Company's sale of Vioxx. Pharmacia may seek an appeal of
this decision. The Company has also received favorable decisions regarding the
patent status of Vioxx from courts in the United Kingdom, Holland and Spain,
while receiving no adverse decisions in any country. In addition, in February
2002, the Board of Appeal at the European Patent Office revoked, in its
entirety, the Pharmacia European patent that has been the basis of patent
infringement suits involving
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Vioxx in European countries. As a result, Merck will maintain exclusive patent
rights in Europe for Vioxx. The Company also noted that a number of federal and
state lawsuits, involving individual claims as well as purported class actions,
have been filed against the Company with respect to Vioxx. Some of the lawsuits
also name as defendants Pfizer Inc. and Pharmacia, which market a competing
product. The lawsuits include allegations regarding gastrointestinal bleeding
and cardiovascular events. The Company believes that these lawsuits are
completely without merit and will vigorously defend them.
From time to time, generic manufacturers of pharmaceutical products
file Abbreviated New Drug Applications ("ANDAs") with the FDA seeking to market
generic forms of Company products prior to the expiration of relevant patents
owned by the Company. Generic pharmaceutical manufacturers have submitted ANDAs
to the FDA seeking to market in the United States a generic form of Fosamax and
Prilosec prior to the expiration of the Company's (and AstraZeneca's in the case
of Prilosec) patents concerning these products. The generic companies' ANDAs
include allegations of non-infringement, invalidity and unenforceability of the
patents. One manufacturer has received FDA approval to market a generic form of
Prilosec. The Company has filed patent infringement suits in federal court
against companies filing ANDAs for generic alendronate, and AstraZeneca and the
Company have filed patent infringement suits in federal court against companies
filing ANDAs for generic omeprazole. In the case of alendronate, similar patent
challenges exist in certain foreign jurisdictions. The Company intends to
vigorously defend its patents, which it believes are valid, against infringement
by generic companies attempting to market products prior to the expiration dates
of such patents. A trial in the United States with respect to the alendronate
daily product concluded in November 2001 and the Company is awaiting a ruling;
no trial involving the alendronate weekly product is expected before 2003. In
the case of omeprazole, a trial in the United States commenced in December 2001.
As with any litigation, there can be no assurance of the outcomes, which, if
adverse, could result in significantly shortened periods of exclusivity for
these products.
The Company is a party to a number of proceedings brought under the
Comprehensive Environmental Response, Compensation and Liability Act, commonly
known as Superfund. These proceedings seek to require the operators of hazardous
waste disposal facilities, transporters of waste to the sites and generators of
hazardous waste disposed of at the sites to clean up the sites or to reimburse
the government for cleanup costs. The Company has been made a party to these
proceedings as an alleged generator of waste disposed of at the sites. In each
case, the government alleges that the defendants are jointly and severally
liable for the cleanup costs. Although joint and several liability is alleged,
these proceedings are frequently resolved so that the allocation of cleanup
costs among the parties more nearly reflects the relative contributions of the
parties to the site situation. The Company's potential liability varies greatly
from site to site. For some sites the potential liability is de minimis and for
others the costs of cleanup have not yet been determined. While it is not
feasible to predict the outcome of many of these proceedings brought by federal
or state agencies or private litigants, in the opinion of the Company, such
proceedings should not ultimately result in any liability which would have a
materially adverse effect on the financial position, results of operations,
liquidity or capital resources of the Company. The Company has taken an active
role in identifying and providing for these costs and such amounts do not
include any reduction for anticipated recoveries of cleanup costs from insurers,
former site owners or operators or other recalcitrant potentially responsible
parties.
There are various other legal proceedings, principally product
liability and intellectual property suits involving the Company, which are
pending. While it is not feasible to predict the outcome of these proceedings,
in the opinion of the Company, all such proceedings are either adequately
covered by insurance or, if not so covered, should not ultimately result in any
liability which would have a materially adverse effect on the financial
position, liquidity or results of operations of the Company.
Merck-Medco
- -----------
Seven plaintiffs, from six pharmaceutical benefit plans for which
Merck-Medco is the pharmaceutical benefit manager, have sued Merck-Medco and the
Company in federal court. The suits, which are similar to claims against other
pharmaceutical benefit managers in other pending cases, allege that Merck-Medco
should be treated as a "fiduciary" under the provisions of the Employee
Retirement Income Security Act ("ERISA"). Plaintiffs have not yet formally
sought class-action status.
The amended complaints in the lawsuits also allege that the Company and
Merck-Medco have violated ERISA by using Merck-Medco to increase the Company's
market share and by entering into certain "prohibited transactions" with each
other that favor the Company's products. The plaintiffs have demanded that
Merck-Medco
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and the Company turn over any unlawfully obtained profits to a trust to be set
up for the benefit plans. A motion for summary judgment filed by Merck-Medco
has been withdrawn for procedural reasons without prejudice to being refiled.
In addition, a complaint against Merck-Medco and the Company has
recently been filed by one Northwest Airlines plan participant, purportedly on
behalf of the plan and similarly-situated self-funded plans. Class action status
has not yet been sought, and Northwest Airlines is not a party to the lawsuit.
The complaint relies on many of the same theories as the litigation discussed
above.
Merck-Medco and the Company believe that these cases are without merit,
Merck-Medco is not a "fiduciary" within the meaning of ERISA and the Company has
not violated ERISA. Merck-Medco and the Company intend to vigorously defend
these claims.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
_________________
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Executive Officers of the Registrant (as of March 15, 2002)
RAYMOND V. GILMARTIN -- Age 61
June, 1994 -- Chairman of the Board (since November, 1994), President
and Chief Executive Officer
DAVID W. ANSTICE -- Age 53
March, 2001 -- President, The Americas and U.S. Human Health --
responsible for one of the two prescription drug divisions comprising
U.S. Human Health, as well as the Company's prescription drug business
in Canada and Latin America, and the Company's joint venture
relationship with Schering-Plough
January, 1997 -- President, Human Health-The Americas -- responsible for
the Company's human health business in the United States, Canada and
Latin America
PAUL R. BELL -- Age 56
April, 1997 -- President, Human Health-Asia Pacific -- responsible for
the Company's prescription drug business in the Far East, Australia,
New Zealand and Japan
March, 1994 -- Vice President, Merck Sharp & Dohme Australia and New
Zealand
RICHARD T. CLARK -- Age 56
January, 2000 -- President, Merck-Medco Managed Care, L.L.C.
(Merck-Medco), a wholly-owned subsidiary of the Company
June, 1997 -- Executive Vice President/Chief Operating Officer,
Merck-Medco
April, 1997 -- Senior Vice President, Quality and Commercial Affairs,
Merck Manufacturing Division (MMD)
May, 1996 -- Senior Vice President, North American Operations, MMD
CELIA A. COLBERT -- Age 45
January, 1997 -- Vice President, Secretary (since September, 1993) and
Assistant General Counsel (since November, 1993)
CAROLINE DORSA -- Age 42
September, 1999 -- Vice President and Treasurer -- responsible for the
Company's treasury and tax functions and for providing financial
support for the Asia Pacific Division
February, 1999 -- Vice President and Treasurer -- responsible for the
Company's treasury and tax functions
January, 1997 -- Vice President and Treasurer (since January, 1994)
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KENNETH C. FRAZIER -- Age 47
December, 1999 -- Senior Vice President and General Counsel --
responsible for legal and public affairs functions and The Merck
Company Foundation (a not-for-profit charitable organization affiliated
with the Company)
January, 1999 -- Vice President and Deputy General Counsel
January, 1997 -- Vice President, Public Affairs (since April, 1994) and
Assistant General Counsel -- responsible for public affairs, corporate
legal activities and The Merck Company Foundation
DOUGLAS A. GREENE -- Age 57
May, 2000 -- Executive Vice President, Clinical Sciences and Product
Development, Merck Research Laboratories
Prior to May, 2000, Dr. Greene served as Chief, Division of
Endocrinology & Metabolism at the University of Michigan School of
Medicine since 1991 and as Director, Center for Clinical Investigation
and Therapeutics since 1998
RICHARD C. HENRIQUES JR. -- Age 46
November, 2000 -- Vice President, Controller -- responsible for the
Corporate Controller's Group and providing financial
support for U.S. Human Health, Canada and Latin America (The Americas)
and the Merck Vaccine Division
February, 1999 -- Vice President, Controller -- responsible for the
Corporate Controller's Group and providing financial support for The
Americas
January, 1998 -- Vice President & Controller, The Americas
January, 1997 -- Controller, The Americas
BERNARD J. KELLEY -- Age 60
December, 1993 -- President, Merck Manufacturing Division
PETER S. KIM -- Age 43
February, 2001 -- Executive Vice President, Research and Development,
Merck Research Laboratories
Prior to February, 2001, Dr. Kim served as Member of the Whitehead
Institute (1985 - 2001), Professor of Biology at the Massachusetts
Institute of Technology (1988 - 2001), and Investigator of the Howard
Hughes Medical Institute (1990 - 2001)
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JUDY C. LEWENT -- Age 53
February, 2001 -- Executive Vice President and Chief Financial Officer
-- responsible for financial and corporate development functions,
internal auditing, corporate licensing, the Company's joint venture
relationships, and Merck Capital Ventures, LLC, a wholly-owned
subsidiary of the Company
November, 2000 -- Senior Vice President and Chief Financial Officer --
responsible for financial and corporate development functions, internal
auditing, corporate licensing, the Company's joint venture
relationships, and Merck Capital Ventures, LLC
January, 1997 -- Senior Vice President (since January, 1993) and Chief
Financial Officer (since April, 1990) -- responsible for financial and
corporate development functions, internal auditing and the Company's
joint venture relationships
ADEL MAHMOUD -- Age 60
May, 1999 -- President, Merck Vaccines
November, 1998 -- Executive Vice President, Merck Vaccines
Prior to November, 1998, Dr. Mahmoud was the John H. Hord Professor and
Chairman, Department of Medicine and Physician-in-Chief, Case Western
Reserve University and University Hospitals of Cleveland (1987-1998)
EDWARD M. SCOLNICK -- Age 61
December, 1999 -- Executive Vice President, Science and Technology and
President, Merck Research Laboratories (MRL) -- responsible for
worldwide research function, computer resources and corporate licensing
September, 1994 -- Executive Vice President (since January, 1993),
Science and Technology and President, MRL (since May, 1985) --
responsible for worldwide research function and activities of Merck
Manufacturing Division (since December, 1993), computer resources
(since January, 1993) and corporate licensing
BRADLEY T. SHEARES -- Age 45
March, 2001 -- President, U.S. Human Health -- responsible for one of
the two prescription drug divisions comprising U.S. Human Health (USHH)
July, 1998 -- Vice President, Hospital Marketing and Sales, USHH
May, 1996 -- Vice President, Anti-Infectives Therapeutic Business Group,
USHH
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JOAN E. WAINWRIGHT -- Age 41
January, 2001 -- Vice President, Public Affairs
June, 2000 -- Vice President, Corporate Communications, Public Affairs
Prior to June, 2000, Ms. Wainwright was Deputy Commissioner for
Communications at the U.S. Social Security Administration (1994 - 2000)
PER WOLD-OLSEN -- Age 54
January, 1997 -- President, Human Health-Europe, Middle East & Africa --
responsible for the Company's prescription drug business in Europe, the
Middle East and Africa and worldwide human health marketing
September, 1994 -- President, Human Health-Europe -- responsible for the
Company's European prescription drug business
WENDY L. YARNO -- Age 47
December, 1999 -- Senior Vice President, Human Resources
June, 1999 -- Vice President, Human Resources
January, 1999 -- Vice President, Worldwide Human Health Marketing
November, 1997 to January, 1999, Ms. Yarno was Vice President, Women's
Health Care, Johnson & Johnson, Ortho-McNeil Pharmaceutical
(manufacturer of pharmaceuticals)
January, 1995 to November, 1997 -- Vice President, Hypertension and
Heart Failure Therapeutic Business Group, U.S. Human Health
All officers listed above serve at the pleasure of the Board of
Directors. None of these officers was elected pursuant to any arrangement or
understanding between the officer and the Board. There are no family
relationships among the officers listed above.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
The information required for this item is incorporated by reference
to pages 23 and 40 of the Company's 2001 Annual Report to stockholders.
Item 6. Selected Financial Data.
The information required for this item is incorporated by reference
to the data for the last five fiscal years of the Company included under Results
for Year and Year-End Position in the Selected Financial Data table on page 40
of the Company's 2001 Annual Report to stockholders.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The information required for this item is incorporated by reference
to pages 13 through 23 of the Company's 2001 Annual Report to stockholders.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information required for this item is incorporated by reference
to pages 20 (under the caption "Analysis of Liquidity and Capital Resources") to
22 of the Company's 2001 Annual Report to stockholders.
Item 8. Financial Statements and Supplementary Data.
(a) Financial Statements
The consolidated balance sheet of Merck & Co., Inc. and subsidiaries
as of December 31, 2001 and 2000, and the related consolidated statements of
income, retained earnings, comprehensive income and cash flows for each of the
three years in the period ended December 31, 2001 and the report dated January
22, 2002 of Arthur Andersen LLP, independent public accountants, are
incorporated by reference to pages 24 through 37 and page 38, respectively, of
the Company's 2001 Annual Report to stockholders.
(b) Supplementary Data
Selected quarterly financial data for 2001 and 2000 are incorporated
by reference to the data contained in the Condensed Interim Financial Data table
on page 23 of the Company's 2001 Annual Report to stockholders.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
On February 26, 2002, the Board of Directors of the Company and its
Audit Committee dismissed Arthur Andersen LLP ("Arthur Andersen" or "AA") as the
Company's independent public accountants and engaged PricewaterhouseCoopers LLP
("PwC") to serve as the Company's independent public accountants for the fiscal
year 2002. The appointment of PwC is subject to stockholder ratification at the
Company's 2002 Annual Meeting of Stockholders to be held in April.
Arthur Andersen's reports on the Company's consolidated financial
statements for each of the years ended 2001, 2000 and 1999 did not contain an
adverse opinion or disclaimer of opinion, nor were they qualified or modified as
to uncertainty, audit scope or accounting principles.
During the years ended December 31, 2001, 2000 and 1999 and through
March 21, 2002, there were no disagreements with Arthur Andersen on any matter
of accounting principle or practice, financial statement disclosure, or auditing
scope or procedure which, if not resolved to AA's satisfaction, would have
caused them to make reference to the subject matter in connection with their
report on the Company's consolidated financial statements for such years; and
there were no reportable events as defined in Item 304(a)(1)(v) of Regulation
S-K.
The Company provided Arthur Andersen with a copy of the foregoing
disclosures. Attached as Exhibit 16 is a copy of AA's letter, dated March 21,
2002, stating its agreement with such statements.
During the years ended December 31, 2001 and 2000 and through the
date of the Board's decision, the Company did not consult PwC with respect to
the application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
the Company's consolidated financial statements, or any other matters or
reportable events as set forth in Items 304(a)(2)(i)and (ii) of Regulation S-K.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The required information on directors and nominees is incorporated by
reference to pages 7 (beginning with the caption "Election of Directors")
through 10 of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held April 23, 2002. Information on executive officers is set
forth in Part I of this document on pages 14 through 17. The required
information on compliance with Section 16(a) of the Securities Exchange Act of
1934 is incorporated by reference to page 30 (under the caption "Section 16(a)
Beneficial Ownership Reporting Compliance") of the Company's Proxy Statement for
the Annual Meeting of Stockholders to be held April 23, 2002.
Item 11. Executive Compensation.
The information required for this item is incorporated by reference
to page 13 (under the caption "Compensation of Directors"), and pages 15
(beginning with the caption "Compensation and Benefits Committee
18
<PAGE>
Report on Executive Compensation") to 22 of the Company's Proxy Statement for
the Annual Meeting of Stockholders to be held April 23, 2002.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required for this item is incorporated by reference
to pages 14 (under the caption "Security Ownership of Directors and Executive
Officers") to 15 of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held April 23, 2002.
Item 13. Certain Relationships and Related Transactions.
The information required for this item is incorporated by reference
to page 13 (under the caption "Relationships with Outside Firms") and pages 22
(under the caption "Indebtedness of Management") to 23 of the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held April 23, 2002.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed as part of this Form 10-K
1. Financial Statements
The following consolidated financial statements and report of
independent public accountants are incorporated herein by
reference to the Company's 2001 Annual Report to stockholders,
as noted on page 18 of this document:
Consolidated statement of income for the years ended December
31, 2001, 2000 and 1999
Consolidated statement of retained earnings for the years ended
December 31, 2001, 2000 and 1999
Consolidated statement of comprehensive income for the years
ended December 31, 2001, 2000 and 1999
Consolidated balance sheet as of December 31, 2001 and 2000
Consolidated statement of cash flows for the years ended
December 31, 2001, 2000 and 1999
Notes to consolidated financial statements
Report of independent public accountants
2. Financial Statement Schedules
Schedules are omitted because they are either not required or
not applicable.
Financial statements of affiliates carried on the equity basis have been
omitted because, considered individually or in the aggregate, such affiliates do
not constitute a significant subsidiary.
3. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description Method of Filing
------ ----------- ---------------
<S> <C> <C>
2.1 -- Master Restructuring Agreement dated as of *
June 19, 1998 between Astra AB, Merck & Co.,
Inc., Astra Merck Inc., Astra USA, Inc.,
KB USA, L.P., Astra Merck Enterprises, Inc.,
KBI Sub Inc., Merck Holdings, Inc. and Astra
Pharmaceuticals, L.P. (Portions of this Exhibit
are subject to a request for confidential
treatment filed with the Commission)
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Method of Filing
------ ----------- ----------------
<S> <C> <C>
3(a) -- Restated Certificate of Incorporation of Incorporated by reference to
Merck & Co., Inc. (September 1, 2000) Form 10-Q Quarterly Report
for the period ended
September 30, 2000
3(b) -- By-Laws of Merck & Co., Inc. (as amended Incorporated by reference to
effective February 25, 1997) Form 10-Q Quarterly Report
for the period ended
March 31, 1997
10(a) -- Executive Incentive Plan (as amended Incorporated by reference to
effective February 27, 1996) Form 10-K Annual Report
for the fiscal year ended
December 31, 1995
10(b) -- Base Salary Deferral Plan (as adopted on Incorporated by reference to
October 22, 1996, effective January 1, Form 10-K Annual Report
1997) for the fiscal year ended
December 31, 1996
10(c) -- 1991 Incentive Stock Plan (as amended Incorporated by reference to
effective February 23, 1994) Form 10-K Annual Report
for the fiscal year ended
December 31, 1994
10(d) -- 1996 Incentive Stock Plan (as amended Incorporated by reference to
November 24, 1998) Form 10-Q Quarterly Report
for the period ended
June 30, 1999
10(e) -- 2001 Incentive Stock Plan (as amended Filed with this document
and restated February 26, 2002)
10(f) -- Non-Employee Directors Stock Option Plan Incorporated by reference to
(as amended and restated February 24, 1998) Form 10-K Annual Report
for the fiscal year ended
December 31, 1997
10(g) -- 1996 Non-Employee Directors Stock Option Plan Incorporated by reference to
(as amended April 27, 1999) Form 10-Q Quarterly Report
for the period ended
June 30, 1999
10(h) -- 2001 Non-Employee Directors Stock Option Plan Incorporated by reference to
(adopted April 24, 2001) Form 10-Q Quarterly Report
for the period ended
June 30, 2001
10(i) -- Supplemental Retirement Plan (as amended Incorporated by reference to
effective January 1, 1995) Form 10-K Annual Report
for the fiscal year ended
December 31, 1994
10(j) -- Retirement Plan for the Directors of Incorporated by reference to
Merck & Co., Inc. (amended and Form 10-Q Quarterly Report
restated June 21, 1996) for the period ended
June 30, 1996
10(k) -- Plan for Deferred Payment of Directors' Filed with this document
Compensation (amended and restated
as of January 1, 2002)
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Method of Filing
------ ----------- ----------------
<S> <C> <C>
10(l) -- Limited Liability Company Agreement of Incorporated by reference to
Merck Capital Ventures, LLC (Dated as of Form 10-K Annual Report
November 27, 2000) for the fiscal year ended
December 31, 2000
10(m) -- Amended and Restated License and Option *
Agreement dated as of July 1, 1998 between
Astra AB and Astra Merck Inc.
10(n) -- KBI Shares Option Agreement dated as of *
July 1, 1998 by and among Astra AB,
Merck & Co., Inc. and Merck Holdings, Inc.
10(o) -- KBI-E Asset Option Agreement dated as of *
July 1, 1998 by and among Astra AB,
Merck & Co., Inc., Astra Merck Inc. and
Astra Merck Enterprises Inc.
10(p) -- KBI Supply Agreement dated as of *
July 1, 1998 between Astra Merck Inc. and
Astra Pharmaceuticals, L.P. (Portions of this
Exhibit are subject to a request for confidential
treatment filed with the Commission)
10(q) -- Second Amended and Restated Manufacturing *
Agreement dated as of July 1, 1998 among
Merck & Co., Inc., Astra AB, Astra Merck Inc.
and Astra USA, Inc.
10(r) -- Limited Partnership Agreement dated as of *
July 1, 1998 between KB USA, L.P. and
KBI Sub Inc.
10(s) -- Distribution Agreement dated as of July 1, 1998 *
between Astra Merck Enterprises Inc. and
Astra Pharmaceuticals, L.P.
10(t) -- Agreement to Incorporate Defined Terms dated *
as of June 19, 1998 between Astra AB, Merck
& Co., Inc., Astra Merck Inc., Astra USA, Inc.,
KB USA, L.P., Astra Merck Enterprises Inc.,
KBI Sub Inc., Merck Holdings, Inc. and Astra
Pharmaceuticals, L.P.
12 -- Computation of Ratios of Earnings to Fixed Filed with this document
Charges
13 -- 2001 Annual Report to stockholders (only Filed with this document
those portions incorporated by reference in
this document are deemed "filed")
16 -- Letter from Arthur Andersen LLP Incorporated by reference to
to the Securities and Exchange Commission Form 8-K/A Amendment No.1 to
dated March 21, 2002 Current Report on Form 8-K
dated March 21, 2002
21 -- List of subsidiaries Filed with this document
23 -- Consent of Independent Public Accountants Contained on page 24 of
this Report
24 -- Power of Attorney and Certified Resolution Filed with this document
of Board of Directors
99 -- Letter from Registrant to the Filed with this document
Securities and Exchange
Commission relating to
Arthur Anderson LLP
</TABLE>
- -------------------------
* Incorporated by reference to Form 10-Q Quarterly Report for the
period ended June 30, 1998
21
<PAGE>
None of the instruments defining the rights of holders of long-term
debt of the Company and its subsidiaries (Exhibit Number 4) are being filed
since the total amount of securities authorized under any of such instruments
taken individually does not exceed 10% of the total assets of the Company and
its subsidiaries on a consolidated basis. The Company agrees to furnish a copy
of such instruments to the Commission upon request.
Copies of the exhibits may be obtained by stockholders upon written
request directed to the Stockholder Services Department, Merck & Co., Inc., P.O.
Box 100--WS 3AB-40, Whitehouse Station, New Jersey 08889-0100 accompanied by
check in the amount of $5.00 payable to Merck & Co., Inc. to cover processing
and mailing costs.
(b) Reports on Form 8-K
During the three-month period ended December 31, 2001, the Company
furnished three Current Reports on Form 8-K under Item 9 -- Regulation FD
Disclosure:
(1) Report dated and furnished October 18, 2001, regarding earnings
for third quarter and certain supplemental information.
(2) Report dated and furnished October 24, 2001, regarding an
updated presentation to investors.
(3) Report dated December 11, 2001 and furnished December 12, 2001,
regarding the Company's business briefing to analysts.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MERCK & CO., INC.
Dated: March 21, 2002
By RAYMOND V. GILMARTIN
(Chairman of the Board,
President and Chief Executive Officer)
By CELIA A. COLBERT
Celia A. Colbert
(Attorney-in-Fact)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
RAYMOND V. GILMARTIN Chairman of the Board, March 21, 2002
President and Chief Executive
Officer; Principal Executive
Officer; Director
JUDY C. LEWENT Executive Vice President and Chief March 21, 2002
Financial Officer; Principal
Financial Officer
RICHARD C. HENRIQUES JR. Vice President, Controller; March 21, 2002
Principal Accounting Officer
LAWRENCE A. BOSSIDY Director March 21, 2002
WILLIAM G. BOWEN Director March 21, 2002
JOHNNETTA B. COLE Director March 21, 2002
NIALL FITZGERALD Director March 21, 2002
WILLIAM N. KELLEY Director March 21, 2002
HEIDI G. MILLER Director March 21, 2002
EDWARD M. SCOLNICK Director March 21, 2002
THOMAS E. SHENK Director March 21, 2002
SAMUEL O. THIER Director March 21, 2002
</TABLE>
Celia A. Colbert, by signing her name hereto, does hereby sign this
document pursuant to powers of attorney duly executed by the persons named,
filed with the Securities and Exchange Commission as an exhibit to this
document, on behalf of such persons, all in the capacities and on the date
stated, such persons including a majority of the directors of the Company.
By CELIA A. COLBERT
Celia A. Colbert
(Attorney-in-Fact)
23
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference in this Form 10-K of our report dated January 22,
2002 included in the Company's Annual Report to stockholders for the fiscal year
ended December 31, 2001, into the Company's previously filed Registration
Statements on Form S-8 (Nos. 33-21087, 33-21088, 33-36101, 33-40177, 33-51235,
33-53463, 33-64273, 33-64665, 333-23293, 333-23295, 333-91769, 333-30526,
333-31762, 333-40282, 333-52264, 333-53246, 333-56696, 333-72206 and 333-65796),
on Form S-4 (Nos. 33-50667 and 333-61982) and on Form S-3 (Nos. 33-39349,
33-60322, 33-51785, 33-57421, 333-17045, 333-36383, 333-77569 and 333-72546). It
should be noted that we have not audited any financial statements of the Company
subsequent to December 31, 2001 or performed any audit procedures subsequent to
the date of our report.
ARTHUR ANDERSEN LLP
New York, New York
March 21, 2002
24
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit
Number Description Method of Filing
- ------ ----------- ----------------
<S> <C> <C>
2.1 -- Master Restructuring Agreement dated as of *
June 19, 1998 between Astra AB, Merck & Co.,
Inc., Astra Merck Inc., Astra USA, Inc.,
KB USA, L.P., Astra Merck Enterprises, Inc.,
KBI Sub Inc., Merck Holdings, Inc. and Astra
Pharmaceuticals, L.P. (Portions of this Exhibit
are subject to a request for confidential
treatment filed with the Commission)
3(a) -- Restated Certificate of Incorporation of Incorporated by reference to
Merck & Co., Inc. (September 1, 2000) Form 10-Q Quarterly Report
for the period ended
September 30, 2000
3(b) -- By-Laws of Merck & Co., Inc. (as amended Incorporated by reference to
effective February 25, 1997) Form 10-Q Quarterly Report
for the period ended
March 31, 1997
10(a) -- Executive Incentive Plan (as amended Incorporated by reference to
effective February 27, 1996) Form 10-K Annual Report
for the fiscal year ended
December 31, 1995
10(b) -- Base Salary Deferral Plan (as adopted on Incorporated by reference to
October 22, 1996, effective January 1, Form 10-K Annual Report
1997) for the fiscal year ended
December 31, 1996
10(c) -- 1991 Incentive Stock Plan (as amended Incorporated by reference to
effective February 23, 1994) Form 10-K Annual Report
for the fiscal year ended
December 31, 1994
10(d) -- 1996 Incentive Stock Plan (as amended Incorporated by reference to
November 24, 1998) Form 10-Q Quarterly Report
for the period ended
June 30, 1999
10(e) -- 2001 Incentive Stock Plan (as amended Filed with this document
and restated February 26, 2002)
10(f) -- Non-Employee Directors Stock Option Plan Incorporated by reference to
(as amended and restated February 24, 1998) Form 10-K Annual Report
for the fiscal year ended
December 31, 1997
10(g) -- 1996 Non-Employee Directors Stock Option Plan Incorporated by reference to
(as amended April 27, 1999) Form 10-Q Quarterly Report
for the period ended
June 30, 1999
10(h) -- 2001 Non-Employee Directors Stock Option Plan Incorporated by reference to
(adopted April 24, 2001) Form 10-Q Quarterly Report
for the period ended
June 30, 2001
10(i) -- Supplemental Retirement Plan (as amended Incorporated by reference to
effective January 1, 1995) Form 10-K Annual Report
for the fiscal year ended
December 31, 1994
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Method of Filing
- ------ ----------- ----------------
<S> <C> <C>
10(j) -- Retirement Plan for the Directors of Incorporated by reference to
Merck & Co., Inc. (amended and Form 10-Q Quarterly Report
restated June 21, 1996) for the period ended
June 30, 1996
10(k) -- Plan for Deferred Payment of Directors' Filed with this document
Compensation (amended and restated
as of January 1, 2002)
10(l) -- Limited Liability Company Agreement of Incorporated by reference to
Merck Capital Ventures, LLC (Dated as of Form 10-K Annual Report
November 27, 2000) for the fiscal year ended
December 31, 2000
10(m) -- Amended and Restated License and Option *
Agreement dated as of July 1, 1998 between
Astra AB and Astra Merck Inc.
10(n) -- KBI Shares Option Agreement dated as of *
July 1, 1998 by and among Astra AB,
Merck & Co., Inc. and Merck Holdings, Inc.
10(o) -- KBI-E Asset Option Agreement dated as of *
July 1, 1998 by and among Astra AB,
Merck & Co., Inc., Astra Merck Inc. and
Astra Merck Enterprises Inc.
10(p) -- KBI Supply Agreement dated as of *
July 1, 1998 between Astra Merck Inc. and
Astra Pharmaceuticals, L.P. (Portions of this
Exhibit are subject to a request for confidential
treatment filed with the Commission)
10(q) -- Second Amended and Restated Manufacturing *
Agreement dated as of July 1, 1998 among
Merck & Co., Inc., Astra AB, Astra Merck Inc.
and Astra USA, Inc.
10(r) -- Limited Partnership Agreement dated as of *
July 1, 1998 between KB USA, L.P. and
KBI Sub Inc.
10(s) -- Distribution Agreement dated as of July 1, 1998 *
between Astra Merck Enterprises Inc. and
Astra Pharmaceuticals, L.P.
10(t) -- Agreement to Incorporate Defined Terms dated *
as of June 19, 1998 between Astra AB, Merck
& Co., Inc., Astra Merck Inc., Astra USA, Inc.,
KB USA, L.P., Astra Merck Enterprises Inc.,
KBI Sub Inc., Merck Holdings, Inc. and Astra
Pharmaceuticals, L.P.
12 -- Computation of Ratios of Earnings to Fixed Filed with this document
Charges
13 -- 2001 Annual Report to stockholders (only Filed with this document
those portions incorporated by reference in
this document are deemed "filed")
16 -- Letter from Arthur Andersen LLP Incorporated by reference to
to the Securities and Exchange Commission Form 8-K/A Amendment No. 1 to
dated March 21, 2002 Current Report on Form 8-K
dated March 21, 2002
21 -- List of subsidiaries Filed with this document
23 -- Consent of Independent Public Accountants Contained on page 24 of
this Report
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Method of Filing
------ ----------- ----------------
<S> <C> <C>
24 -- Power of Attorney and Certified Resolution Filed with this document
of Board of Directors
99 -- Letter from Registrant to the Filed with this document
Securities and Exchange
Commission relating to
Arthur Andersen LLP
</TABLE>
- ----------------
* Incorporated by reference to Form 10-Q Quarterly Report for the period
ended June 30, 1998
None of the instruments defining the rights of holders of long-term
debt of the Company and its subsidiaries (Exhibit Number 4) are being filed
since the total amount of securities authorized under any of such instruments
taken individually does not exceed 10% of the total assets of the Company and
its subsidiaries on a consolidated basis. The Company agrees to furnish a copy
of such instruments to the Commission upon request.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.(E)
<SEQUENCE>3
<FILENAME>dex10e.txt
<DESCRIPTION>2001 INCENTIVE STOCK PLAN
<TEXT>
<PAGE>
================================================================================
Exhibit 10(e)
MERCK & CO., INC.
2001 INCENTIVE STOCK PLAN
(amended and restated
February 26, 2002)
================================================================================
<PAGE>
2001 INCENTIVE STOCK PLAN
The 2001 Incentive Stock Plan ("ISP"), effective January 1, 2001, is
established to encourage employees of Merck & Co., Inc. (the "Company"), its
subsidiaries, its affiliates and its joint ventures to acquire Common Stock in
the Company ("Common Stock"). It is believed that the ISP will stimulate
employees' efforts on the Company's behalf, will tend to maintain and strengthen
their desire to remain with the Company, will be in the interest of the Company
and its Stockholders and will encourage such employees to have a greater
personal financial investment in the Company through ownership of its Common
Stock.
1. Incentives
Incentives under the ISP may be granted in any one or a combination of (a)
Incentive Stock Options (or other statutory stock options); (b) Nonqualified
Stock Options; (c) Stock Appreciation Rights; (d) Restricted Stock Grants and
(e) Performance Shares (collectively "Incentives"). All Incentives shall be
subject to the terms and conditions set forth herein and to such other terms and
conditions as may be established by the Compensation and Benefits Committee of
the Board of Directors (the "Committee").
2. Eligibility
Regular full-time and part-time employees of the Company, its subsidiaries,
its affiliates and its joint ventures, including officers, whether or not
directors of the Company, and employees of a joint venture partner or affiliate
of the Company who provide services to the joint venture with such partner or
affiliate, shall be eligible to participate in the ISP ("Eligible Employees") if
designated by the Committee. Directors of the Company who are not regular
employees are not eligible to participate in the ISP.
3. Administration
The ISP shall be administered by the Committee. The Committee shall be
responsible for the administration of the ISP including, without limitation,
determining which Eligible Employees receive Incentives, what kind of Incentives
are made under the ISP and for what number of shares, and the other terms and
conditions of such Incentives. Determinations by the Committee under the ISP
including, without limitation, determinations of the Eligible Employees, the
form, amount and timing of Incentives, the terms and provisions of Incentives
and the agreements evidencing Incentives, need not be uniform and may be made
selectively among Eligible Employees who receive, or are eligible to receive,
Incentives hereunder, whether or not such Eligible Employees are similarly
situated.
The Committee shall have the responsibility of construing and interpreting
the ISP and of establishing and amending such rules and regulations as it may
deem necessary or desirable for the proper administration of the ISP. Any
decision or action taken or to be taken by the Committee, arising out of or in
connection with the construction, administration, interpretation and effect of
the ISP and of its rules and regulations, shall, to the maximum extent permitted
by applicable law, be within its absolute discretion (except as otherwise
specifically provided herein) and shall be conclusive and binding upon the
Company, all Eligible Employees and any person claiming under or through any
Eligible Employee.
<PAGE>
The Committee may delegate some or all of its power and authority hereunder
to the Chief Executive Officer or other senior member of management as the
Committee deems appropriate; provided, however, that the Committee may not
delegate its authority with regard to any matter or action affecting an officer
subject to Section 16 of the Securities Exchange Act of 1934.
For the purpose of this section and all subsequent sections, the ISP shall
be deemed to include this plan and any comparable sub-plans established by
subsidiaries which, in the aggregate, shall constitute one plan governed by the
terms set forth herein.
4. Shares Available for Incentives
(a) Shares Subject to Issuance or Transfer. Subject to adjustment as
provided in Section 4(c) hereof, there is hereby reserved for issuance under the
ISP 95 million shares of Common Stock. The shares available for granting awards
shall be increased by the number of shares as to which options or other benefits
granted under the ISP have lapsed, expired, terminated or been canceled. In
addition, any shares reserved for issuance under the Company's 1996 Incentive
Stock Plan and 1991 Incentive Stock Plan ("Prior Plans") in excess of the number
of shares as to which options or other benefits have been awarded thereunder,
plus any such shares as to which options or other benefits granted under the
Prior Plans may lapse, expire, terminate or be canceled, shall also be reserved
and available for issuance or reissuance under the ISP. Shares under this ISP
may be delivered by the Company from its authorized but unissued shares of
Common Stock or from Common Stock held in the Treasury.
(b) Limit on an Individual's Incentives. In any given year, no Eligible
Employee may receive Incentives covering more than three (3) million shares of
the Company's Common Stock (such number of shares shall be adjusted in
accordance with Section 4(c)).
(c) Adjustment of Shares. In the event of a reorganization,
recapitalization, stock split, stock dividend, combination of shares, merger,
consolidation, rights offering, spin off, split off, split up or other event
identified by the Committee, the Committee shall make such adjustments, if any,
as it may deem appropriate in (i) the number and kind of shares authorized for
issuance under the ISP, (ii) the number and kind of shares subject to
outstanding Incentives, (iii) the option price of Stock Options and (iv) the
fair market value of stock appreciation rights, provided that fractions of a
share will be rounded down to the nearest whole share.
5. Stock Options
The Committee may grant options qualifying as Incentive Stock Options under
the Internal Revenue Code of 1986, as amended, or any successor code thereto
(the "Code"), other statutory options under the Code and Nonqualified Options
(collectively "Stock Options"). Such Stock Options shall be subject to the
following terms and conditions and such other terms and conditions as the
Committee may prescribe:
(a) Option Price. The option price per share with respect to each
Stock Option shall be determined by the Committee, but shall not be less
than 100% of the fair market value of the Common Stock on the date the
Stock Option is granted, as determined by the Committee.
(b) Period of Option. The period of each Stock Option shall be fixed
by the Committee, but shall not exceed ten (10) years.
2
<PAGE>
(c) Payment. No shares shall be issued until full payment of the
option price has been made. The option prices may be paid in cash or, if
the Committee determines, in shares of Common Stock or a combination of
cash and shares. If the Committee approves the use of shares of Common
Stock as a payment method, the Committee shall establish such conditions as
it deems appropriate for the use of Common Stock to exercise a stock
option. Stock options awarded under the ISP shall be exercised through the
Company's broker-assisted stock option exercise program, provided such
program is available at the time of the option exercise, or by such other
means as the Committee may determine from time to time. The Committee may
establish rules and procedures to permit an optionholder to defer
recognition of gain upon the exercise of a stock option.
(d) Exercise of Option. The Committee shall determine how and when
shares covered by a Stock Option may be purchased. The Committee may
establish waiting periods, the dates on which options become exercisable or
"vested" and exercise periods, provided that in no event (including those
specified in paragraphs (e), (f) and (g) of this section) shall any Stock
Option be exercisable after its specified expiration period.
(e) Termination of Employment. Upon the termination of a Stock Option
grantee's employment (for any reason other than retirement, death or
termination for deliberate, willful or gross misconduct), Stock Option
privileges shall be limited to the shares which were immediately
exercisable at the date of such termination. The Committee, however, in its
discretion, may provide that any Stock Options outstanding but not yet
exercisable upon the termination of a Stock Option grantee's employment may
become exercisable in accordance with a schedule as may be determined by
the Committee. Such Stock Option privileges shall expire unless exercised
or surrendered under a Stock Appreciation Right within such period of time
after the date of termination of employment as may be established by the
Committee, but in no event later than the expiration date of the Stock
Option.
(f) Retirement. Upon retirement of a Stock Option grantee, Stock
Option privileges shall apply to those shares immediately exercisable at
the date of retirement. The Committee, however, in its discretion, may
provide that any Stock Options outstanding but not yet exercisable upon the
retirement of a Stock Option grantee may become exercisable in accordance
with a schedule as may be determined by the Committee. Stock Option
privileges shall expire unless exercised within such period of time as may
be established by the Committee, but in no event later than the expiration
date of the Stock Option.
(g) Death. Upon the death of a Stock Option grantee, Stock Option
privileges shall apply to those shares which were immediately exercisable
at the time of death. The Committee, however, in its discretion, may
provide that any Stock Options outstanding but not yet exercisable upon the
death of a Stock Option grantee may become exercisable in accordance with a
schedule as may be determined by the Committee. Such privileges shall
expire unless exercised by legal representative(s) within a period of time
as determined by the Committee, but in no event later than the expiration
date of the Stock Option.
(h) Termination due to Misconduct. If a Stock Option grantee's
employment is terminated for deliberate, willful or gross misconduct, as
determined by the Company, all rights under the Stock Option shall expire
upon receipt of the notice of such termination.
(i) Limits on Incentive Stock Options. Except as may otherwise be
permitted by the Code, the Committee shall not grant to an Eligible
Employee Incentive Stock Options that, in the aggregate, are first
exercisable during any one calendar year to the extent that the aggregate
fair market value of the Common Stock, at the time the Incentive Stock
Options are granted, exceeds $100,000, or such other amount as the Internal
Revenue Service may decide from time to time.
3
<PAGE>
6. Stock Appreciation Rights
The Committee may, in its discretion, grant a right to receive the
appreciation in the fair market value of shares of Common Stock ("Stock
Appreciation Right") either singly or in combination with an underlying Stock
Option granted hereunder or under the Prior Plans. Such Stock Appreciation
Rights shall be subject to the following terms and conditions and such other
terms and conditions as the Committee may prescribe:
(a) Time and Period of Grant. If a Stock Appreciation Right is granted
with respect to an underlying Stock Option, it may be granted at the time
of the Stock Option grant or at any time thereafter but prior to the
expiration of the Stock Option grant. If a Stock Appreciation Right is
granted with respect to an underlying Stock Option, at the time the Stock
Appreciation Right is granted the Committee may limit the exercise period
for such Stock Appreciation Right, before and after which period no Stock
Appreciation Right shall attach to the underlying Stock Option. In no event
shall the exercise period for a Stock Appreciation Right granted with
respect to an underlying Stock Option exceed the exercise period for such
Stock Option. If a Stock Appreciation Right is granted without an
underlying Stock Option, the period for exercise of the Stock Appreciation
Right shall be set by the Committee.
(b) Value of Stock Appreciation Right. If a Stock Appreciation Right
is granted with respect to an underlying Stock Option, the grantee will be
entitled to surrender the Stock Option which is then exercisable and
receive in exchange therefor an amount equal to the excess of the fair
market value of the Common Stock on the date the election to surrender is
received by the Company over the Stock Option price multiplied by the
number of shares covered by the Stock Option which is surrendered. If a
Stock Appreciation Right is granted without an underlying Stock Option, the
grantee will receive upon exercise of the Stock Appreciation Right an
amount equal to the excess of the fair market value of the Common Stock on
the date the election to surrender such Stock Appreciation Right is
received by the Company over the fair market value of the Common Stock on
the date of grant multiplied by the number of shares covered by the grant
of the Stock Appreciation Right.
(c) Payment of Stock Appreciation Right. Payment of a Stock
Appreciation Right shall be in the form of shares of Common Stock, cash or
any combination of shares and cash. The form of payment upon exercise of
such a right shall be determined by the Committee either at the time of
grant of the Stock Appreciation Right or at the time of exercise of the
Stock Appreciation Right.
7. Performance Share Awards
The Committee may grant awards under which payment may be made in shares of
Common Stock, cash or any combination of shares and cash if the performance of
the Company or any subsidiary, division, affiliate or joint venture of the
Company selected by the Committee during the Award Period meets certain goals
established by the Committee ("Performance Share Awards"). Such Performance
Share Awards shall be subject to the following terms and conditions and such
other terms and conditions as the Committee may prescribe:
(a) Award Period and Performance Goals. The Committee shall determine
and include in a Performance Share Award grant the period of time for which
a Performance Share Award is made ("Award Period"). The Committee shall
also establish performance objectives ("Performance Goals") to be met by
the Company, subsidiary, division or joint venture during the Award Period
as a condition to payment of the Performance Share Award. The Performance
Goals may include earnings per share, return on stockholders' equity,
return on assets, net income or any other financial or other measurement
established by the Committee. The Performance Goals may include minimum and
optimum objectives or a single set of objectives.
4
<PAGE>
(b) Payment of Performance Share Awards. The Committee shall establish
the method of calculating the amount of payment to be made under a
Performance Share Award if the Performance Goals are met, including the
fixing of a maximum payment. The Performance Share Award shall be expressed
in terms of shares of Common Stock and referred to as "Performance Shares."
After the completion of an Award Period, the performance of the Company,
subsidiary, division or joint venture shall be measured against the
Performance Goals, and the Committee shall determine whether all, none or
any portion of a Performance Share Award shall be paid. The Committee, in
its discretion, may elect to make payment in shares of Common Stock, cash
or a combination of shares and cash. Any cash payment shall be based on the
fair market value of Performance Shares on, or as soon as practicable prior
to, the date of payment.
(c) Revision of Performance Goals. At any time prior to the end of an
Award Period, the Committee may revise the Performance Goals and the
computation of payment if unforeseen events occur which have a substantial
effect on the performance of the Company, subsidiary, division or joint
venture and which, in the judgment of the Committee, make the application
of the Performance Goals unfair unless a revision is made.
(d) Requirement of Employment. A grantee of a Performance Share Award
must remain in the employ of the Company until the completion of the Award
Period in order to be entitled to payment under the Performance Share
Award; provided that the Committee may, in its discretion, provide for a
full or partial payment where such an exception is deemed equitable.
(e) Dividends. The Committee may, in its discretion, at the time of
the granting of a Performance Share Award, provide that any dividends
declared on the Common Stock during the Award Period, and which would have
been paid with respect to Performance Shares had they been owned by a
grantee, be (i) paid to the grantee, or (ii) accumulated for the benefit of
the grantee and used to increase the number of Performance Shares of the
grantee.
(f) Limit on Performance Share Awards. Incentives granted as
Performance Share Awards under this section and Restricted Stock Grants
under Section 8 shall not exceed, in the aggregate, six (6) million shares
of Common Stock (such number of shares shall be adjusted in accordance with
Section 4(c)).
8. Restricted Stock Grants
The Committee may award shares of Common Stock to a grantee, which shares
shall be subject to the following terms and conditions and such other terms and
conditions as the Committee may prescribe ("Restricted Stock Grant"):
(a) Requirement of Employment. A grantee of a Restricted Stock Grant
must remain in the employment of the Company during a period designated by
the Committee ("Restriction Period") in order to retain the shares under
the Restricted Stock Grant. If the grantee leaves the employment of the
Company prior to the end of the Restriction Period, the Restricted Stock
Grant shall terminate and the shares of Common Stock shall be returned
immediately to the Company provided that the Committee may, at the time of
the grant, provide for the employment restriction to lapse with respect to
a portion or portions of the Restricted Stock Grant at different times
during the Restriction Period. The Committee may, in its discretion, also
provide for such complete or partial exceptions to the employment
restriction as it deems equitable.
5
<PAGE>
(b) Restrictions on Transfer and Legend on Stock Certificates. During
the Restriction Period, the grantee may not sell, assign, transfer, pledge
or otherwise dispose of the shares of Common Stock. Each certificate for
shares of Common Stock issued hereunder shall contain a legend giving
appropriate notice of the restrictions in the grant.
(c) Escrow Agreement. The Committee may require the grantee to enter
into an escrow agreement providing that the certificates representing the
Restricted Stock Grant will remain in the physical custody of an escrow
holder until all restrictions are removed or expire.
(d) Lapse of Restrictions. All restrictions imposed under the
Restricted Stock Grant shall lapse upon the expiration of the Restriction
Period if the conditions as to employment set forth above have been met.
The grantee shall then be entitled to have the legend removed from the
certificates.
(e) Dividends. The Committee shall, in its discretion, at the time of
the Restricted Stock Grant, provide that any dividends declared on the
Common Stock during the Restriction Period shall either be (i) paid to the
grantee, or (ii) accumulated for the benefit of the grantee and paid to the
grantee only after the expiration of the Restriction Period.
(f) Limit on Restricted Stock Grant. Incentives granted as Restricted
Stock Grants under this section and Performance Share Awards under Section
7 shall not exceed, in the aggregate, six (6) million shares of Common
Stock (such number of shares shall be adjusted in accordance with Section
4(c)).
9. Transferability
Each Incentive Stock Option granted under the ISP shall not be transferable
other than by will or the laws of descent and distribution; each other Incentive
granted under the ISP will not be transferable or assignable by the recipient,
and may not be made subject to execution, attachment or similar procedures,
other than by will or the laws of descent and distribution or as determined by
the Committee in accordance with regulations promulgated under the Securities
Exchange Act of 1934, or any other applicable law or regulation.
10. Discontinuance or Amendment of the Plan
The Board of Directors may discontinue the ISP at any time and may from
time to time amend or revise the terms of the ISP as permitted by applicable
statutes, except that it may not revoke or alter, in a manner unfavorable to the
grantees of any Incentives hereunder, any Incentives then outstanding, nor may
the Board amend the ISP without stockholder approval where the absence of such
approval would cause the Plan to fail to comply with Rule 16b-3 under the
Securities Exchange Act of 1934, or any other requirement of applicable law or
regulation. Unless approved by the Company's stockholders, no adjustments or
reduction of the exercise price of any outstanding Incentives shall be made by
cancellation of outstanding Incentives and the subsequent regranting of
Incentives at a lower price to the same individual. No Incentive shall be
granted under the ISP after December 31, 2003, but Incentives granted
theretofore may extend beyond that date.
11. No Right of Employment or Participation
The ISP and the Incentives granted hereunder shall not confer upon any
Eligible Employee the right to continued employment with the Company, its
subsidiaries, its affiliates or its joint ventures or affect in any way the
right of such entities to terminate the employment of an Eligible Employee at
any time and for any reason. No individual shall have a right to be granted an
Incentive, or having been granted an Incentive, to receive any future
Incentives.
6
<PAGE>
12. No Limitation on Compensation
Nothing in the ISP shall be construed to limit the right of the Company to
establish other plans or to pay compensation to its employees, in cash or
property, in a manner which is not expressly authorized under the ISP.
13. No Impact on Benefits
Except as may otherwise be specifically stated under any employee benefit
plan, policy or program, no amount payable in respect of any Incentive shall be
treated as compensation for purposes of calculating an employee's right under
any such plan, policy or program.
14. No Constraint on Corporate Action
Nothing in the ISP shall be construed (i) to limit, impair or otherwise
affect the Company's right or power to make adjustments, reclassifications,
reorganizations or changes of its capital or business structure, or to merge or
consolidate, or dissolve, liquidate, sell or transfer all or any part of its
business or assets, or (ii) except as provided in Section 10, to limit the right
or power of the Company or any subsidiary to take any action which such entity
deems to be necessary or appropriate.
15. Withholding Taxes
The Company shall be entitled to deduct from any payment under the ISP,
regardless of the form of such payment, the amount of all applicable income and
employment taxes required by law to be withheld with respect to such payment or
may require the Eligible Employee to pay to it such tax prior to and as a
condition of the making of such payment. In accordance with any applicable
administrative guidelines it establishes, the Committee may allow an Eligible
Employee to pay the amount of taxes required by law to be withheld from an
Incentive by withholding from any payment of Common Stock due as a result of
such Incentive, or by permitting the Eligible Employee to deliver to the
Company, shares of Common Stock having a fair market value, as determined by the
Committee, equal to the amount of such required withholding taxes.
16. Governing Law
The ISP, and all agreements hereunder, shall be construed in accordance
with and governed by the laws of the State of New Jersey.
7
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.(K)
<SEQUENCE>4
<FILENAME>dex10k.txt
<DESCRIPTION>PLAN FOR DEFERRED PAYMENT /DIRECTORS' COMPENSATION
<TEXT>
<PAGE>
================================================================================
Exhibit 10(k)
MERCK & CO., INC.
PLAN FOR DEFERRED PAYMENT OF
DIRECTORS' COMPENSATION
(Amended and Restated as of January 1, 2002)
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Article I Purpose 1
Article II Election of Deferral, Measurement Methods and Distribution Schedule 1
Article III Valuation of Deferred Amounts 2
Article IV Redesignation Within a Deferral Account 3
Article V Payment of Deferred Amounts 4
Article VI Designation of Beneficiary 5
Article VII Plan Amendment or Termination 5
Schedule A Measurement Methods 6
</TABLE>
(i)
<PAGE>
MERCK & CO., INC.
PLAN FOR DEFERRED PAYMENT OF
DIRECTORS' COMPENSATION
I. PURPOSE
To provide an arrangement under which directors of Merck & Co., Inc.
other than current employees may (i) elect to voluntarily defer payment
of the annual retainer and meeting and committee fees until after
termination of their service as a director, and (ii) value compensation
mandatorily deferred on their behalf.
II. ELECTION OF DEFERRAL, MEASUREMENT METHODS AND
DISTRIBUTION SCHEDULE
A. Election of Voluntary Deferral Amount
-------------------------------------
1. Prior to December 28 of each year, each director is entitled
to make an irrevocable election to defer until termination of
service as a director receipt of payment of (a) 50% or 100% of
the retainer for the 12 months beginning April 1 of the next
calendar year, (b) 50% or 100% of the Committee Chairperson
retainer beginning April 1 of the next calendar year, and (c)
50% or 100% of the meeting and committee fees for the 12
months beginning April 1 of the next calendar year.
2. Prior to commencement of duties as a director, a director
newly elected or appointed to the Board during a calendar year
must make the election under this paragraph for the portion of
the Voluntary Deferral Amount applicable to such director's
first year of service (or part thereof).
3. The Voluntary Deferral Amount shall be credited as follows:
(1) Meeting and committee fees that are deferred are credited
as of the day the director's services are rendered; (2) if the
Board retainer and/or Committee Chairperson retainer is
deferred, a pro-rata share of the deferred retainer is
credited on the last business day of each calendar quarter.
The dates the Voluntary Deferral Amount, or parts thereof, are
credited to the director's deferred account are hereinafter
referred to as the Voluntary Deferral Dates.
B. Mandatory Deferral Amount
-------------------------
1. On the Friday following the Company's Annual Meeting of
Stockholders (such Friday hereinafter referred to as the
"Mandatory Deferral Date"), each director will be credited
with an amount equivalent to one-third of the annual cash
retainer for the 12 month period beginning on the April 1
preceding the Annual Meeting (the "Mandatory Deferral
Amount"). The Mandatory Deferral Amount will be measured by
the Merck Common Stock account.
2. A director newly elected or appointed to the Board after the
Mandatory Deferral Date will be credited with a pro rata
portion of the Mandatory Deferral Amount applicable to such
director's first year of service (or part thereof). Such pro
rata portion shall be credited to the director's account on
the first day of such director's service.
<PAGE>
C. Election of Measurement Method
------------------------------
Each such annual election referred to in Section A shall
include an election as to the measurement method or methods by
which the value of amounts deferred will be measured in
accordance with Article III, below. The available measurement
methods are set forth on Schedule A hereto.
D. Election of Distribution Schedule
---------------------------------
Each annual election referred to in Section A above shall also
include an election to receive payment following termination
of service as a director of all Voluntary Deferral Amounts and
Mandatory Deferral Amounts in a lump sum either immediately or
one year after such termination, or in quarterly or annual
installments over five, ten or fifteen years.
III. VALUATION OF DEFERRED AMOUNTS
A. Common Stock
------------
1. Initial Crediting. The annual Mandatory Deferral Amount shall
be used to determine the number of full and partial shares of
Merck Common Stock which such amount would purchase at the
closing price of the Common Stock on the New York Stock
Exchange on the Mandatory Deferral Date.
That portion of the Voluntary Deferral Amount allocated to
Merck Common Stock shall be used to determine the number of
full and partial shares of Merck Common Stock which such
amount would purchase at the closing price of the Common Stock
on the New York Stock Exchange on the applicable Voluntary
Deferral Date.
However, should it be determined by the Committee on Directors
of the Board of Directors that a measurement of Merck Common
Stock on any Mandatory or Voluntary Deferral Date would not
constitute fair market value, then the Committee shall decide
on which date fair market value shall be determined using the
valuation method set forth in this Article III, Section A.1.
At no time during the deferral period will any shares of Merck
Common Stock be purchased or earmarked for such deferred
amounts nor will any rights of a shareholder exist with
respect to such amounts.
2. Dividends. Each director's account will be credited with the
additional number of full and partial shares of Merck Common
Stock which would have been purchasable with the dividends on
shares previously credited to the account at the closing price
of the Common Stock on the New York Stock Exchange on the date
each dividend was paid.
3. Distributions. Distribution from the Merck Common Stock
account will be valued at the closing price of Merck Common
Stock on the New York Stock Exchange on the distribution date.
2
<PAGE>
B. Mutual Funds
------------
1. Initial Crediting. The amount allocated to each Mutual Fund
shall be used to determine the full and partial Mutual Fund
shares which such amount would purchase at the closing net
asset value of the Mutual Fund shares on the Mandatory or
Voluntary Deferral Date, whichever is applicable. The
director's account will be credited with the number of full
and partial Mutual Fund shares so determined.
At no time during the deferral period will any Mutual Fund
shares be purchased or earmarked for such deferred amounts nor
will any rights of a shareholder exist with respect to such
amounts.
2. Dividends. Each director's account will be credited with the
additional number of full and partial Mutual Fund shares which
would have been purchasable, at the closing net asset value of
the Mutual Fund shares as of the date each dividend is paid on
the Mutual Fund shares, with the dividends which would have
been paid on the number of shares previously credited to such
account (including pro rata dividends on any partial shares).
3. Distributions. Mutual Fund distributions will be valued based
on the closing net asset value of the Mutual Fund shares on
the distribution date.
C. Adjustments
-----------
In the event of a reorganization, recapitalization, stock
split, stock dividend, combination of shares, merger,
consolidation, rights offering or any other change in the
corporate structure or shares of the Company or a Mutual Fund,
the number and kind of shares or units of such investment
measurement method available under this Plan and credited to
each director's account shall be adjusted accordingly.
IV. REDESIGNATION WITHIN A DEFERRAL ACCOUNT
A. General
-------
A director may request a change in the measurement methods
used to value all or a portion his/her account other than
Merck Common Stock. Amounts deferred using the Merck Common
Stock method and any earnings attributable to such deferrals
may not be redesignated. The change will be effective on (i)
the day when the redesignation request is received pursuant to
administrative guidelines established by the Human Resources
Financial Services area of the Treasury department, provided
the request is received prior to the close of the New York
Stock Exchange on such day or (ii) the next following business
day if the request is received when the New York Stock
Exchange is closed.
B. When Redesignation May Occur
----------------------------
1. During Active Service. There is no limit on the number of
times a director may redesignate the portion of his/her
deferred account permitted to be redesignated. Each such
request shall be irrevocable and can be designated in whole
percentages or as a dollar amount.
3
<PAGE>
2. After Death. Following the death of a director, the legal
representative or beneficiary of such director may redesignate
subject to the same rules as for active directors set forth in
Article IV, Section B.1.
C. Valuation of Amounts to be Redesignated
----------------------------------------
The portion of the director's account to be redesignated will
be valued at its cash equivalent and such cash equivalent will
be converted into shares or units of the other measurement
method(s). For purposes of such redesignations, the cash
equivalent of the value of the Mutual Fund shares shall be the
closing net asset value of such Mutual Fund on (i) the day
when the redesignation request is received pursuant to
administrative guidelines established by the Human Resources
Financial Services area of the Treasury department, provided
the request is received prior to the close of the New York
Stock Exchange on such day or (ii) the next following business
day if the request is received when the New York Stock
Exchange is closed.
V. PAYMENT OF DEFERRED AMOUNTS
A. Payment
-------
All payments to directors of amounts deferred will be in cash
in accordance with the distribution schedule elected by the
director pursuant to Article II, Section D. Distributions
shall be pro rata by measurement method. Distributions shall
be valued on the fifteenth day of the distribution month (or,
if such day is not a business day, the next business day) and
paid as soon thereafter as possible.
B. Changes to Distribution Schedule Prior to Termination
-----------------------------------------------------
Upon the request of a director made at any time during the
calendar year immediately preceding the calendar year in which
service as a director is expected to terminate, the Committee
on Directors of the Board of Directors ("Committee on
Directors"), in its sole discretion, may authorize: (a) an
extension of a payment period beyond that originally elected
by the director not to exceed that otherwise allowable under
Article II, Section D, and/or (b) a payment frequency
different from that originally elected by the director. Such
request may not be made with regard to amounts deferred after
December 31, 1990 using the Merck Common Stock method and to
any earnings attributable to such deferrals. Deferrals into
Merck Common Stock made after December 31, 1990 and any
earnings thereon may only be distributed in accordance with
the schedule elected by the director under Article II, Section
D or determined by the Committee on Directors under Article
VI.
C. Post-Termination Changes to Distribution Schedule
-------------------------------------------------
Following termination of service as a director, each director
may make one request for a further extension of the period for
distribution of his/her deferred compensation. Such request
must be received by the Committee on Directors prior to the
first distribution to the participant under his/her previously
elected distribution schedule. Any revised distribution
schedule may not exceed the deferral period otherwise
allowable under Article II, Section C. This request may be
granted and a new payment schedule determined in the sole
discretion of the Committee on Directors.
4
<PAGE>
Such request may not be made with regard to amounts deferred
after December 31, 1990 using the Merck Common Stock Method
and to any earnings attributable to such deferrals. Any
retired director who is not subject to U.S. income tax may
petition the Committee on Directors to change payment
frequency, including a lump sum distribution, and the
Committee on Directors may grant such petition if, in its
discretion, it considers there to be reasonable justification
therefor. Deferrals into Merck Common Stock made after
December 30, 1990 and any earnings thereon may only be
distributed in accordance with the schedule elected by the
director under Article II, Section D or determined by the
Committee on Directors under Article VI.
D. Forfeitures
-----------
A director's deferred amount attributable to the Mandatory
Deferral Amount and earnings thereon shall be forfeited upon
his or her removal as a director or upon a determination by
the Committee on Directors in its sole discretion, that a
director has:
(i) joined the Board of, managed, operated, participated in
a material way in, entered employment with, performed
consulting (or any other) services for, or otherwise
been connected in any material manner with a company,
corporation, enterprise, firm, limited partnership,
partnership, person, sole proprietorship or any other
business entity determined by the Committee on
Directors in its sole discretion to be competitive with
the business of the Company, its subsidiaries or its
affiliates (a "Competitor");
(ii) directly or indirectly acquired an equity interest of
five (5) percent or greater in a Competitor; or
(iii) disclosed any material trade secrets or other material
confidential information, including customer lists,
relating to the Company or to the business of the
Company to others, including a Competitor.
VI. DESIGNATION OF BENEFICIARY
In the event of the death of a director, the deferred amount at the
date of death shall be paid to the last named beneficiary or
beneficiaries designated by the director, or, if no beneficiary has
been designated, to the director's legal representative, in one or more
installments as the Committee on Directors in its sole discretion may
determine.
VII. PLAN AMENDMENT OR TERMINATION
The Committee on Directors shall have the right to amend or terminate
this Plan at any time for any reason.
5
<PAGE>
SCHEDULE A
MEASUREMENT METHODS
(February 1, 2001 - December 31, 2001)
Merck Common Stock
Mutual Funds
Acorn Fund
American Century Emerging Markets Fund
Europacific Growth Fund
Fidelity Destiny I
Fidelity Dividend Growth
Fidelity Equity Income Fund
Fidelity Low-Priced Stock Fund
Fidelity Retirement Money Market
Fidelity Spartan Government Income
Fidelity Spartan U.S. Equity Index
Franklin Small Cap Growth A
Janus Enterprise
Janus Growth & Income
PIMCO Foreign Bond Institutional
PIMCO Long Term US Government Institutional
PIMCO Total Return Institutional
Putnam Global Equity A
Putnam International Voyager A
Putnam Vista A
T. Rowe Price Blue Chip Growth Fund
Vanguard Asset Allocation
Vanguard U.S. Growth Portfolio
6
<PAGE>
SCHEDULE A
MEASUREMENT METHODS
(January 1, 2002)
Merck Common Stock
Mutual Funds
American Century Emerging Markets Fund
Europacific Growth Fund
Fidelity Destiny I
Fidelity Dividend Growth
Fidelity Equity Income Fund
Fidelity Low-Priced Stock Fund
Fidelity Retirement Money Market
Fidelity Spartan Government Income
Fidelity Spartan U.S. Equity Index
Franklin Small-Mid Cap Growth A
Janus Enterprise
Janus Growth & Income
Liberty Acorn Z
PIMCO Foreign Bond Institutional
PIMCO Long Term US Government Institutional
PIMCO Total Return Institutional
Putnam Global Equity A
Putnam International Voyager A
Putnam Vista A
T. Rowe Price Blue Chip Growth Fund
Vanguard Asset Allocation
7
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>5
<FILENAME>dex12.txt
<DESCRIPTION>COMPUTATION OF RATIOS OF EARNINGS
<TEXT>
<PAGE>
Exhibit 12
MERCK & CO., INC. AND SUBSIDIARIES
Computation Of Ratios Of Earnings To Fixed Charges
--------------------------------------------------
(In millions except ratio data)
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------------------------------------------------
2001 2000 1999 1998 1997 1996
----------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income Before Taxes $ 10,402.6 $ 9,824.1 $ 8,619.5 $ 8,133.1 $ 6,462.3 $ 5,540.8
Add:
One-third of rents 77.7 67.0 66.7 56.0 47.0 41.0
Interest expense, net 369.7 361.9 236.4 150.6 98.2 103.2
Preferred stock dividends 199.6 205.2 120.7 62.1 49.6 70.0
----------- ----------- ---------- ---------- ---------- ----------
Earnings $ 11,049.6 $ 10,458.2 $ 9,043.3 $ 8,401.8 $ 6,657.1 $ 5,755.0
=========== =========== ========== ========== ========== ==========
One-third of rents $ 77.7 $ 67.0 $ 66.7 $ 56.0 $ 47.0 $ 41.0
Interest expense 464.7 484.4 316.9 205.6 129.5 138.6
Preferred stock dividends 199.6 205.2 120.7 62.1 49.6 70.0
----------- ----------- ---------- ---------- ---------- ----------
Fixed Charges $ 742.0 $ 756.6 $ 504.3 $ 323.7 $ 226.1 $ 249.6
=========== =========== ========== ========== ========== ==========
Ratio of Earnings
to Fixed Charges 15 14 18 26 29 23
== == == == == ==
</TABLE>
For purposes of computing these ratios, "earnings" consist of income before
taxes, one-third of rents (deemed by the Company to be representative of the
interest factor inherent in rents), interest expense, net of amounts
capitalized, and dividends on preferred stock of subsidiary companies. "Fixed
charges" consist of one-third of rents, interest expense as reported in the
Company's consolidated financial statements and dividends on preferred stock of
subsidiary companies.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>6
<FILENAME>dex13.txt
<DESCRIPTION>2001 ANNUAL REPORT TO STOCKHOLDERS
<TEXT>
<PAGE>
Exhibit 13
Financial Section
- --------------------------------------------------------------------------------
Contents
Financial Review
Description of Merck's Business ........................................ 13
Competition and the Health Care Environment ............................ 13
Business Strategies .................................................... 14
Joint Ventures ......................................................... 14
Foreign Operations ..................................................... 16
Operating Results ...................................................... 16
Environmental and Other Matters ........................................ 19
Capital Expenditures ................................................... 20
Analysis of Liquidity and Capital Resources ............................ 20
Recently Issued Accounting Standards ................................... 22
2002 Outlook ........................................................... 22
Use of Estimates and Cautionary Factors That
May Affect Future Results ............................................ 23
Condensed Interim Financial Data ....................................... 23
Dividends Paid per Common Share ........................................ 23
Common Stock Market Prices ............................................. 23
Consolidated Statement of Income .......................................... 24
Consolidated Statement of Retained Earnings ............................... 24
Consolidated Statement of Comprehensive Income ............................ 24
Consolidated Balance Sheet ................................................ 25
Consolidated Statement of Cash Flows ...................................... 26
Notes to Consolidated Financial Statements ................................ 27
Management's Report ....................................................... 38
Report of Independent Public Accountants .................................. 38
Audit Committee's Report .................................................. 39
Compensation and Benefits Committee's Report .............................. 39
Selected Financial Data ................................................... 40
Financial Review
- --------------------------------------------------------------------------------
Description of Merck's Business
Merck is a global research-driven pharmaceutical company that discovers,
develops, manufactures and markets a broad range of human and animal health
products, directly and through its joint ventures, and provides pharmaceutical
benefit services through Merck-Medco Managed Care (Merck-Medco).
Sales
- --------------------------------------------------------------------------------
($ in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
Atherosclerosis ................... $ 7,179.6 $ 5,805.2 $ 5,093.2
Hypertension/heart failure ........ 4,255.6 4,629.1 4,563.8
Anti-inflammatory/analgesics ...... 2,630.5 2,251.7 578.5
Osteoporosis ...................... 1,759.2 1,275.3 1,043.1
Respiratory ....................... 1,375.7 862.2 501.8
Vaccines/biologicals .............. 1,022.4 952.0 860.0
Anti-bacterial/anti-fungal ........ 795.4 783.3 772.3
Ophthalmologicals ................. 672.2 656.2 670.0
Human immunodeficiency
virus (HIV) .................... 411.0 528.8 664.4
Anti-ulcerants .................... 354.2 849.4 913.9
Other Merck products .............. 891.2 1,629.7 1,820.6
Merck-Medco ....................... 26,368.7 20,140.3 15,232.4
- --------------------------------------------------------------------------------
$47,715.7 $40,363.2 $32,714.0
================================================================================
Human health products include therapeutic and preventive agents, generally
sold by prescription, for the treatment of human disorders. Among these are
atherosclerosis products, which include Zocor and Mevacor; hypertension/heart
failure products which include Cozaar, Hyzaar, Prinivil, Vasotec and Vaseretic;
anti-inflammatory/analgesics, of which Vioxx, an agent that specifically
inhibits COX-2, is the largest-selling; an osteoporosis product, Fosamax, for
treatment and prevention of osteoporosis; a respiratory product, Singulair, a
leukotriene receptor antagonist; vaccines/biologicals, of which M-M-R II, a
pediatric vaccine for measles, mumps and rubella, Varivax, a live virus vaccine
for the prevention of chickenpox, and Recombivax HB (hepatitis B vaccine
recombinant) are the largest-selling; anti-bacterial/anti-fungal, of which
Primaxin, Noroxin and Cancidas are the largest-selling; ophthalmologicals, of
which Timoptic, Timoptic-XE, Trusopt and Cosopt are the largest-selling; HIV
products, which include Crixivan, a protease inhibitor for the treatment of
human immunodeficiency viral infection in adults; and anti-ulcerants, which
includes Pepcid.
Other Merck products include sales of other human pharmaceuticals, continuing
sales to divested businesses, pharmaceutical and animal health supply sales to
the Company's joint ventures as well as supply sales to AstraZeneca LP (AZLP).
Also included in this category are rebates and discounts on Merck pharmaceutical
products.
Merck-Medco primarily includes Merck-Medco sales of non-Merck products and
Merck-Medco pharmaceutical benefit services, principally sales of prescription
drugs through managed prescription drug programs, as well as services provided
through programs to manage patient health and drug utilization.
Merck sells its human health products primarily to drug wholesalers and
retailers, hospitals, clinics, government agencies and managed health care
providers such as health maintenance organizations and other institutions. The
Company's professional representatives communicate the effectiveness, safety and
value of our products to health care professionals in private practice, group
practices and managed care organizations.
Competition and the Health Care Environment
The markets in which the Company conducts its business are highly competitive
and often highly regulated. Global efforts toward health care cost containment
continue to exert pressure on product pricing and access. In the United States,
the Company has been working with private and government employers to slow the
increase of health care costs. Demonstrating that the Company's medicines can
help save costs in other areas and pricing flexibly across our product portfolio
have encouraged growing use of our medicines and helped offset the effects of
increasing cost pressures. Legislative bodies continue to work to expand health
care access and reduce associated costs. Such initiatives include prescription
drug benefit proposals for Medicare beneficiaries introduced in the U.S.
Congress.
Outside the United States, in difficult environments encumbered by government
cost containment actions, the Company has worked with payers to help them
allocate scarce resources to optimize health care outcomes, limiting the
potentially detrimental effects of government actions on sales growth. In
addition, countries within the European Union (EU), recognizing the economic
importance of the research-based pharmaceutical industry and the value of
innovative medicines to society, are working with industry representatives and
the European Commission on proposals for market deregulation.
Merck & Co., Inc. 2001 Annual Report Financial Section 13
<PAGE>
There has been an increasing amount of focus on privacy issues in countries
around the world, including the United States and the EU. In the United States,
federal and state governments have pursued legislative and regulatory
initiatives regarding patient privacy, including recently issued federal privacy
regulations concerning health information, which could affect the Company's
operations, particularly at Merck-Medco.
Although no one can predict the outcome of these and other legislative,
regulatory and advocacy initiatives, we are well positioned to respond to the
evolving health care environment and market forces.
Several products have recently faced expiration of product patents. U.S.
product patents expired in 2001 for Prilosec, which is supplied exclusively to
AZLP; Prinivil, for which co-marketing rights have been licensed to a third
party; Mevacor; and Vaseretic. In the aggregate, domestic sales of these
products, as well as Pepcid, for which market exclusivity expired in 2001,
represented 10% of Merck human health sales for 2001. The Company expects a
significant decline in the sales of these products in 2002 as a result of the
loss of market exclusivity. With the exception of Prilosec, for which the
Company has U.S. rights only, a decline is also expected in the Company's
European sales for these products in the years 2002 through 2005 upon the loss
of market exclusivity in European countries throughout this period. European
sales of these products represented 1% of Merck human health sales for 2001.
While the expiration of a product patent normally results in a loss of market
exclusivity, commercial benefits may continue to be derived from other patents,
for example, patents on processes, intermediates, compositions, uses and
formulations related to the product, and, in the United States, additional
market exclusivity that may be available under federal law. The additional six
months of U.S. market exclusivity granted to Pepcid, Prilosec and Mevacor by the
U.S. Food and Drug Administration (FDA) based upon pediatric use studies expired
in April, October and December 2001, respectively. Prinivil was similarly
granted U.S. market exclusivity based on pediatric use studies for six months,
commencing December 2001. The Company and AstraZeneca have filed patent
infringement suits in federal court against pharmaceutical manufacturers seeking
to market a generic form of Prilosec (omeprazole) prior to the expiration of
certain patents. A trial commenced in December 2001.
We anticipate that the worldwide trend toward cost-containment will continue,
resulting in ongoing pressures on health care budgets. As we continue to
successfully launch new products, contribute to health care debates and monitor
reforms, our new products, policies and strategies will enable us to maintain
our strong position in the changing economic environment.
Business Strategies
The Company is discovering new innovative products and developing new
indications for existing products - the result of its continuing commitment to
research. The Company is also developing innovative sales, marketing and
education techniques; establishing joint ventures, licensing arrangements and
health care partnerships with large managed care organizations and other payers;
and demonstrating to payers and providers the cost-effectiveness of Merck
products. Additionally, achievement of productivity gains has become a permanent
strategy. Productivity initiatives include, at the manufacturing level,
optimizing plant utilization, implementing lowest-cost processes and improving
technology transfer between research and manufacturing, and throughout the
Company, reducing the cost of purchased materials and services, re-engineering
core and administrative processes and streamlining the organization. At the
manufacturing level, the Company expects that productivity gains will continue
to substantially offset inflation.
The Company is committed to improving access to medicines and enhancing the
quality of life for people around the world. Merck's African Comprehensive
HIV/AIDS Partnership in Botswana, in collaboration with the Government of
Botswana and the Bill & Melinda Gates Foundation, is striving to develop a
comprehensive and sustainable approach to HIV prevention, care and treatment. To
help catalyze access to HIV medicines in developing world countries, in March
2001 the Company significantly lowered prices of its HIV antiretroviral drugs in
countries in the low and medium categories of the United Nations Development
Program's Human Development Index to help increase the accessibility of these
products.
In 1993, Merck acquired Medco Containment Services, Inc. (renamed
Merck-Medco). Merck-Medco provides pharmaceutical benefit services in the United
States. Merck-Medco manages prescription drug programs through its mail service
and retail pharmacy networks, and offers a series of health management programs
to help payers, providers and patients manage high-risk, high-cost diseases.
Merck-Medco sells its pharmaceutical benefit management services to
corporations, labor unions, insurance companies, Blue Cross/Blue Shield
organizations, government agencies, federal and state employee plans, health
maintenance and other similar organizations.
In January 2002, the Company announced plans to establish Merck-Medco as a
separate, publicly-traded company, with full separation completed within 12
months of an initial public offering, subject to market conditions and receipt
of an Internal Revenue Service ruling that such an event would be tax-free to
shareholders and to other customary conditions.
Joint Ventures
To expand its research base and realize synergies from combining capabilities,
opportunities and assets, the Company has formed a number of joint ventures. In
1982, Merck entered into an agreement with Astra AB (Astra) to develop and
market Astra's products under a royalty-bearing license. In 1993, the Company's
total sales of Astra products reached a level that triggered the first step in
the establishment of a joint venture business carried on by Astra Merck Inc.
(AMI), in which Merck and Astra each owned a 50% share. This joint venture,
formed in November 1994, developed and marketed most of Astra's new prescription
medicines in the United States including Prilosec, the first of 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 completed the restructuring of the ownership and
operations of the joint venture whereby the Company acquired Astra's interest in
AMI, renamed KBI Inc. (KBI), and contributed KBI's operating assets to a new
U.S. limited partnership, 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 (the AstraZeneca merger), became
the exclusive distributor of the products for which KBI retained rights.
14 Merck & Co., Inc. 2001 Annual Report Financial Section
<PAGE>
While maintaining a 1% limited partner interest in AZLP, Merck has consent
and protective rights intended to preserve its business and economic interests,
including restrictions on the power of the general partner to make certain
distributions or dispositions. Furthermore, in limited events of default,
additional rights will be granted to the Company, including powers to direct the
actions of, or remove and replace, the Partnership's chief executive officer and
chief financial officer. Merck earns certain Partnership returns as well as
ongoing revenue based on sales of current and future KBI products. The
Partnership returns include a priority return provided for in the Partnership
Agreement, variable returns based, in part, upon sales of certain former Astra
USA, Inc. products, and a preferential return representing Merck's share of
undistributed AZLP GAAP earnings. These returns, which are recorded as Equity
income from affiliates, aggregated $642.8 million, $637.5 million and $633.6
million in 2001, 2000 and 1999, respectively. The AstraZeneca merger triggers a
partial redemption of Merck's limited partner interest in 2008. Upon this
redemption, AZLP will distribute to KBI an amount based primarily on a multiple
of Merck's annual revenue derived from sales of the former Astra USA, Inc.
products for the three years prior to the redemption (the Limited Partner Share
of Agreed Value).
In conjunction with the 1998 restructuring, for a payment of $443.0 million,
Astra purchased an option (the Asset Option) to buy Merck's interest in the KBI
products, excluding the gastrointestinal medicines Prilosec and Nexium. The
Asset Option is exercisable in 2010 at an exercise price equal to the net
present value as of March 31, 2008 of projected future pretax revenue to be
received by the Company from the KBI products (the Appraised Value). Merck also
has the right to require Astra to purchase such interest in 2008 at the
Appraised Value. In addition, the Company granted Astra an option to buy Merck's
common stock interest in KBI at an exercise price based on the net present value
of estimated future net sales of Prilosec and Nexium. This option is exercisable
two years after Astra's purchase of Merck's interest in the KBI products.
The 1999 AstraZeneca merger constituted a Trigger Event under the KBI
restructuring agreements. As a result of the merger, Astra was required to make
two one-time payments to Merck totaling approximately $1.8 billion. In exchange
for Merck's relinquishment of rights to future Astra products with no existing
or pending U.S. patents at the time of the merger, Astra paid $967.4 million
(the Advance Payment), which is subject to a true-up calculation in 2008 that
may require repayment of all or a portion of this amount. The True-Up Amount is
directly dependent on the fair market value in 2008 of the Astra product rights
retained by the Company. Accordingly, recognition of this contingent income has
been deferred until the realizable amount, if any, is determinable, which is not
anticipated prior to 2008. The Company was also entitled to receive a Lump Sum
Payment in an amount that it estimated as $822.0 million. Astra paid $712.5
million of the Lump Sum Payment in 1999 and disputed its obligation to pay the
remainder. One-half of the expected payment reduced goodwill by $411.0 million,
less 50% of a reserve relating to disputed proceeds. The balance was recorded in
Other (income) expense, net. In 2000, arbitration over the disputed proceeds
concluded and the Company received $87.2 million plus interest.
Under the provisions of the KBI restructuring agreements, because a Trigger
Event has occurred, the sum of the Limited Partner Share of Agreed Value, the
Appraised Value and the True-Up Amount is guaranteed to be a minimum of $4.7
billion. Distribution of the Limited Partner Share of Agreed Value and payment
of the True-Up Amount will occur in 2008. Astra-Zeneca's purchase of Merck's
interest in the KBI products is contingent upon the exercise of either Merck's
option in 2008 or AstraZeneca's option in 2010 and, therefore, payment of the
Appraised Value may or may not occur.
In 1989, Merck formed a joint venture with Johnson & Johnson to develop and
market a broad range of nonprescription medicines for U.S. consumers. This 50%
owned joint venture was expanded into Europe in 1993, and into Canada in 1996.
Sales of joint venture products were as follows:
($ in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
Gastrointestinal products $293.5 $321.1 $332.8
Other products 101.5 108.0 118.6
- --------------------------------------------------------------------------------
$395.0 $429.1 $451.4
================================================================================
In 1994, Merck and Pasteur Merieux Connaught (now Aventis Pasteur)
established a 50% owned joint venture to market vaccines in Europe and to
collaborate in the development of combination vaccines for distribution in
Europe. Sales of joint venture products were as follows:
($ in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
Hepatitis vaccines $ 88.0 $134.1 $159.6
Viral vaccines 40.5 48.5 68.6
Other vaccines 371.1 358.3 338.6
- --------------------------------------------------------------------------------
$499.6 $540.9 $566.8
================================================================================
In 1997, Merck and Rhone-Poulenc (now Aventis) combined their animal health
and poultry genetics businesses to form Merial Limited (Merial), a fully
integrated animal health company, which is a stand-alone joint venture, equally
owned by each party. Merial provides a comprehensive range of pharmaceuticals
and vaccines to enhance the health, well-being and performance of a wide range
of animal species. Sales of joint venture products were as follows:
($ in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
Avermectin products $ 495.0 $ 531.7 $ 564.9
Fipronil products 409.7 345.7 316.0
Other products 754.8 730.4 799.2
- --------------------------------------------------------------------------------
$1,659.5 $1,607.8 $1,680.1
================================================================================
In May 2000, the Company and Schering-Plough Corporation (Schering-Plough)
entered into agreements to create separate partnerships to develop and market in
the United States new prescription medicines in the cholesterol-management and
respiratory therapeutic areas. These partnerships are pursuing the development
and marketing of Zetia, an investigational cholesterol absorption inhibitor
discovered by Schering-Plough, as a once-daily monotherapy and in
co-administration with statins; Zetia as a once-daily combination tablet with
Zocor; and a once-daily combination tablet of Singulair and Claritin,
Schering-Plough's nonsedating antihistamine, for the treatment of allergic
rhinitis and asthma. In December 2001, the Company and Schering-Plough announced
the worldwide expansion (excluding Japan) of the cholesterol-management
partnership.
Merck & Co., Inc. 2001 Annual Report 15
<PAGE>
Foreign Operations
The Company's operations outside the United States are conducted primarily
through subsidiaries. Sales of Merck human health products by subsidiaries
outside the United States were 37% of Merck human health sales in 2001, and 36%
and 40% in 2000 and 1999, respectively.
Distribution of 2001 Foreign Human Health Sales
[CHART]
Western Europe 45%
Asia/Pacific 28%
Other Foreign 27%
----
Total 100%
The Company's worldwide business is subject to risks of currency fluctuations
and governmental actions. The Company does not regard these risks as a deterrent
to further expansion of its operations abroad. However, the Company closely
reviews its methods of operations and adopts strategies responsive to changing
economic and political conditions.
In recent years, Merck has been expanding its operations in countries located
in Latin America, the Middle East, Africa, Eastern Europe and Asia Pacific where
changes in government policies and economic conditions are making it possible
for Merck to earn fair returns. Businesses in these developing areas, while
sometimes less stable, offer important opportunities for growth over time.
Operating Results
Total sales for 2001 increased 18% in total and 14% on a volume basis from 2000.
Foreign exchange had a one point unfavorable effect on 2001 sales
growth. Total sales for 2000 increased 23% in total and 20% on a volume basis
from 1999. Foreign exchange had a one point unfavorable effect on 2000 sales
growth.
Components of Human Health Sales Growth
[CHART]
Total Sales Sales Volume Net Pricing Foreign
Growth Growth Actions Exchange Rates
1997 15.0% 17.6% 0.3% -2.9%
1998 10.9 14.1 -- -3.2
1999 15.3 16.1 -0.1 -0.7
2000 16.2 18.8 -0.9 -1.7
2001 5.7 7.9 0.3 -2.5
This chart illustrates the effects of price, volume and exchange on sales of
Merck human health products. Growth for 1999 and 1998 includes a three and five
point increase, respectively, attributable to the 1998 AMI restructuring. The
human health business has grown through sales volume over the last five years.
Price had essentially no effect on sales growth, while the effect of exchange
had a varied unfavorable effect over the same period.
In 2001, sales of Merck human health products grew 6%. Foreign exchange
rates had approximately a three percentage point unfavorable effect on sales
growth, while price changes had less than a half point favorable effect on
growth. In measuring these effects, changes in the value of foreign currencies
are calculated net of price increases in hyperinflationary countries,
principally in Latin America. Domestic sales growth was 5%, while foreign sales
grew 7% including a seven percentage point unfavorable effect from exchange. The
unit volume growth from sales of Merck human health products was driven by five
key products: Zocor, Vioxx, Cozaar/Hyzaar, Fosamax and Singulair. Also
contributing to Merck's human health volume growth were Proscar, Maxalt and
Cancidas, which was launched in 2001.
Zocor, Merck's cholesterol-modifying medicine, continued its strong growth in
2001, based on the product's demonstrated ability to act favorably on all major
lipid parameters with the lowering of "bad" (LDL) cholesterol and triglycerides
while raising the levels of "good" (HDL) cholesterol. A five-year Heart
Protection Study (HPS) conducted by Oxford University, the largest study ever on
statins, demonstrated that Zocor 40 mg saved lives and significantly reduced the
risk of stroke and heart attacks in a broad range of patients with or at high
risk of heart disease including patients with average and below average
cholesterol levels. In addition, preliminary results from the study, which were
presented at the American Heart Association Meeting in November 2001,
demonstrated that Zocor significantly reduced the risk of stroke and heart
attacks for several distinct populations with and without elevated cholesterol,
including diabetes patients, stroke victims and women with or at high risk of
heart disease. Results from the HPS study also showed that Zocor 40 mg was well
tolerated throughout the five-year study. Merck intends to file for regulatory
approval to include this information on the prescribing label for Zocor. Also in
2001, the U.S. National Cholesterol Education Program significantly broadened
its definition of those at highest risk from coronary heart disease and the
patient population considered eligible for cholesterol control medicines.
Vioxx, Merck's second largest-selling product, continued its strong growth in
2001 and was the product leader within the COX-2 class for new prescription
volume growth in the United States. It exceeded the $2 billion sales mark faster
than any other product in Merck's history. Pain relief and gastrointestinal
safety continue to be the primary needs in the arthritis and pain market. Vioxx
is now available in 68 markets around the world as a once-a-day treatment for
osteoarthritis, acute pain and dysmenorrhea and, in some countries outside the
United States, rheumatoid arthritis. Physicians are responding favorably to the
Company's pain studies in which Vioxx 50 mg was compared to acetaminophen in
combination with either codeine 60 mg or oxycodone 5 mg, which are commonly
prescribed narcotics. In addition, an initiative with U.S. hospitals resulted in
a favorable formulary status for Vioxx at more than 3,000 major hospitals. In
November 2001, Vioxx was approved for symptomatic relief in the treatment of
adult rheumatoid arthritis in all EU member states through the mutual
recognition procedure. In December 2001, Vioxx, under the trade names Ceoxx or
Vioxx Acute, was also approved for relief of acute pain and pain from
dysmenorrhea in 13 member states of the EU.
16 Merck & Co., Inc. 2001 Annual Report Financial Section
<PAGE>
Cozaar, and its companion agent, Hyzaar (a combination of Cozaar and the
diuretic hydrochlorothiazide), Merck's high-blood pressure medicines, continued
their strong growth in 2001 and together are the global leaders in the
angiotensin II antagonist (AIIA) class of anti-hypertensive drugs. In the RENAAL
study, which was published in September in The New England Journal of Medicine,
Cozaar delayed the progression of renal disease in Type 2 diabetics with
nephropathy, including a significant reduction in End-stage Renal Disease
(ESRD). The results have been submitted to the FDA for inclusion in the
prescribing information for Cozaar. Merck continues to support the growth of
Cozaar and Hyzaar with ongoing investment in two large outcomes studies, LIFE
and OPTIMAAL. Results from the LIFE study will be presented at the American
College of Cardiology meeting in early 2002. Beginning in 2001, Merck and E.I.
du Pont de Nemours and Company (DuPont) began sharing equally the operating
profits from Cozaar and Hyzaar in North America, under terms of the license
agreement established between the parties in 1989. Financial terms outside of
North America were not changed.
Fosamax, Merck's nonhormonal medicine and the leading product worldwide for
treatment and prevention of post-menopausal osteoporosis in women, continued its
strong growth in 2001. In August 2001, Fosamax was launched in Japan, the
world's second-largest prescription drug market. The largest study of
osteoporosis, National Osteoporosis Risk Assessment, found that almost half of
the more than 200,000 postmenopausal women assessed in the study had low bone
mass, putting them at increased risk of bone fractures. The study, recently
published in the Journal of the American Medical Association, suggests that
millions of women age 50 and older who have not been assessed for osteoporosis
may be at increased risk of fracturing a bone, underscoring the significant
market opportunity for Fosamax. Fosamax Once Weekly, the first and only oral
once-weekly treatment for osteoporosis, has received rapid physician and patient
acceptance since its introduction in the U.S. in November 2000. Studies show
that nine out of ten women preferred the once-weekly dosing regimen and in many
markets almost 80 percent switched to the once-weekly product. Launched in 30
markets worldwide, the once-weekly medicine has accelerated the growth of the
Fosamax brand, extending Merck's leadership in several markets, including the
United States. While osteoporosis basically affects women, an estimated 3
million men also have the condition and the FDA recently approved the
once-weekly version of Fosamax for men.
Singulair, Merck's once-a-day tablet for the treatment of chronic asthma in
adults and children age 2 and older, continued its growth in 2001. It remains
the No. 1 prescribed asthma controller in the United States and is the most
widely used medicine of its kind. In August 2001, Singulair was launched in
Japan, the world's second-largest national market for asthma medicines.
Singulair is being investigated for potential use in the treatment of allergic
rhinitis, more commonly known as hay fever. Singulair operates with an entirely
different mechanism of action from the steroids and sedating antihistamines for
the treatment of this condition and the Company plans to file for regulatory
approval in early 2002.
Proscar, for the treatment of symptomatic benign prostatic hyperplasia in
men with enlarged prostates, reported strong growth in 2001. With long-term
clinical studies in over 13,000 men, Proscar is supported by a wealth of
clinical data on its proven efficacy and safety, and is the only product
approved to reduce the risk of acute urinary retention and the risk of benign
prostatic hyperplasia (BPH) related surgery. Proscar provides durable symptom
improvements for many men with symptomatic BPH and enlarged prostates. Since its
introduction in 1992, Proscar has been prescribed to millions of men and is
currently marketed in over 100 countries.
Maxalt, Merck's treatment for acute migraine headaches in adults, continued
its impressive growth in 2001, growing nearly twice as fast as the oral triptan
migraine market. Maxalt provides fast and effective relief of disabling headache
pain and other symptoms such as nausea and sensitivity to light and noise that
often accompany a migraine attack. In a recently published independent analysis
of clinical trials among migraine therapies, Maxalt 10 mg was shown to be the
most effective therapy in eliminating headache pain after two hours when
compared to other drugs in the triptan class. Maxalt is available in the United
States in both conventional tablets and convenient, rapidly dissolving oral
wafers which disintegrate within seconds on the tongue without liquids, thereby
offering the convenience of being able to be taken anytime, anywhere.
Growth in 2001 also benefited from the February launch of Cancidas, which is
the first in a new class of anti-fungals, called echinocandins or glucan
synthesis inhibitors, introduced in more than a decade. Cancidas is used to
treat certain life-threatening fungal infections that are becoming more
prevalent as the number of people with compromised immune systems increases.
This new medicine is indicated for the treatment of invasive aspergillosis in
patients who do not respond to or cannot tolerate other anti-fungal therapies,
such as amphotericin B, lipid formulations of amphotericin B and/or
itraconazole. Merck is studying Cancidas as a potential treatment for the fungal
infection Candida.
Other products contributing to growth include Prinivil, Cosopt and
Propecia. Crixivan and older products, including Vasotec, Vaseretic, Pepcid and
Mevacor, though still contributing to 2001 sales, declined in unit volume due to
generic and therapeutic competition.
In 2000, sales of Merck human health products grew 16%. Foreign exchange
rates had a two percentage point unfavorable effect on sales growth, while price
changes had a one point unfavorable effect on growth. Domestic sales growth was
24%, while foreign sales grew 5% including a four percentage point unfavorable
effect from exchange. The unit volume growth from sales of Merck human health
products was driven by five key products: Zocor, Vioxx, Cozaar/Hyzaar, Fosamax
and Singulair. Also contributing to Merck's human health volume growth were
newer products, including Maxalt and Aggrastat.
Merck-Medco sales contributed significantly to 2001 and 2000 sales growth. By
continuing to invest in the development of clinical programs, state of the art
prescription fulfillment technology, enhanced information management systems,
Internet initiatives, and growth in the business fueled from the UnitedHealth
Group contract and the acquisition of ProVantage, Merck-Medco strengthened its
leadership position in providing pharmaceutical benefit services. Merckmedco.com
became the first Internet pharmacy to eclipse $1.0 billion in cumulative sales
and is now filling more than 180,000 prescriptions a week. Merck-Medco recently
commenced operations in its newest, largest and most advanced automated pharmacy
located in Willingboro, New Jersey. The number of prescriptions managed by
Merck-Medco grew to more than 537 million in 2001, up 19% from more than 450
million prescriptions in 2000.
Merck & Co., Inc. 2001 Annual Report 17
<PAGE>
Costs, Expenses and Other
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
$ in millions) 2001 Change 2000 Change 1999
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Materials and
production ........ $ 28,976.5 +29% $ 22,443.5 +28% $ 17,534.2
Marketing and
administrative .... 6,224.4 + 1% 6,167.7 +19% 5,199.9
Research and
development ....... 2,456.4 + 5% 2,343.8 +13% 2,068.3
Equity income
from affiliates ... (685.9) -10% (764.9) - (762.0)
Other (income)
expense, net ...... 341.7 - 2% 349.0 * 54.1
- --------------------------------------------------------------------------------------
$ 37,313.1 +22% $ 30,539.1 +27% $ 24,094.5
======================================================================================
</TABLE>
* 100% or greater
In 2001, materials and production costs increased 29% compared to an 18%
sales growth rate. Excluding the effect of exchange and inflation, these costs
increased 19%, five points higher than the unit sales volume growth in 2001. The
higher growth rate in these costs over the sales volume growth is primarily
attributable to the significant growth in Merck-Medco's historically
lower-margin business. In 2000, materials and production costs increased 28%,
compared to a 23% sales growth rate primarily attributable to growth in the
lower-margin Merck-Medco business. Excluding the effect of exchange and
inflation, these costs increased 20%, the same as the unit sales volume growth
in 2000.
Marketing and administrative expenses increased 1% in total and were
essentially level with 2000 on a volume basis, including a one point decrease
attributable to marketing expenses. Marketing expenses reflect the increased
resource commitment to Merck's five key product growth drivers, including 1,000
new sales representatives added in the United States during 2001, and continued
refinement of the promotion and direct selling spending mix to maximize product
sales performance. The moderation in the growth of marketing and administrative
expenses for 2001 also reflects the success of operational efficiency
initiatives focused on the fundamental redesign of work processes as well as
leveraging technology to reduce administrative expenses within the Company's
overall cost structure. Marketing and administrative expenses increased 19% in
total and on a volume basis in 2000, including a 12 point increase attributable
to marketing expenses, primarily in support of the Company's five key product
franchises. Marketing and administrative expenses as a percentage of sales were
13% in 2001, 15% in 2000 and 16% in 1999. The continuous improvement in the
ratios over 1999 primarily reflects the lower growth of marketing and
administrative costs relative to Merck-Medco's sales growth and operational
efficiency initiatives implemented in 2001.
Research and development expenses increased 5% in 2001 and continue to
reflect Merck's ongoing commitment to scientific innovation. Excluding the
effect of exchange and inflation, these expenses increased 3%. Research and
development expenses increased 13% in 2000. Excluding the effects of exchange
and inflation, these expenses increased 11%.
Research and development in the pharmaceutical industry is inherently a
long-term process. The following data show an unbroken trend of year-to-year
increases in research and development spending. For the period 1992 to 2001, the
compounded annual growth rate in research and development was 10%. Research and
development expenses for 2002 are estimated to approximate $2.9 billion.
R&D Expenditures
----------------
($ in millions)
[CHART]
Year Total R&D Expenditures
---- ----------------------
1992 $1,112
1993 1,173
1994 1,231
1995 1,331
1996 1,487
1997 1,684
1998 1,821
1999 2,068
2000 2,344
2001 2,456
Equity income from affiliates reflects the favorable performance of the
Company's joint ventures and partnership returns from AZLP. In 2001, the
decrease in equity income from affiliates primarily reflects the impact of the
Company's share of research and development expenses associated with the
partnerships formed in mid-2000 with Schering-Plough.
In 2001, the decrease in other expense, net, was primarily attributable to
higher interest income, lower minority interest expense and an increase in gains
on security sales. This decrease was partially offset by lower exchange gains
resulting from the translation of the Company's balance sheet and the effect of
income recorded in 2000 from the settlement of disputed proceeds related to the
AstraZeneca merger. In 2000, the increase in other expense, net, primarily
reflects the effects of a number of items recorded in 1999: $411.0 million of
income associated with the Lump Sum Payment from Astra, partially offset by a
reserve related to disputed proceeds, and $77.9 million of income resulting from
the reversal of a 1995 restructuring reserve, partially offset by $110.0 million
of charges primarily for endowment of both The Merck Company Foundation and The
Merck Genome Research Institute and provisions for the settlement of claims.
Also contributing to the increase was higher net interest expense and minority
interest expense in 2000, partially offset by income recorded from the
aforementioned disputed proceeds settlement.
18 Merck & Co., Inc. 2001 Annual Report Financial Section
<PAGE>
Earnings
- --------------------------------------------------------------------------------
($ in millions except
per share amounts) 2001 Change 2000 Change 1999
- --------------------------------------------------------------------------------
Net income ............. $7,281.8 +7% $6,821.7 +16% $5,890.5
As a % of sales ..... 15.3% 16.9% 18.0%
As a % of average
total assets ...... 17.3% 17.9% 17.4%
Earnings per
common share
assuming dilution ... $ 3.14 +8% $ 2.90 +18% $ 2.45
================================================================================
Net income was up 7% in 2001 and 16% in 2000. Net income as a percentage of
sales was 15.3% in 2001 compared to 16.9% in 2000 and 18.0% in 1999. The decline
in the ratio from 2000 is principally due to a higher growth rate in
Merck-Medco's historically lower-margin business, offset in part by the lower
growth in marketing and administrative expenses. Foreign currency exchange had a
three percentage point unfavorable effect on the growth rate compared to a one
percentage point unfavorable effect in 2000. The Company's effective income tax
rate in 2001 was 30.0%, compared to 30.6% in 2000 and 31.7% in 1999. The higher
effective tax rate in 1999 versus 2000 and 2001 primarily reflects the
nondeductibility of the goodwill write-off recorded in 1999 resulting from the
AstraZeneca merger. Net income as a percentage of average total assets was 17.3%
in 2001, 17.9% in 2000 and 17.4% in 1999. Earnings per common share assuming
dilution grew 8% in 2001, compared to 18% in 2000. In 2001 and 2000, earnings
per common share assuming dilution increased at a faster rate than net income as
a result of treasury stock purchases.
Distribution of 2001 Sales and Equity Income
[CHART]
Raw Materials and Production Costs 60%
Operating Expenses 19%
Taxes and Net Interest 6%
Dividends 7%
Retained Earnings 8%
----
Total 100%
Environmental and Other Matters
The Company believes that it is in compliance in all material respects with
applicable environmental laws and regulations. In 2001, the Company incurred
capital expenditures of approximately $197.5 million for environmental
protection facilities. Capital expenditures for this purpose are forecasted to
exceed $500.0 million for the years 2002 through 2006. In addition, the
Company's operating and maintenance expenditures for pollution control were
approximately $88.7 million in 2001. Expenditures for this purpose for the years
2002 through 2006 are forecasted to approximate $520.0 million.
The Company is a party to a number of proceedings brought under the
Comprehensive Environmental Response, Compensation and Liability Act, commonly
known as Superfund, as well as under other federal and state statutes. The
Company is also remediating environmental contamination resulting from past
industrial activity at certain of its sites and has taken 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. Expenditures for remediation and environmental
liabilities were $34.2 million in 2001, and are estimated at $137.0 million for
the years 2002 through 2006. These amounts do not consider potential recoveries
from insurers or other parties. Although it is not possible to predict with
certainty the outcome of these environmental matters, or the ultimate costs of
remediation, management does not believe that any reasonably possible
expenditures that may be incurred in excess of those provided should result in a
materially adverse effect on the Company's financial position, results of
operations, liquidity or capital resources for any year. (See Note 9 to the
consolidated financial statements for further information.)
In June 2001, the Company received a notice from the Federal Trade
Commission (FTC) advising the Company that the FTC had closed its investigation
into pricing practices, which commenced in 1996. Merck has been advised by the
U.S. Department of Justice that it is investigating marketing and selling
activities of Merck and other pharmaceutical manufacturers. Merck will be
working with the government to respond appropriately to informational requests.
In a continuing worldwide dispute between Merck and Pharmacia Corporation
(Pharmacia) over competing claims to the patent rights to the class of compounds
that include rofecoxib, the active ingredient in Vioxx, the federal district
court in Washington, D.C., recently dismissed a Pharmacia claim for damages for
Merck's sale of Vioxx. Pharmacia may seek an appeal of this decision. Merck has
also received favorable decisions regarding the patent status of Vioxx from
courts in the United Kingdom, Holland and Spain, while receiving no adverse
decisions in any country. The Company also noted that a number of federal and
state lawsuits, involving individual claims as well as purported class actions,
have been filed against the Company with respect to Vioxx. Some of the lawsuits
also name as defendants Pfizer Inc. and Pharmacia, which market a competing
product. The lawsuits include allegations regarding gastrointestinal bleeding
and cardiovascular events. The Company believes that these lawsuits are
completely without merit and will vigorously defend them.
From time to time, generic manufacturers of pharmaceutical products file
Abbreviated New Drug Applications (ANDAs) with the FDA seeking to market generic
forms of Company products prior to the expiration of relevant patents owned by
the Company. Generic pharmaceutical manufacturers have submitted ANDAs to the
FDA seeking to market in the U.S. a generic form of Fosamax (alendronate) and
Prilosec (omeprazole) prior to the expiration of the Company's (and
AstraZeneca's in the case of Prilosec) patents concerning these products. The
generic companies' ANDAs include allegations of non-infringement, invalidity and
unenforceability of the patents. One manufacturer has received FDA approval to
market a generic form of Prilosec. The Company has filed patent infringement
suits in federal court against companies filing ANDAs for generic alendronate,
and AstraZeneca and the Company have filed patent infringement suits in federal
court against companies filing ANDAs for
Merck & Co., Inc. 2001 Annual Report 19
<PAGE>
generic omeprazole. In the case of alendronate, similar patent challenges exist
in certain foreign jurisdictions. The Company intends to vigorously defend its
patents, which it believes are valid, against infringement by generic companies
attempting to market products prior to the expiration dates of such patents. A
trial in the U.S. with respect to the alendronate daily product concluded in
November 2001 and the Company is awaiting a ruling; no trial involving the
alendronate weekly product is expected before 2003. In the case of omeprazole, a
trial commenced in December 2001. As with any litigation, there can be no
assurance of the outcomes, which if adverse, could result in significantly
shortened periods of exclusivity for these products.
Seven plaintiffs, from six pharmaceutical benefit plans for which Merck-Medco
is the pharmaceutical benefit manager, have sued Merck-Medco and the Company in
federal court. The suits, which are similar to claims against other
pharmaceutical benefit managers in other pending cases, allege that Merck-Medco
should be treated as a "fiduciary" under the provisions of the Employee
Retirement Income Security Act (ERISA). Plaintiffs have not yet formally sought
class-action status. The amended complaints in the lawsuits also allege that the
Company and Merck-Medco have violated ERISA by using Merck-Medco to increase the
Company's market share and by entering into certain "prohibited transactions"
with each other that favor the Company's products. The plaintiffs have demanded
that Merck-Medco and the Company turn over any unlawfully obtained profits to a
trust to be set up for the benefit plans. A motion for summary judgement filed
by Merck-Medco is still pending. In addition, a complaint against Merck-Medco
and the Company has recently been filed by one Northwest Airlines plan
participant, purportedly on behalf of the plan and similarly-situated
self-funded plans. Class action status has not yet been sought, and Northwest
Airlines is not a party to the lawsuit. The complaint relies on many of the same
theories as the litigation discussed above. Merck-Medco and the Company believe
that these cases are without merit, Merck-Medco is not a "fiduciary" within the
meaning of ERISA and the Company has not violated ERISA. Merck-Medco and the
Company intend to vigorously defend these claims.
Capital Expenditures
Capital expenditures were $2.7 billion in 2001 and 2000. Expenditures in the
United States were $2.1 billion in 2001 and 2000. Expenditures during 2001
included $1.0 billion for production facilities, $763.1 million for research and
development facilities, $197.5 million for environmental projects, and $763.6
million for administrative, safety and general site projects. Capital
expenditures approved but not yet spent at December 31, 2001 were $2.3 billion.
Capital expenditures for 2002 are estimated to be $2.6 billion.
Depreciation was $1.1 billion in 2001 and $905.5 million in 2000, of which
$777.1 million and $653.9 million, respectively, applied to locations in the
United States.
Capital Expenditures
--------------------
($ in millions)
[CHART]
YEAR TOTAL CAPITAL EXPENDITURES
---- --------------------------
1992 $1,067
1993 1,013
1994 1,009
1995 1,005
1996 1,197
1997 1,449
1998 1,973
1999 2,561
2000 2,728
2001 2,725
Analysis of Liquidity and Capital Resources
Cash provided by operations continues to be the Company's primary source of
funds to finance operating needs and capital expenditures. In 2001, cash flows
from operations were $9.1 billion, reflecting the continued growth of the
Company's earnings. This cash was used to fund capital expenditures of $2.7
billion, to pay Company dividends of $3.1 billion and to partially fund the
purchase of treasury shares. At December 31, 2001, the total of worldwide cash
and investments was $10.3 billion, including $3.3 billion of cash, cash
equivalents and short-term investments, and $7.0 billion of long-term
investments. The above totals include $1.1 billion in cash and investments held
by Banyu Pharmaceutical Co., Ltd., in which the Company has a 50.87% ownership
interest.
Selected Data
- --------------------------------------------------------------------------------
($ in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
Working capital ..................... $ 1,417.4 $ 3,643.8 $ 2,500.4
Total debt to total liabilities
and equity ....................... 20.1% 17.2% 16.7%
Cash provided by operations
to total debt .................... 1.0:1 1.1:1 1.0:1
- --------------------------------------------------------------------------------
Working capital levels are more than adequate to meet the operating
requirements of the Company. The ratio of total debt to total liabilities and
equity was affected by incremental borrowings used to fund capital expenditures,
treasury stock repurchases and other corporate initiatives. The ratio of cash
provided by operations to total debt, although impacted by these incremental
borrowings, reflects the ability of the Company to cover its debt obligations.
In February 2000, the Board of Directors approved purchases of up to $10.0
billion of Merck shares. From 1999 to 2001, the Company purchased $4.7 billion
of treasury shares under previously authorized completed programs, and $6.4
billion under the 2000 program. Total treasury stock purchased in 2001 was $3.9
billion. For the period 1992 to 2001, the Company has purchased 507.1 million
shares at a total cost of $23.2 billion.
20 Merck & Co., Inc. 2001 Annual Report Financial Section
<PAGE>
Under its shelf registration statement, in both July and December 2001, the
Company issued $500.0 million of medium-term notes, bearing coupons of 5.3% and
4.1%, respectively, payable semiannually. During the year, the Company also
issued an additional $158.7 million of securities under the shelf. In the fourth
quarter, the Company's $1.5 billion shelf registration statement filed with the
Securities and Exchange Commission for the issuance of debt securities became
effective. The remaining capacity under such filings is $1.9 billion at December
31, 2001.
The Company's strong financial position, as evidenced by its triple-A
credit ratings from Moody's and Standard & Poor's on outstanding debt issues,
provides a high degree of flexibility in obtaining funds on competitive terms.
The ability to finance ongoing operations primarily from internally generated
funds is desirable because of the high risks inherent in research and
development required to develop and market innovative new products and the
highly competitive nature of the pharmaceutical industry. The Company does not
participate in any off-balance sheet arrangements involving unconsolidated
subsidiaries that provide a material source of financing or potentially expose
the Company to material unrecorded financial obligations.
A significant portion of the Company's cash flows are denominated in
foreign currencies. Merck relies on sustained cash flows generated from foreign
sources to support its long-term commitment to U.S. dollar-based research and
development. To the extent the dollar value of cash flows is diminished as a
result of a strengthening dollar, the Company's ability to fund research and
other dollar-based strategic initiatives at a consistent level may be impaired.
The Company has established revenue hedging and balance sheet risk management
programs to protect against volatility of future foreign currency cash flows and
changes in fair value caused by volatility in foreign exchange rates.
The objective of the revenue hedging program is to reduce the potential for
longer-term unfavorable changes in foreign exchange to decrease the U.S. dollar
value of future cash flows derived from foreign currency denominated sales,
primarily the euro and Japanese yen. To achieve this objective, the Company will
partially hedge anticipated sales that are expected to occur over its planning
cycle, typically no more than three years into the future. The Company will
layer in hedges over time, increasing the portion of sales hedged as it gets
closer to the expected date of the transaction. The portion of sales hedged is
based on assessments of cost-benefit profiles that consider natural offsetting
exposures, revenue and exchange rate volatilities and correlations, and the cost
of hedging instruments. Merck manages its anticipated transaction exposure
principally with purchased local currency put options which provide the Company
with a right, but not an obligation, to sell foreign currencies in the future at
a predetermined price. If the U.S. dollar strengthens relative to the currency
of the hedged anticipated sales, total changes in the options' cash flows fully
offset the decline in the expected future U.S. dollar cash flows of the hedged
foreign currency sales. Conversely, if the U.S. dollar weakens, the options'
value reduces to zero, but the Company benefits from the increase in the value
of the anticipated foreign currency cash flows. While a weaker U.S. dollar would
result in a net benefit, the market value of the Company's hedges would have
declined by $11.9 million and $47.4 million, respectively, from a uniform 10%
weakening of the U.S. dollar at December 31, 2001 and 2000. The market value was
determined using a foreign exchange option pricing model and holding all factors
except exchange rates constant. Because Merck uses purchased local currency put
options, a uniform weakening of the U.S. dollar will yield the largest overall
potential loss in the market value of these options. The December 31, 2001
measurement reflects reduced notional amounts compared to the prior year. The
sensitivity measurement assumes that a change in one foreign currency relative
to the U.S. dollar would not affect other foreign currencies relative to the
U.S. dollar. Although not predictive in nature, the Company believes that a 10%
threshold reflects reasonably possible near-term changes in Merck's major
foreign currency exposures relative to the U.S. dollar. Over the last three
years, the program has reduced the volatility of cash flows and mitigated the
loss in value of cash flows during periods of relative strength in the U.S.
dollar for the portion of revenues hedged. The cash flows from these contracts
are reported as operating activities in the Consolidated Statement of Cash
Flows.
A primary objective of the balance sheet risk management program is to
protect the U.S. dollar value of foreign currency denominated net monetary
assets from the effects of volatility in foreign exchange that might occur prior
to their conversion to U.S. dollars. Merck seeks to fully offset the effects of
exchange on exposures denominated in developed country currencies, primarily the
euro, Japanese yen and Canadian dollar, and will either partially offset or not
offset at all exposures in developing countries where we consider the cost of
derivative instruments to be uneconomic or when such instruments are unavailable
at any cost. The Company will also minimize the effect of exchange on monetary
assets and liabilities by managing operating activities and net asset positions
at the local level. Merck principally utilizes forward exchange contracts which
enable the Company to buy and sell foreign currencies in the future at fixed
exchange rates and offset the consequences of changes in foreign exchange on the
amount of U.S. dollar cash flows derived from the net assets. The Company also
uses forward contracts to hedge the changes in fair value of certain foreign
currency denominated available-for-sale securities attributable to fluctuations
in foreign currency exchange rates. A sensitivity analysis to changes in the
value of the U.S. dollar on foreign currency denominated derivatives,
investments and monetary assets and liabilities indicated that if the U.S.
dollar uniformly strengthened by 10% against all currency exposures of the
Company at December 31, 2001, Income before taxes would have declined by $2.5
million. Because Merck is in a net long position relative to its major foreign
currencies after consideration of forward contracts, a uniform strengthening of
the U.S. dollar will yield the largest overall potential net loss in earnings
due to exchange. At December 31, 2000, the Company was in a net short position
after consideration of forward contracts. A uniform 10% weakening of the U.S.
dollar would have reduced Income before taxes by $2.5 million. This measurement
Merck & Co., Inc. 2001 Annual Report 21
<PAGE>
assumes that a change in one foreign currency relative to the U.S. dollar would
not affect other foreign currencies relative to the U.S. dollar. Although not
predictive in nature, the Company believes that a 10% threshold reflects
reasonably possible near-term changes in Merck's major foreign currency
exposures relative to the U.S. dollar. The cash flows from these contracts are
reported as operating activities in the Consolidated Statement of Cash Flows.
In addition to the revenue hedging and balance sheet risk management
programs, the Company may use interest rate swap contracts on certain investing
and borrowing transactions to manage its net exposure to interest rate changes
and to reduce its overall cost of borrowing. The Company does not use leveraged
swaps and, in general, does not leverage any of its investment activities that
would put principal capital at risk. In July 2001, the Company entered into a
five-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 five-year fixed rate notes attributable to changes in the benchmark
London Interbank Offered Rate (LIBOR) swap rate. In December 2001, the Company
entered into a similar three-year swap contract designated as a fair value hedge
of $500.0 million of three-year fixed rate notes. The swaps effectively convert
fixed rate obligations to floating rate instruments. The Company is also a party
to a seven-year combined interest rate and currency swap contract entered into
in 1997 which converts a variable rate foreign currency denominated investment
to a variable rate U.S. dollar investment. The swap contract hedges the changes
in the fair value of the investment attributable to fluctuations in exchange
rates while allowing the Company to receive variable rate returns. The cash
flows from these contracts are reported as operating activities in the
Consolidated Statement of Cash Flows.
The Company's investment portfolio includes cash equivalents and short-term
investments, the market values of which are not significantly impacted by
changes in interest rates. The market value of the Company's medium- to
long-term fixed rate investments is modestly impacted by changes in U.S.
interest rates. Changes in medium- to long-term U.S. interest rates would have a
more significant impact on the market value of the Company's fixed-rate
borrowings, which generally have longer maturities. A sensitivity analysis to
measure potential changes in the market value of the Company's investments, debt
and related swap contracts from a change in interest rates indicated that a one
percentage point increase in interest rates at December 31, 2001 and 2000 would
have positively impacted the net aggregate market value of these instruments by
$26.3 million and $116.0 million, respectively. A one percentage point decrease
at December 31, 2001 and 2000 would have negatively impacted the net aggregate
market value by $89.1 million and $135.6 million, respectively. The reduced
sensitivity of the Company's aggregate investment and debt portfolio at December
31, 2001 reflects an increase in the size and weighted average maturity of the
Company's investments. The fair value of the Company's debt was determined using
pricing models reflecting one percentage point shifts in the appropriate yield
curves. The fair value of the Company's investments was determined using a
combination of pricing and duration models. Whereas duration is a linear
approximation that works well for modest changes in yields and generates a
symmetrical result, pricing models reflecting the convexity of the price/yield
relationship provide greater precision and reflect the asymmetry of price
movements for interest rate changes in opposite directions. The impact of
convexity is more pronounced in longer-term maturities and low interest rate
environments.
Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board issued Statement No. 142,
Goodwill and Other Intangible Assets (FAS 142), which is effective beginning
January 1, 2002. FAS 142 addresses the recognition and measurement of goodwill
and other intangible assets subsequent to a business combination. In accordance
with FAS 142, goodwill will no longer be amortized, but rather assigned to
reporting units within the Company's segments and evaluated for impairment on an
annual basis using a fair value based test. The Company has identified the
appropriate reporting units as defined by the new guidance and is currently
assessing their fair value. Beginning January 1, 2002, annual amortization
expense of approximately $130.0 million will no longer be recorded.
2002 Outlook
In January 2002, the Company announced plans to establish Merck-Medco as a
separate, publicly-traded company. The Company plans an initial public offering
of a portion of the new company by mid-2002, subject to market conditions.
Alternatives for the distribution of the remaining shares in the new company are
under evaluation. The full separation of Merck-Medco should be completed within
12 months of the initial public offering, subject to receipt of an Internal
Revenue Service ruling that such an event would be tax-free to shareholders and
to other customary conditions.
For 2002, the Company's outlook for the operating earnings of its core
pharmaceutical business is unchanged as a result of this transaction. Growth of
its key franchises, continued investments in research and development and
marketing, and the benefits from operational efficiencies will contribute to
operating income growth in the Company's core human health business. The impact
of patent expiries, however, most importantly the anticipated impact of the
patent expiry of Prilosec, will significantly dampen net income growth in 2002.
As a result, 2002 will be a transition year and the Company anticipates that on
an as-reported basis, earnings per share for 2002 will be at the same level as
2001 results. The 2002 as-reported earnings per share will also be affected by
the benefit from the implementation of FAS 142 regarding goodwill amortization,
most of which relates to Merck's 1993 acquisition of Merck-Medco, and the timing
of the completion of the distribution of the remaining shares in the company.
Going forward, the Company expects its core pharmaceutical business to deliver
double-digit earnings-per-share growth in 2003, driven by accelerating top-line
growth.
22 Merck & Co., Inc. 2001 Annual Report Financial Section
<PAGE>
Use of Estimates and Cautionary Factors That May Affect Future Results
The consolidated financial statements include certain amounts that are based on
management's best estimates and judgments. Estimates are used in determining
such items as provisions for rebates, returns and allowances,
depreciable/amortizable lives, pension and other postretirement benefit plan
assumptions, and amounts recorded for contingencies, environmental liabilities
and other reserves. Because of the uncertainty inherent in such estimates,
actual results may differ from these estimates. The Company is not aware of
reasonably likely events or circumstances which would result in different
amounts being reported that would have a material impact on results of
operations or financial condition.
This annual report and other written reports and oral statements made from
time to time by the Company may contain so-called "forward-looking statements,"
all of which are subject to risks and uncertainties. One can identify these
forward-looking statements by their use of words such as "expects," "plans,"
"will," "estimates," "forecasts," "projects" and other words of similar meaning.
One can also identify them by the fact that they do not relate strictly to
historical or current facts. These statements are likely to address the
Company's growth strategy, financial results, product approvals and development
programs. One must carefully consider any such statement and should understand
that many factors could cause actual results to differ from the Company's
forward-looking statements. These factors include inaccurate assumptions and a
broad variety of other risks and uncertainties, including some that are known
and some that are not. No forward-looking statement can be guaranteed and actual
future results may vary materially.
The Company does not assume the obligation to update any forward-looking
statement. One should carefully evaluate such statements in light of factors
described in the Company's filings with the Securities and Exchange Commission,
especially on Forms 10-K, 10-Q and 8-K (if any). In Item 1 of the Company's
annual report on Form 10-K for the year ended December 31, 2001, which will be
filed in March 2002, the Company discusses in more detail various important
factors that could cause actual results to differ from expected or historic
results. The Company notes these factors for investors as permitted by the
Private Securities Litigation Reform Act of 1995. Prior to the filing of the
Form 10-K for the year ended December 31, 2001, reference should be made to Item
1 of the Company's annual report on Form 10-K for the year ended December 31,
2000. One should understand that it is not possible to predict or identify all
such factors. Consequently, the reader should not consider any such list to be a
complete statement of all potential risks or uncertainties.
<TABLE>
<CAPTION>
Condensed Interim Financial Data
- --------------------------------------------------------------------------------
($ in millions except
per share amounts) 4th Q 3rd Q 2nd Q 1st Q
- --------------------------------------------------------------------------------
2001
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales ...................... $12,558.0 $11,919.6 $11,893.1 $11,345.1
Materials and production
costs ..................... 7,642.4 7,082.8 7,204.8 7,046.5
Marketing and
administrative expenses ... 1,555.4 1,525.3 1,637.4 1,506.2
Research and development
expenses .................. 716.4 590.3 602.4 547.4
Equity income from
affiliates ................ (128.2) (164.1) (215.0) (178.6)
Other (income) expense,
net ....................... 113.5 102.2 70.0 56.1
Income before taxes ........ 2,658.5 2,783.1 2,593.5 2,367.5
Net income ................. 1,860.9 1,948.2 1,815.4 1,657.3
Basic earnings per common
share ..................... $.82 $.85 $.79 $.72
Earnings per common share
assuming dilution ......... $.81 $.84 $.78 $.71
- --------------------------------------------------------------------------------
2000
- --------------------------------------------------------------------------------
Sales ...................... $11,467.3 $10,567.5 $9,477.1 $8,851.4
Materials and production
costs ..................... 6,570.6 5,987.4 5,052.1 4,833.4
Marketing and
administrative expenses ... 1,774.1 1,452.1 1,524.3 1,417.2
Research and development
expenses .................. 662.4 609.8 548.0 523.6
Equity income from
affiliates ................ (145.5) (219.4) (211.8) (188.3)
Other (income) expense,
net ....................... 94.6 96.0 87.2 71.5
Income before taxes ........ 2,511.1 2,641.6 2,477.3 2,194.0
Net income ................. 1,764.4 1,835.9 1,721.7 1,499.6
Basic earnings per common
share ..................... $.77 $.80 $.74 $.65
Earnings per common share
assuming dilution ......... $.75 $.78 $.73 $.63
================================================================================
</TABLE>
Dividends Paid per Common Share
- --------------------------------------------------------------------------------
Year 4th Q 3rd Q 2nd Q 1st Q
- --------------------------------------------------------------------------------
2001 ............. $1.37 $.35 $.34 $.34 $.34
2000 ............. 1.21 .34 .29 .29 .29
================================================================================
Common Stock Market Prices
- --------------------------------------------------------------------------------
2001 4th Q 3rd Q 2nd Q 1st Q
- --------------------------------------------------------------------------------
High .......................... $70.60 $71.50 $80.85 $95.25
Low ........................... 56.80 60.35 63.65 66.00
- --------------------------------------------------------------------------------
2000
- --------------------------------------------------------------------------------
High .......................... $96.69 $77.38 $76.63 $79.00
Low ........................... 72.88 63.00 61.88 52.00
- --------------------------------------------------------------------------------
The principal market for trading of the common stock is the New York Stock
Exchange under the symbol MRK.
Merck & Co., Inc. 2001 Annual Report 23
<PAGE>
Consolidated Statement of Income
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Merck & Co., Inc. and Subsidiaries
Years Ended December 31
($ in millions except per share amounts) 2001 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales .................................. $47,715.7 $40,363.2 $32,714.0
- --------------------------------------------------------------------------------
Costs, Expenses and Other
Materials and production ............... 28,976.5 22,443.5 17,534.2
Marketing and administrative ........... 6,224.4 6,167.7 5,199.9
Research and development ............... 2,456.4 2,343.8 2,068.3
Equity income from affiliates .......... (685.9) (764.9) (762.0)
Other (income) expense, net ............ 341.7 349.0 54.1
- --------------------------------------------------------------------------------
37,313.1 30,539.1 24,094.5
- --------------------------------------------------------------------------------
Income Before Taxes .................... 10,402.6 9,824.1 8,619.5
Taxes on Income ........................ 3,120.8 3,002.4 2,729.0
- --------------------------------------------------------------------------------
Net Income ............................. $ 7,281.8 $ 6,821.7 $ 5,890.5
================================================================================
Basic Earnings per Common Share ........ $ 3.18 $ 2.96 $ 2.51
================================================================================
Earnings per Common Share Assuming
Dilution ............................ $ 3.14 $ 2.90 $ 2.45
================================================================================
<CAPTION>
Consolidated Statement of Retained Earnings
- --------------------------------------------------------------------------------
Merck & Co., Inc. and Subsidiaries
Years Ended December 31
($ in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1 ................... $ 27,363.9 $ 23,447.9 $ 20,186.7
- --------------------------------------------------------------------------------
Net Income ........................... 7,281.8 6,821.7 5,890.5
Common Stock Dividends Declared ...... (3,156.1) (2,905.7) (2,629.3)
- --------------------------------------------------------------------------------
Balance, December 31 ................. $ 31,489.6 $ 27,363.9 $ 23,447.9
================================================================================
<CAPTION>
Consolidated Statement of Comprehensive Income
- --------------------------------------------------------------------------------
Merck & Co., Inc. and Subsidiaries
Years Ended December 31
($ in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income ............................ $ 7,281.8 $ 6,821.7 $ 5,890.5
- --------------------------------------------------------------------------------
Other Comprehensive Income (Loss)
Net unrealized gain on derivatives,
net of tax and net income
realization ......................... 7.3 -- --
Net unrealized gain on investments,
net of tax and net income
realization ......................... 11.1 24.3 25.6
Minimum pension liability, net of
tax ................................. (38.6) (1.6) 3.8
- --------------------------------------------------------------------------------
(20.2) 22.7 29.4
- --------------------------------------------------------------------------------
Comprehensive Income ................. $ 7,261.6 $ 6,844.4 $ 5,919.9
================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24 Merck & Co., Inc. 2001 Annual Report Financial Section
<PAGE>
Consolidated Balance Sheet
- --------------------------------------------------------------------------------
Merck & Co., Inc. and Subsidiaries
December 31
($ in millions) 2001 2000
- --------------------------------------------------------------------------------
Assets
- --------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents ........................... $ 2,144.0 $ 2,536.8
Short-term investments .............................. 1,142.6 1,717.8
Accounts receivable ................................. 5,215.4 5,262.4
Inventories ......................................... 3,579.3 3,021.5
Prepaid expenses and taxes .......................... 880.3 1,059.4
- --------------------------------------------------------------------------------
Total current assets ................................ 12,961.6 13,597.9
- --------------------------------------------------------------------------------
Investments ......................................... 6,983.5 4,947.8
- --------------------------------------------------------------------------------
Property, Plant and Equipment (at cost)
Land ................................................ 315.2 311.6
Buildings ........................................... 6,653.9 5,514.2
Machinery, equipment and office furnishings ......... 9,807.0 8,576.5
Construction in progress ............................ 2,180.4 2,304.9
- --------------------------------------------------------------------------------
18,956.5 16,707.2
Less allowance for depreciation ..................... 5,853.1 5,225.1
- --------------------------------------------------------------------------------
13,103.4 11,482.1
- --------------------------------------------------------------------------------
Goodwill and Other Intangibles (net of
accumulated amortization of $2,224.4
million in 2001 and $1,850.7 million in 2000) ..... 7,476.5 7,374.2
- --------------------------------------------------------------------------------
Other Assets ........................................ 3,481.7 2,752.9
- --------------------------------------------------------------------------------
$ 44,006.7 $ 40,154.9
================================================================================
Liabilities and Stockholders' Equity
- --------------------------------------------------------------------------------
Current Liabilities
Accounts payable and accrued liabilities ............ $ 5,108.4 $ 4,605.8
Loans payable and current portion of long-term
debt .............................................. 4,066.7 3,319.3
Income taxes payable ................................ 1,573.3 1,244.3
Dividends payable ................................... 795.8 784.7
- --------------------------------------------------------------------------------
Total current liabilities ........................... 11,544.2 9,954.1
- --------------------------------------------------------------------------------
Long-Term Debt ...................................... 4,798.6 3,600.7
- --------------------------------------------------------------------------------
Deferred Income Taxes and Noncurrent Liabilities .... 6,776.3 6,746.7
- --------------------------------------------------------------------------------
Minority Interests .................................. 4,837.5 5,021.0
- --------------------------------------------------------------------------------
Stockholders' Equity
Common stock, one cent par value
Authorized - 5,400,000,000 shares
Issued - 2,976,129,820 shares - 2001
- 2,968,355,365 shares - 2000 ............... 29.8 29.7
Other paid-in capital ............................... 6,907.2 6,265.8
Retained earnings ................................... 31,489.6 27,363.9
Accumulated other comprehensive income .............. 10.6 30.8
- --------------------------------------------------------------------------------
38,437.2 33,690.2
Less treasury stock, at cost
703,400,499 shares - 2001
660,756,186 shares - 2000 .......................... 22,387.1 18,857.8
- --------------------------------------------------------------------------------
Total stockholders' equity .......................... 16,050.1 14,832.4
- --------------------------------------------------------------------------------
$ 44,006.7 $ 40,154.9
================================================================================
The accompanying notes are an integral part of this consolidated financial
statement.
Merck & Co., Inc. 2001 Annual Report 25
<PAGE>
Consolidated Statement of Cash Flows
- --------------------------------------------------------------------------------
Merck & Co., Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years Ended December 31
($ in millions) 2001 2000 1999
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Income before taxes ....................... $ 10,402.6 $ 9,824.1 $ 8,619.5
Adjustments to reconcile income before
taxes to cash provided from operations
before taxes:
Depreciation and amortization ........... 1,463.8 1,277.3 1,144.8
Other ................................... (359.5) (222.8) (496.6)
Net changes in assets and liabilities:
Accounts receivable .................... (9.2) (885.8) (1,021.4)
Inventories ............................ (557.5) (210.1) (223.0)
Accounts payable and accrued
liabilities .......................... 458.3 (37.7) 673.0
Noncurrent liabilities ................. (261.9) (94.3) (150.9)
Other .................................. 246.6 204.3 69.9
- --------------------------------------------------------------------------------------
Cash Provided by Operating Activities
Before Taxes ............................. 11,383.2 9,855.0 8,615.3
Income Taxes Paid ......................... (2,303.3) (2,167.7) (2,484.6)
- --------------------------------------------------------------------------------------
Net Cash Provided by Operating
Activities .............................. 9,079.9 7,687.3 6,130.7
- --------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Capital expenditures ...................... (2,724.7) (2,727.8) (2,560.5)
Purchase of securities, subsidiaries
and other investments .................... (34,780.4) (28,637.1) (42,211.2)
Proceeds from sale of securities,
subsidiaries and other investments ....... 33,383.0 27,667.5 40,308.7
Proceeds from relinquishment of certain
AstraZeneca product rights ............... - 92.6 1,679.9
Other ..................................... (190.2) (36.5) (33.9)
- --------------------------------------------------------------------------------------
Net Cash Used by Investing Activities ..... (4,312.3) (3,641.3) (2,817.0)
- --------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net change in short-term borrowings ....... 259.8 905.6 2,137.9
Proceeds from issuance of debt ............ 1,694.4 442.1 11.6
Payments on debt .......................... (11.0) (443.2) (17.5)
Proceeds from issuance of preferred units
of subsidiary ............................ - 1,500.0 -
Purchase of treasury stock ................ (3,890.8) (3,545.4) (3,582.1)
Dividends paid to stockholders ............ (3,145.0) (2,798.0) (2,589.7)
Proceeds from exercise of stock options ... 300.6 640.7 322.9
Other ..................................... (279.2) (149.2) (152.5)
- --------------------------------------------------------------------------------------
Net Cash Used by Financing Activities ..... (5,071.2) (3,447.4) (3,869.4)
- --------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash
and Cash Equivalents ..................... (89.2) (83.7) (28.6)
- --------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and Cash
Equivalents .............................. (392.8) 514.9 (584.3)
- --------------------------------------------------------------------------------------
Cash and Cash Equivalents at Beginning of
Year ..................................... 2,536.8 2,021.9 2,606.2
- --------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year .. $ 2,144.0 $ 2,536.8 $ 2,021.9
======================================================================================
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
26 Merck & Co., Inc. 2001 Annual Report Financial Section
<PAGE>
Notes to Consolidated
Financial Statements
- --------------------------------------------------------------------------------
Merck & Co., Inc. and Subsidiaries
($ in millions except per share amounts)
1. Nature of Operations
Merck is a global research-driven pharmaceutical company that discovers,
develops, manufactures and markets a broad range of human and animal health
products, directly and through its joint ventures, and provides pharmaceutical
benefit services through Merck-Medco Managed Care (Merck-Medco). Human health
products include therapeutic and preventive agents, generally sold by
prescription, for the treatment of human disorders. Pharmaceutical benefit
services primarily include sales of prescription drugs through managed
prescription drug programs as well as services provided through programs to
manage patient health and drug utilization.
Merck sells its human health products and provides pharmaceutical benefit
services primarily to drug wholesalers and retailers, hospitals, clinics,
government agencies, corporations, labor unions, retirement systems, insurance
carriers, managed health care providers such as health maintenance organizations
and other institutions.
2. Summary of Accounting Policies
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company and all of its subsidiaries in which a controlling
interest is maintained. For those consolidated subsidiaries where Merck
ownership is less than 100%, the outside stockholders' interests are shown as
Minority interests. Investments in affiliates over which the Company has
significant influence but not a controlling interest are carried on the equity
basis.
Foreign Currency Translation - The U.S. dollar is the functional currency for
the Company's foreign subsidiaries.
Cash and Cash Equivalents - Cash equivalents are comprised of certain highly
liquid investments with original maturities of less than three months.
Inventories - The majority of domestic inventories are valued at the lower of
last-in, first-out (LIFO) cost or market. Remaining inventories are valued at
the lower of first-in, first-out (FIFO) cost or market.
Revenue Recognition - Revenues from sales of Merck human health products are
recognized upon shipment of product. Revenues generated by Merck-Medco's
pharmaceutical benefit services, comprised principally of sales of prescription
drugs, are recognized, net of certain rebates, upon dispensing of product.
Specifically, revenues from plan member orders dispensed at Merck-Medco's mail
service pharmacies are recognized when the product is shipped, while revenues
from orders dispensed by retail network pharmacies are recognized when the
prescription is filled. For the majority of the retail business, Merck-Medco
assumes financial risk through having independent contractual arrangements to
bill plan sponsors and pay the retail network pharmacy providers. In such cases,
revenues are recognized based on the prescription drug price negotiated with the
plan sponsor. When Merck-Medco acts solely as a liaison to reimburse retail
pharmacies on the plan sponsor's behalf, no financial risk has been assumed, and
therefore, revenues are recognized only for the amount of the administrative fee
received from the plan sponsor.
Merck-Medco has contracts with multiple pharmaceutical manufacturers that
offer rebates on drugs included on Merck-Medco formularies. These rebates are
recognized as a credit to cost of sales in the period earned based upon the
dispensed volume of specific drugs stipulated in the contracts.
Depreciation - Depreciation is provided over the estimated useful lives of the
assets, principally using the straight-line method. For tax purposes,
accelerated methods are used. The estimated useful lives primarily range from 10
to 50 years for Buildings, and from 3 to 15 years for Machinery, equipment and
office furnishings.
Goodwill and Other Intangibles - Goodwill of $4.1 billion in 2001 and $3.8
billion in 2000 (net of accumulated amortization) represents the excess of
acquisition costs over the fair value of net assets of businesses purchased and
is amortized on a straight-line basis over periods up to 40 years. Under
Statement No. 142, Goodwill and Other Intangible Assets (FAS 142), goodwill
associated with acquisitions subsequent to June 30, 2001 is not amortized. (See
Note 3.) Effective January 1, 2002, goodwill existing at June 30, 2001 will no
longer be amortized, but rather, evaluated for impairment on an annual basis
using a fair value based test. Other acquired intangibles principally include
customer relationships of $2.5 billion in 2001 and 2000 (net of accumulated
amortization) that arose in connection with the acquisition of Medco Containment
Services, Inc. (renamed Merck-Medco) and patent rights approximating $.6 billion
in 2001 and $.7 billion in 2000 (net of accumulated amortization) acquired as
part of the restructuring of Astra Merck Inc. (AMI). (See Note 4.) These
acquired intangibles are recorded at cost and are amortized on a straight-line
basis over their estimated useful lives of up to 40 years. The weighted average
amortization period for other intangibles was 29 years at December 31, 2001 and
2000. The Company reviews other intangibles to assess recoverability from future
operations using undiscounted cash flows derived from the lowest appropriate
asset groupings, generally the subsidiary level. Impairments are recognized in
operating results to the extent that carrying value exceeds fair value, which is
determined based on the net present value of estimated future cash flows.
Stock-Based Compensation - Employee stock-based compensation is recognized using
the intrinsic value method. For disclosure purposes, pro forma net income and
earnings per share impacts are provided as if the fair value method had been
applied.
Use of Estimates - The consolidated financial statements are prepared in
conformity with accounting principles generally accepted in the United States
(GAAP) and, accordingly, include amounts that are based on management's best
estimates and judgments. Estimates are used in determining such items as
provisions for rebates, returns and allowances, depreciable/amortizable lives,
pension and other postretirement benefit plan assumptions, and amounts recorded
for contingencies, environmental liabilities and other reserves. Because of the
uncertainty inherent in such estimates, actual results may differ from these
estimates. The Company is not aware of reasonably likely
Merck & Co., Inc. 2001 Annual Report 27
<PAGE>
events or circumstances which would result in different amounts being reported
that would have a material impact on results of operations or financial
condition.
Reclassifications - Certain reclassifications have been made to prior year
amounts to conform with current year presentation.
3. Acquisition
On July 19, 2001, the Company completed its acquisition of Rosetta Inpharmatics,
Inc. (Rosetta), a leading informational genomics company, in a tax-free
reorganization. Rosetta has designed and developed several unique technologies
to efficiently analyze gene data to predict how medical compounds will interact
with different kinds of cells in the body, therefore allowing Merck scientists
to more precisely select drug targets and potentially accelerate the development
process. The acquisition was accounted for under the purchase method and,
accordingly, Rosetta's results of operations have been included with the
Company's since the acquisition date. Pro forma information is not provided as
the transaction does not have material impact on the Company's results of
operations or financial position.
In accordance with the May 10, 2001 Agreement and Plan of Merger (the
Agreement), each share of outstanding Rosetta stock was converted into .2352
shares of Merck stock, resulting in the issuance by the Company of approximately
7.7 million shares of common stock. The aggregate purchase price of the
transaction approximated $633.7 million, including a $587.1 million common share
value, $33.5 million representing employee stock options valued as of the
Agreement date, and $13.1 million of estimated transaction fees. The preliminary
allocation of the purchase price resulted in tangible assets of $188.5 million,
consisting primarily of cash and short-term investments; other intangible assets
of $44.1 million; liabilities assumed of $31.1 million, including deferred tax
liabilities of $16.0 million associated with the other intangible assets; and
goodwill totaling $432.2 million. Other intangibles, which have weighted average
useful life approximating five years in aggregate and by major class, include
$27.3 million of patent rights and $16.7 million of contractual agreements. In
accordance with FAS 142, the goodwill associated with the Rosetta acquisition is
not amortized.
4. Joint Ventures
In 1982, Merck entered into an agreement with Astra AB (Astra) to develop and
market Astra's products under a royalty-bearing license. In 1993, the Company's
total sales of Astra products reached a level that triggered the first step in
the establishment of a joint venture business carried on by AMI, in which Merck
and Astra each owned a 50% share. This joint venture, formed in 1994, developed
and marketed most of Astra's new prescription medicines in the United States
including Prilosec, the first of 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 completed the restructuring of the ownership and
operations of the joint venture whereby the Company acquired Astra's interest in
AMI, renamed KBI Inc. (KBI), and contributed KBI's operating assets to a new
U.S. limited partnership, 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 (the AstraZeneca merger), became
the exclusive distributor of the products for which KBI retained rights.
While maintaining a 1% limited partner interest in AZLP, Merck has consent
and protective rights intended to preserve its business and economic interests,
including restrictions on the power of the general partner to make certain
distributions or dispositions. Furthermore, in limited events of default,
additional rights will be granted to the Company, including powers to direct the
actions of, or remove and replace, the Partnership's chief executive officer and
chief financial officer. Merck earns certain Partnership returns as well as
ongoing revenue based on sales of current and future KBI products. The
Partnership returns include a priority return provided for in the Partnership
Agreement, variable returns based, in part, upon sales of certain former Astra
USA, Inc. products, and a preferential return representing Merck's share of
undistributed AZLP GAAP earnings. These returns, which are recorded as Equity
income from affiliates, aggregated $642.8 million, $637.5 million and $633.6
million in 2001, 2000 and 1999, respectively. The AstraZeneca merger triggers a
partial redemption of Merck's limited partnership interest in 2008. Upon this
redemption, AZLP will distribute to KBI an amount based primarily on a multiple
of Merck's annual revenue derived from sales of the former Astra USA, Inc.
products for the three years prior to the redemption (the Limited Partner Share
of Agreed Value).
In conjunction with the 1998 restructuring, for a payment of $443.0 million,
which was deferred, Astra purchased an option (the Asset Option) to buy Merck's
interest in the KBI products, excluding the gastrointestinal medicines Prilosec
and Nexium. The Asset Option is exercisable in 2010 at an exercise price equal
to the net present value as of March 31, 2008 of projected future pretax revenue
to be received by the Company from the KBI products (the Appraised Value). Merck
also has the right to require Astra to purchase such interest in 2008 at the
Appraised Value. In addition, the Company granted Astra an option to buy Merck's
common stock interest in KBI at an exercise price based on the net present value
of estimated future net sales of Prilosec and Nexium. This option is exercisable
two years after Astra's purchase of Merck's interest in the KBI products.
The 1999 AstraZeneca merger constituted a Trigger Event under the KBI
restructuring agreements. As a result of the merger, Astra was required to make
two one-time payments to Merck totaling approximately $1.8 billion. In exchange
for Merck's relinquishment of rights to future Astra products with no existing
or pending U.S. patents at the time of the merger, Astra paid $967.4 million
(the Advance Payment), which is subject to a true-up calculation in 2008 that
may require repayment of all or a portion of this amount. The True-Up Amount is
directly dependent on the fair market value in 2008 of the Astra product rights
retained by the Company. Accordingly, recognition of this contingent income has
been deferred until the realizable amount, if any, is determinable, which is not
anticipated prior to 2008. The Company was also entitled to receive a Lump Sum
Payment in an amount that it estimated as $822.0 million. Astra paid $712.5
million of the Lump Sum
28 Merck & Co., Inc. 2001 Annual Report Financial Section
<PAGE>
Payment in 1999 and disputed its obligation to pay the remainder. One-half of
the expected payment reduced goodwill by $411.0 million, less 50% of a reserve
relating to disputed proceeds. The balance was recorded in Other (income)
expense, net. In 2000, arbitration over the disputed proceeds concluded and the
Company received $87.2 million plus interest.
Under the provisions of the KBI restructuring agreements, because a Trigger
Event has occurred, the sum of the Limited Partner Share of Agreed Value, the
Appraised Value and the True-Up Amount is guaranteed to be a minimum of $4.7
billion. Distribution of the Limited Partner Share of Agreed Value and payment
of the True-Up Amount will occur in 2008. AstraZeneca's purchase of Merck's
interest in the KBI products is contingent upon the exercise of either Merck's
option in 2008 or AstraZeneca's option in 2010 and, therefore, payment of the
Appraised Value may or may not occur.
In 1989, Merck formed a joint venture with Johnson & Johnson to develop and
market a broad range of nonprescrip-tion medicines for U.S. consumers. This 50%
owned venture was expanded into Europe in 1993, and into Canada in 1996. Sales
of product marketed by the joint venture were $395.0 million for 2001, $429.1
million for 2000 and $451.4 million for 1999.
In 1994, Merck and Pasteur Merieux Connaught (now Aventis Pasteur)
established an equally owned joint venture to market vaccines in Europe and to
collaborate in the development of combination vaccines for distribution in
Europe. Joint venture vaccine sales were $499.6 million for 2001, $540.9 million
for 2000 and $566.8 million for 1999.
In 1997, Merck and Rhone-Poulenc (now Aventis) combined their animal health
and poultry genetics businesses to form Merial Limited (Merial), a fully
integrated animal health company, which is a stand-alone joint venture, equally
owned by each party. Merial provides a comprehensive range of pharmaceuticals
and vaccines to enhance the health, well-being and performance of a wide range
of animal species. Merial sales were $1.7 billion for 2001, $1.6 billion for
2000 and $1.7 billion for 1999.
In May 2000, the Company and Schering-Plough Corporation (Schering-Plough)
entered into agreements to create separate partnerships to develop and market in
the United States new prescription medicines in the cholesterol-management and
respiratory therapeutic areas. These partnerships are pursuing the development
and marketing of Zetia, an investigational cholesterol absorption inhibitor
discovered by Schering-Plough, as a once-daily monotherapy and in
co-administration with statins; Zetia as a once-daily combination tablet with
Zocor; and a once-daily combination tablet of Singulair and Claritin,
Schering-Plough's nonsedating antihistamine, for the treatment of allergic
rhinitis and asthma. In December 2001, the Company and Schering-Plough announced
the worldwide expansion (excluding Japan) of the cholesterol-management
partnership.
5. Affiliates Accounted for Using the Equity Method
Investments in affiliates accounted for using the equity method are included in
Other assets and were $2.0 billion at December 31, 2001 and $1.7 billion at
December 31, 2000. Dividends and distributions received from these affiliates
were $572.2 million in 2001, $475.5 million in 2000 and $412.2 million in 1999.
6. Financial Instruments
Effective January 1, 2001, the Company adopted the provisions of Statement No.
133, Accounting for Derivative Instruments and Hedging Activities (FAS 133),
which establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either an asset or
liability measured at fair value and that changes in fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Upon
adoption of FAS 133, the Company recorded a favorable cumulative effect of
accounting change of $45.5 million after tax in Other comprehensive income
(loss), representing the mark to fair value of purchased local currency put
options. (See Note 17.) The cumulative effect of accounting change recorded in
Net income was not significant.
Foreign Currency Risk Management
A significant portion of the Company's cash flows are denominated in foreign
currencies. Merck relies on sustained cash flows generated from foreign sources
to support its long-term commitment to U.S. dollar-based research and
development. To the extent the dollar value of cash flows is diminished as a
result of a strengthening dollar, the Company's ability to fund research and
other dollar-based strategic initiatives at a consistent level may be impaired.
The Company has established revenue hedging and balance sheet risk management
programs to protect against volatility of future foreign currency cash flows and
changes in fair value caused by volatility in foreign exchange rates.
The objective of the revenue hedging program is to reduce the potential for
longer-term unfavorable changes in foreign exchange to decrease the U.S. dollar
value of future cash flows derived from foreign currency denominated sales,
primarily the euro and Japanese yen. To achieve this objective, the Company will
partially hedge anticipated sales that are expected to occur over its planning
cycle, typically no more than three years into the future. The Company will
layer in hedges over time, increasing the portion of sales hedged as it gets
closer to the expected date of the transaction. The portion of sales hedged is
based on assessments of cost-benefit profiles that consider natural offsetting
exposures, revenue and exchange rate volatilities and correlations, and the cost
of hedging instruments. Merck manages its anticipated transaction exposure
principally with purchased local currency put options which provide the Company
with a right, but not an obligation, to sell foreign currencies in the future at
a predetermined price. If the U.S. dollar strengthens relative to the currency
of the hedged anticipated sales, total changes in the options' cash flows fully
offset the decline in the expected future U.S. dollar cash flows of the hedged
foreign currency sales. Conversely, if the U.S. dollar weakens, the options'
value reduces to zero, but the Company benefits from the increase in the value
of the anticipated foreign currency cash flows.
During the first four months of 2001, changes in the options' intrinsic value
were deferred in Accumulated other comprehensive income (AOCI) until recognition
of the hedged anticipated revenue. Amounts associated with option time value,
which was excluded from the designated hedge relationship and marked to fair
value through earnings, were not significant. Effective May 2001, as permitted
by FAS 133 implementation guidance finalized in June 2001, the designated hedge
relationship is based on total changes in the options' cash flows. Accordingly,
the entire
Merck & Co., Inc. 2001 Annual Report 29
<PAGE>
fair value change in the options is deferred in AOCI and reclassified into Sales
when the hedged anticipated revenue is recognized. No hedge ineffectiveness is
recorded. The fair values of purchased currency options are reported in Accounts
receivable or Other assets.
A primary objective of the balance sheet risk management program is to
protect the U.S. dollar value of foreign currency denominated net monetary
assets from the effects of volatility in foreign exchange that might occur prior
to their conversion to U.S. dollars. Merck seeks to fully offset the effects of
exchange on exposures denominated in developed country currencies, primarily the
euro, Japanese yen and Canadian dollar, and will either partially offset or not
offset at all exposures in developing countries where we consider the cost of
derivative instruments to be uneconomic or when such instruments are unavailable
at any cost. The Company will also minimize the effect of exchange on monetary
assets and liabilities by managing operating activities and net asset positions
at the local level. Merck principally utilizes forward exchange contracts which
enable the Company to buy and sell foreign currencies in the future at fixed
exchange rates and offset the consequences of changes in foreign exchange on the
amount of U.S. dollar cash flows derived from the net assets. Prior to
conversion to U.S. dollars, monetary assets and liabilities are remeasured at
spot rates in effect on the balance sheet date. The effects of changes in spot
rates are reported in Other (income) expense, net. The forward contracts, which
are not designated as hedges, are marked to market through Other (income)
expense, net. Fair value changes in the forward contracts offset the changes in
the value of the remeasured assets and liabilities attributable to changes in
foreign currency exchange rates, except to the extent of the spot-forward
differences. These differences are not significant due to the short-term nature
of the contracts, which typically have average maturities at inception of less
than one year.
The Company also uses forward contracts to hedge the changes in fair value of
certain foreign currency denominated available-for-sale securities attributable
to fluctuations in foreign currency exchange rates. Changes in the fair value of
the hedged securities due to fluctuations in spot rates are offset in Other
(income) expense, net, by the fair value changes in the forward contracts
attributable to spot rate fluctuations. Hedge ineffectiveness was not material
during 2001. Changes in the contracts' fair value due to spot-forward
differences are excluded from the designated hedge relationship and recognized
in Other (income) expense, net. These amounts were not significant for the year
ended December 31, 2001.
The fair values of forward exchange contracts are reported in Accounts
receivable, Other assets, Accounts payable and accrued liabilities or Deferred
income taxes and noncurrent liabilities.
Interest Rate Risk Management
The Company may use interest rate swap contracts on certain investing and
borrowing transactions to manage its net exposure to interest rate changes and
to reduce its overall cost of borrowing. The Company does not use leveraged
swaps and, in general, does not leverage any of its investment activities that
would put principal capital at risk.
In July 2001, the Company entered into a five-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 five-year fixed rate notes
attributable to changes in the benchmark London Interbank Offered Rate (LIBOR)
swap rate. In December 2001, the Company entered into a similar three-year swap
contract designated as a fair value hedge of $500.0 million of three-year fixed
rate notes. The swaps effectively convert 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 contracts.
The Company is also a party to a seven-year combined interest rate and
currency swap contract entered into in 1997 which converts a variable rate
foreign currency denominated investment to a variable rate U.S. dollar
investment. In 2000, a portion of this contract was terminated in conjunction
with the sale of a portion of the related asset with an immaterial impact on net
income. The interest rate component of the swap is not designated as a hedge.
The currency swap component is designated as a hedge of the changes in fair
value of the investment attributable to exchange. Accordingly, changes in the
fair value of the investment due to fluctuations in spot rates are offset in
Other (income) expense, net, by fair value changes in the currency swap. Hedge
ineffectiveness was not significant during 2001. In 2000, a similar five-year
swap contract matured and the related asset was sold with an immaterial impact
on net income.
The fair values of these contracts are reported in Accounts receivable, Other
assets, Accounts payable and accrued liabilities or Deferred income taxes and
noncurrent liabilities.
Fair Value of Financial Instruments
Summarized below are the carrying values and fair values of the Company's
financial instruments at December 31, 2001 and 2000. Fair values were estimated
based on market prices, where available, or dealer quotes.
2001 2000
---------------------- ----------------------
Carrying Fair Carrying Fair
Value Value Value Value
- --------------------------------------------------------------------------------
Assets
- --------------------------------------------------------------------------------
Cash and cash
equivalents .............. $ 2,144.0 $ 2,144.0 $ 2,536.8 $ 2,536.8
Short-term investments .... 1,142.6 1,141.7 1,717.8 1,717.1
Long-term investments ..... 6,983.5 6,983.4 4,947.8 4,945.6
Purchased currency
options .................. 17.6 17.6 43.8 120.7
Forward exchange
contracts and
currency swap ............ 195.4 195.4 99.3 99.3
Interest rate swaps ....... 11.3 11.3 - -
- --------------------------------------------------------------------------------
Liabilities
- --------------------------------------------------------------------------------
Loans payable and
current portion of
long-term debt ........... $ 4,066.7 $ 4,070.5 $ 3,319.3 $ 3,320.4
Long-term debt ............ 4,798.6 4,860.4 3,600.7 3,537.3
Forward exchange
contracts ................ 35.9 35.9 42.1 42.1
================================================================================
30 Merck & Co., Inc. 2001 Annual Report Financial Section
<PAGE>
A summary of the carrying values and fair values of the Company's
investments at December 31 is as follows:
2001 2000
----------------------- ---------------------
Carrying Fair Carrying Fair
Value Value Value Value
- --------------------------------------------------------------------------------
Available-for-sale
Debt securities ........ $7,308.9 $7,308.9 $5,476.9 $5,476.9
Equity securities ...... 630.6 630.6 773.8 773.8
Held-to-maturity
securities ............. 186.6 185.6 414.9 412.0
================================================================================
A summary at December 31 of those gross unrealized gains and losses on the
Company's available-for-sale investments, recorded net of tax and minority
interests in AOCI, is as follows:
2001 2000
------------------- -------------------
Gross Unrealized Gross Unrealized
------------------- -------------------
Gains Losses Gains Losses
- -------------------------------------------------------------------------------
Debt securities ................ $144.7 $(19.5) $ 79.0 $(10.5)
Equity securities .............. 32.6 (79.3) 126.3 (83.4)
===============================================================================
Available-for-sale debt securities and held-to-maturity securities maturing
within one year totaled $1.0 billion and $163.9 million, respectively, at
December 31, 2001. Of the remaining debt securities, $5.2 billion mature within
five years.
At December 31, 2001 and 2000, $575.0 million of held-to-maturity
securities maturing within two years set off $575.0 million of 5.0%
non-transferable note obligations due by 2003 issued by the Company.
Concentrations of Credit Risk
As part of its ongoing control procedures, the Company monitors concentrations
of credit risk associated with corporate issuers of securities and financial
institutions with which it conducts business. Credit risk is minimal as credit
exposure limits are established to avoid a concentration with any single issuer
or institution. The Company also monitors the credit-worthiness of its customers
to which it grants credit terms in the normal course of business. Concentrations
of credit risk associated with these trade receivables are considered minimal
due to the Company's diverse customer base. Bad debts have been minimal. The
Company does not normally require collateral or other security to support credit
sales.
7. Inventories
Inventories at December 31 consisted of:
2001 2000
- --------------------------------------------------------------------------------
Finished goods .......................................... $2,155.7 $1,762.8
Raw materials and work in process ....................... 1,340.7 1,174.9
Supplies ................................................ 82.9 83.8
- --------------------------------------------------------------------------------
Total (approximates current cost) ....................... 3,579.3 3,021.5
Reduction to LIFO cost .................................. - -
- --------------------------------------------------------------------------------
$3,579.3 $3,021.5
================================================================================
Inventories valued under the LIFO method comprised approximately 41% and
42% of inventories at December 31, 2001 and 2000, respectively.
8. Loans Payable and Long-Term Debt
Loans payable at December 31, 2001 and 2000 consisted primarily of $3.4 billion
and $3.1 billion, respectively, of commercial paper borrowings. Loans payable at
December 31, 2001 also included $500.0 million of notes with annual interest
rate resets and a final maturity of ten years. On an annual basis, the notes
will either be repurchased from the holders at the option of the remarketing
agent and remarketed, or redeemed by the Company. Loans payable also reflected
$113.0 million and $120.0 million of 5.8% notes at December 31, 2001 and 2000,
respectively. These notes, due 2037, are subject to repayment at par at the
option of the holders in May of each year. The remainder in both years was
principally borrowings by foreign subsidiaries. The weighted average interest
rate for these borrowings was 2.5% and 6.6% at December 31, 2001 and 2000,
respectively.
Long-term debt at December 31 consisted of:
2001 2000
- --------------------------------------------------------------------------------
6.0% Astra note due 2008 ................................ $1,380.0 $1,380.0
5.3% notes due 2006 ..................................... 507.9 -
4.1% notes due 2005 ..................................... 501.4 -
6.8% euronotes due 2005 ................................. 499.5 499.4
6.4% debentures due 2028 ................................ 499.1 499.0
6.0% debentures due 2028 ................................ 496.3 496.1
Variable rate borrowings due 2004 ....................... 300.0 300.0
6.3% debentures due 2026 ................................ 247.2 247.0
Other ................................................... 367.2 179.2
- --------------------------------------------------------------------------------
$4,798.6 $3,600.7
================================================================================
At December 31, 2001, the Company was a party to interest rate swap
contracts which effectively convert the 5.3% and 4.1% fixed rate notes to
floating rate instruments. (See Note 6.)
Other at December 31, 2001 and 2000 consisted primarily of $332.6 million
and $141.9 million of borrowings at variable rates averaging 1.6% and 5.7%,
respectively. At December 31, 2001, $158.7 million and $106.0 million of these
borrowings are subject to repayment at the option of the holders beginning in
2011 and 2010, respectively. In both years, Other also consisted of foreign
borrowings at varying rates up to 9.0%.
The aggregate maturities of long-term debt for each of the next five years
are as follows: 2002, $12.2 million; 2003, $9.0 million; 2004, $307.5 million;
2005, $1.0 billion; 2006, $514.4 million.
Merck & Co., Inc. 2001 Annual Report 31
<PAGE>
9. Contingencies and Environmental Liabilities
The Company is involved in various claims and legal proceedings of a nature
considered normal to its business, principally product liability and
intellectual property cases. Additionally, the Company, along with numerous
other defendants, is a party in several antitrust actions brought by retail
pharmacies and consumers, alleging conspiracies in restraint of trade and
challenging pricing and/or purchasing practices, one of which has been certified
as a federal class action and a number of which have been certified as state
class actions. 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. In October
2001, the Judicial Panel on Multi-District Litigation (Panel) determined that
consolidated pretrial proceedings in federal district court in Chicago were
substantially completed. The Panel ordered that all of the federal antitrust
conspiracy cases, several of which have not been settled by the Company, be
returned to the federal district courts in which each case was originally filed.
The cases have now been returned to those courts for further proceedings. 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 or determine the final outcome of the remaining proceedings, management
does not believe that they should result in a materially adverse effect on the
Company's financial position, results of operations or liquidity.
The Company is also a party to a number of proceedings brought under the
Comprehensive Environmental Response, Compensation and Liability Act, commonly
known as Superfund, as well as under other federal and state statutes. When a
legitimate claim for contribution is asserted, a liability is initially accrued
based upon the estimated transaction costs to manage the site. Accruals are
adjusted as feasibility studies and related cost assessments of remedial
techniques are completed, and as the extent to which other potentially
responsible parties (PRPs) who may be jointly and severally liable can be
expected to contribute is determined.
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. A worldwide survey was initially
performed to assess all sites for potential contamination resulting from past
industrial activities. Where assessment indicated that physical investigation
was warranted, such investigation was performed, providing a better evaluation
of the need for remedial action. Where such need was identified, remedial action
was then initiated. Estimates of the extent of contamination at each site were
initially made at the pre-investigation stage and liabilities for the potential
cost of remediation were accrued at that time. As more definitive information
became available during the course of investigations and/or remedial efforts at
each site, estimates were refined and accruals were adjusted accordingly. These
estimates and related accruals continue to be refined annually.
In management's opinion, the liabilities for all environmental matters
which are probable and reasonably estimable have been accrued and totaled $217.8
million and $250.0 million at December 31, 2001 and 2000, respectively. 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 $120.0 million in the aggregate. Management
also does not believe that these expenditures should result in a materially
adverse effect on the Company's financial position, results of operations,
liquidity or capital resources for any year.
10. Preferred Stock of Subsidiary Companies
In March 2000, a wholly-owned subsidiary of the Company issued $1.5 billion par
value of variable rate preferred units. The units are redeemable at par value
plus accrued dividends at the option of the issuer at any time. They are also
redeemable at the option of the holders in March 2010, and at the end of each
five-year interval thereafter. In addition, certain provisions could lead the
Company's subsidiary to decide to redeem the preferred units if the credit
ratings on the Company's unsecured senior debt obligations fall below specified
levels, the likelihood of which the Company believes is remote. Because the
preferred securities are held at the subsidiary level, they are included in
Minority interests in the consolidated financial statements.
In connection with the 1998 restructuring of AMI (see Note 4), the Company
assumed a $2.4 billion par value preferred stock obligation with a dividend rate
of 5% per annum which is carried by KBI and included in Minority interests.
While a small portion of the preferred stock carried by KBI is convertible into
KBI common shares, none of the preferred securities are convertible into the
Company's common shares and, therefore, they are not included as common shares
issuable for purposes of computing Earnings per common share assuming dilution.
(See Note 16.)
32 Merck & Co., Inc. 2001 Annual Report Financial Section
<PAGE>
11. Stockholders' Equity
Other paid-in capital increased by $641.4 million, $345.3 million and $306.0
million in 2001, 2000 and 1999, respectively. The increase in 2001 includes
$615.3 million resulting from shares issued and equivalent employee stock
options assumed in connection with the Rosetta acquisition. (See Note 3.) The
remaining increases primarily reflect the impact of shares issued upon exercise
of stock options and related income tax benefits.
A summary of treasury stock transactions (shares in millions) is as
follows:
<TABLE>
<CAPTION>
2001 2000 1999
------------------- ------------------ ------------------
Shares Cost Shares Cost Shares Cost
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, Jan. 1 ... 660.8 $18,857.8 638.9 $16,164.6 607.4 $13,007.8
Purchases ......... 54.5 3,890.8 52.5 3,545.4 50.0 3,582.1
Issuances/(1)/ .... (11.9) (361.5) (30.6) (852.2) (18.5) (425.3)
- -------------------------------------------------------------------------------------
Balance, Dec. 31 .. 703.4 $22,387.1 660.8 $18,857.8 638.9 $16,164.6
=====================================================================================
/(1)/Issued primarily under stock option plans.
</TABLE>
At December 31, 2001 and 2000, 10 million shares of preferred stock,
without par value, were authorized; none were issued.
12. Stock Option Plans
The Company has stock option plans under which employees, non-employee directors
and employees of certain of the Company's equity method investees may be granted
options to purchase shares of Company common stock at the fair market value at
the time of the grant. Options generally vest in 5 years and expire in 10 years
from the date of grant. The Company's stock option plan for employees also
provides for the granting of performance-based stock awards. In connection with
Merck's acquisitions of SIBIA Neurosciences, Inc. and Rosetta in 1999 and 2001,
respectively, and Merck-Medco's 2000 acquisition of ProVantage Health Services,
Inc., stock options outstanding on the acquisition dates were converted into
options to purchase shares of Company common stock with equivalent value.
Summarized information relative to the Company's stock option plans (shares
in thousands) is as follows:
Number Average
of Shares Price/(1)/
- --------------------------------------------------------------------------------
Outstanding at December 31, 1998 ...................... 172,340.7 $34.20
Granted ............................................... 28,929.5 80.04
Exercised ............................................. (18,367.7) 17.59
Forfeited ............................................. (4,363.7) 51.08
Equivalent options assumed ............................ 153.8 40.55
- --------------------------------------------------------------------------------
Outstanding at December 31, 1999 ...................... 178,692.6 42.92
Granted ............................................... 32,947.5 66.97
Exercised ............................................. (30,638.4) 20.91
Forfeited ............................................. (4,774.7) 61.80
Equivalent options assumed ............................ 149.7 78.94
- --------------------------------------------------------------------------------
Outstanding at December 31, 2000 ...................... 176,376.7 50.75
Granted ............................................... 36,767.6 79.12
Exercised ............................................. (11,604.4) 25.90
Forfeited ............................................. (5,021.0) 68.78
Equivalent options assumed ............................ 681.8 30.78
- --------------------------------------------------------------------------------
Outstanding at December 31, 2001 ...................... 197,200.7 $56.98
================================================================================
/(1)/Weighted average exercise price.
The number of shares and average price of options exercisable at December
31, 2001, 2000 and 1999 were 55.1 million shares at $27.09, 42.5 million shares
at $21.56 and 51.3 million shares at $19.14, respectively. At December 31, 2001
and 2000, 87.6 million shares and 28.9 million shares, respectively, were
available for future grants under the terms of these plans.
The Company accounts for stock-based compensation using the intrinsic value
method. Accordingly, no compensation expense is recognized for its 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. Had the fair value method of accounting, which
requires recognition of compensation cost ratably over the vesting period of the
underlying equity instruments, been applied to all of the Company's stock option
plans, Net income would have been reduced by $401.1 million, or $.17 per share
in 2001, $359.8 million, or $.15 per share in 2000 and $288.9 million, or $.12
per share in 1999. The average fair value of employee and non-employee director
options granted during 2001, 2000 and 1999 was $25.42, $23.28 and $24.75,
respectively. This fair value was estimated using the Black-Scholes
option-pricing model based on the weighted average market price at grant date of
$79.10 in 2001, $66.81 in 2000 and $80.04 in 1999 and the following weighted
average assumptions:
Years Ended December 31 2001 2000 1999
- --------------------------------------------------------------------------------
Dividend yield ................................ 1.7% 1.8% 1.4%
Risk-free interest rate ....................... 4.8% 6.5% 5.1%
Volatility .................................... 29% 28% 24%
Expected life (years) ......................... 6.7 6.6 6.7
================================================================================
Summarized information about stock options outstanding and exercisable at
December 31, 2001 (shares in thousands) is as follows:
Outstanding Exercisable
Exercise ------------------------------------ -----------------------
Price Number Average Average Number Average
Range of Shares Life/(1)/ Price/(2)/ of Shares Price/(2)/
- --------------------------------------------------------------------------------
Under $15 4,660.8 6.02 $12.92 4,660.8 $12.92
$15 to 25 26,853.5 2.54 18.78 26,754.8 18.77
$25 to 40 18,919.8 4.15 32.71 18,554.8 32.69
$40 to 50 23,577.6 5.10 48.60 1,007.5 46.25
$50 to 65 30,412.8 5.95 62.53 1,904.2 57.15
$65 to 80 65,743.9 8.32 72.93 1,924.5 72.80
Over $80 27,032.3 7.03 81.76 313.3 91.67
- --------------------------------------------------------------------------------
197,200.7 55,119.9
================================================================================
/(1)/Weighted average contractual life remaining in years.
/(2)/Weighted average exercise price.
Merck & Co., Inc. 2001 Annual Report 33
<PAGE>
13. Pension and Other Postretirement Benefit Plans
The net cost for the Company's pension plans consisted of the following
components:
<TABLE>
<CAPTION>
Years Ended December 31 2001 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost ................................. $ 190.4 $ 171.2 $ 159.4
Interest cost ................................ 217.4 199.7 179.0
Expected return on plan assets ............... (287.9) (266.6) (229.4)
Net amortization ............................. 27.9 11.5 27.0
- --------------------------------------------------------------------------------
Net pension cost ............................. $ 147.8 $ 115.8 $ 136.0
================================================================================
</TABLE>
The net pension cost attributable to international plans included in the
above table was $67.3 million in 2001, $73.3 million in 2000 and $66.9 million
in 1999.
The net cost of postretirement benefits other than pensions consisted of the
following components:
<TABLE>
<CAPTION>
Years Ended December 31 2001 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost ................................. $ 52.7 $ 36.5 $ 39.4
Interest cost ................................ 77.4 62.0 58.8
Expected return on plan assets ............... (84.6) (94.5) (73.2)
Net amortization ............................. (11.4) (29.5) (18.7)
- --------------------------------------------------------------------------------
Net postretirement benefit cost .............. $ 34.1 $(25.5) $ 6.3
================================================================================
</TABLE>
The cost of health care and life insurance benefits for active employees was
$307.2 million in 2001, $263.0 million in 2000 and $212.7 million in 1999.
Summarized information about the changes in plan assets and benefit
obligation is as follows:
<TABLE>
<CAPTION>
Other
Postretirement
Pension Benefits Benefits
----------------------- --------------------
2001 2000 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fair value of plan assets
at January 1 ............ $ 3,121.3 $ 3,368.9 $ 861.3 $ 948.6
Actual return on
plan assets ............. (258.1) (195.8) (56.5) (80.8)
Company contributions ...... 250.2 169.0 - -
Benefits paid from
plan assets ............. (255.0) (228.3) (7.9) (6.5)
Other ...................... 6.1 7.5 - -
- --------------------------------------------------------------------------------
Fair value of plan assets
at December 31 .......... $ 2,864.5 $ 3,121.3 $ 796.9 $ 861.3
================================================================================
Benefit obligation
at January 1 ............ $ 3,166.8 $ 2,820.9 $ 909.8 $ 818.6
Service cost ............... 190.4 171.2 52.7 36.5
Interest cost .............. 217.4 199.7 77.4 62.0
Actuarial losses (gains) ... 283.0 220.5 177.1 36.4
Benefits paid .............. (272.5) (252.0) (50.9) (43.7)
Plan amendments ............ 26.6 13.4 (11.5) -
Other ...................... 0.1 (6.9) - -
- --------------------------------------------------------------------------------
Benefit obligation
at December 31 .......... $ 3,611.8 $ 3,166.8 $ 1,154.6 $ 909.8
================================================================================
</TABLE>
The fair value of international pension plan assets included in the preceding
table was $879.7 million in 2001 and $959.0 million in 2000. The pension benefit
obligation of international plans included in this table was $1.2 billion in
2001 and $1.1 billion in 2000.
A reconciliation of the plans' funded status to the net asset (liability)
recognized at December 31 is as follows:
<TABLE>
<CAPTION>
Other
Postretirement
Pension Benefits Benefits
---------------------- ----------------------
2001 2000 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Plan assets less than
benefit obligation ....... $ (747.3) $ (45.5) $ (357.7) $ (48.5)
Unrecognized net
loss (gain) .............. 1,331.2 538.3 215.6 (101.3)
Unrecognized plan
changes .................. 84.4 72.9 (100.7) (102.2)
Unrecognized transitional
net asset ................ (6.3) (15.8) - -
- --------------------------------------------------------------------------------
Net asset (liability) ....... $ 662.0 $ 549.9 $ (242.8) $(252.0)
- --------------------------------------------------------------------------------
Recognized as:
Other assets ............. $ 853.2 $ 713.1 $ - $ -
Accounts payable and
accrued liabilities .... (17.1) (2.8) (24.9) (24.8)
Deferred income taxes and
noncurrent
liabilities ............ (412.2) (280.4) (217.9) (227.2)
Accumulated other
comprehensive loss ..... 238.1 120.0 - -
================================================================================
</TABLE>
For pension plans with benefit obligations in excess of plan assets at
December 31, 2001 and 2000, the fair value of plan assets was $2.3 billion and
$721.1 million, respectively, and the benefit obligation was $3.1 billion and
$1.2 billion, respectively. For those plans with accumulated benefit obligations
in excess of plan assets at December 31, 2001 and 2000, the fair value of plan
assets was $387.7 million and $336.2 million, respectively, and the accumulated
benefit obligation was $697.6 million and $537.4 million, respectively.
34 Merck & Co., Inc. 2001 Annual Report Financial Section
<PAGE>
Assumptions used in determining U.S. plan information are as follows:
Pension and Other
Postretirement Benefits
----------------------------------
December 31 2001 2000 1999
- --------------------------------------------------------------------------------
Discount rate .............................. 7.25% 7.50% 7.75%
Expected rate of return
on plan assets ........................... 10.0 10.0 10.0
Salary growth rate ......................... 4.5 4.5 4.5
================================================================================
For the three years presented, international pension plan assumptions ranged
from 2.0% to 8.0% for the discount rate, 5.5% to 9.0% for the expected rate of
return on plan assets and 2.0% to 5.0% for the salary growth rate.
Unrecognized net loss (gain) amounts, which reflect experience differentials,
primarily relating to differences between expected and actual returns on plan
assets as well as the effects of changes in actuarial assumptions, are amortized
over the average remaining service period of employees.
The health care cost trend rate for other postretirement benefit plans was
9.0% at December 31, 2001. The rate is expected to decline to 5.0% over a 7-year
period. A one percentage point change in the health care cost trend rate would
have had the following effects:
One Percentage Point
-----------------------
Increase Decrease
- --------------------------------------------------------------------------------
Effect on total service and interest cost
components ......................................... $ 26.0 $ (21.4)
Effect on benefit obligation .......................... 186.8 (160.4)
================================================================================
14. Other (Income) Expense, Net
Years Ended December 31 2001 2000 1999
- --------------------------------------------------------------------------------
Interest income ...................... $ (490.1) $ (470.6) $ (364.7)
Interest expense ..................... 464.7 484.4 316.9
Exchange gains ....................... (3.5) (34.4) (27.2)
Minority interests ................... 290.6 308.7 222.3
Amortization of goodwill
and other intangibles ............. 330.1 319.1 317.4
Other, net ........................... (250.1) (258.2) (410.6)
- --------------------------------------------------------------------------------
$ 341.7 $ 349.0 $ 54.1
================================================================================
Minority interests include third parties' share of exchange gains and losses
arising from translation of the financial statements into U.S. dollars. The
increase in minority interests in 2000 primarily reflects dividends on preferred
units of a subsidiary issued in March 2000. (See Note 10.)
In 1999, Other, net, includes $411.0 million of income associated with the
Lump Sum Payment from Astra, partially offset by a reserve relating to disputed
proceeds (see Note 4) and $110.0 million of charges primarily for endowment of
both The Merck Company Foundation and The Merck Genome Research Institute.
Other, net, also includes $77.9 million of income resulting from the reversal of
a restructuring reserve established in 1995 for the anticipated 1999 closure of
a manufacturing facility.
Interest paid was $467.3 million in 2001, $450.5 million in 2000 and $276.8
million in 1999.
15. Taxes on Income
A reconciliation between the Company's effective tax rate and the U.S. statutory
rate is as follows:
<TABLE>
<CAPTION>
Tax Rate
2001 ---------------------------------
Amount 2001 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. statutory rate applied
to pretax income ........... $ 3,640.9 35.0% 35.0% 35.0%
Differential arising from:
Foreign earnings ........... (526.9) (5.1) (4.7) (3.3)
Tax exemption for
Puerto Rico operations ... (93.8) (0.9) (1.1) (1.5)
State taxes ................ 229.1 2.2 1.7 1.8
Other ...................... (128.5) (1.2) (.3) (.3)
- --------------------------------------------------------------------------------
$ 3,120.8 30.0% 30.6% 31.7%
================================================================================
</TABLE>
The higher effective tax rate in 1999 versus 2000 and 2001 primarily reflects
the nondeductibility of the goodwill write-off recorded in 1999 resulting from
the AstraZeneca merger.
Domestic companies contributed approximately 52% in 2001, 54% in 2000 and 65%
in 1999 to consolidated pretax income.
Taxes on income consisted of:
<TABLE>
<CAPTION>
Years Ended December 31 2001 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current provision
Federal ........................... $ 1,692.4 $ 2,239.0 $ 2,674.9
Foreign ........................... 635.7 591.0 439.9
State ............................. 326.8 266.7 297.1
- --------------------------------------------------------------------------------
2,654.9 3,096.7 3,411.9
- --------------------------------------------------------------------------------
Deferred provision
Federal ........................... 332.3 (64.4) (718.9)
Foreign ........................... 57.9 (34.9) 21.9
State ............................. 75.7 5.0 14.1
- --------------------------------------------------------------------------------
465.9 (94.3) (682.9)
- --------------------------------------------------------------------------------
$ 3,120.8 $ 3,002.4 $ 2,729.0
================================================================================
</TABLE>
Merck & Co., Inc. 2001 Annual Report 35
<PAGE>
Deferred income taxes at December 31 consisted of:
2001 2000
--------------------- ---------------------
Assets Liabilities Assets Liabilities
- --------------------------------------------------------------------------------
Other intangibles ........... $ 133.0 $1,248.7 $ 158.1 $ 1,303.7
Inventory related ........... 594.1 300.9 716.0 209.1
Accelerated
depreciation ............. - 905.4 - 700.9
Advance payment ............. 338.6 - 338.6 -
Equity investments .......... 57.8 408.0 57.8 311.5
Pensions and OPEB ........... 165.0 240.4 146.6 221.5
Compensation related ........ 138.1 - 140.7 -
Environmental related ....... 85.3 - 97.7 -
Other ....................... 1,256.0 509.0 1,146.8 507.0
- --------------------------------------------------------------------------------
Subtotal .................... 2,767.9 3,612.4 2,802.3 3,253.7
Valuation allowance ......... (2.1) - (1.3) -
- --------------------------------------------------------------------------------
Total deferred taxes ........ $2,765.8 $3,612.4 $ 2,801.0 $ 3,253.7
- --------------------------------------------------------------------------------
Net deferred tax
liabilities .............. $ 846.6 $ 452.7
- --------------------------------------------------------------------------------
Recognized as:
Prepaid expenses
and taxes .............. $ (613.7) $ (812.5)
Other assets ............. (65.2) (9.8)
Income taxes payable ..... 12.9 30.0
Deferred income
taxes and noncurrent
liabilities ............ 1,512.6 1,245.0
================================================================================
Income taxes paid in 2001, 2000 and 1999 were $2.3 billion, $2.2 billion and
$2.5 billion, respectively. The higher amount in 1999 primarily reflects taxes
paid on two one-time payments from Astra. Stock option exercises reduced income
taxes paid in 2001, 2000 and 1999 by $153.0 million, $537.5 million and $423.1
million, respectively.
At December 31, 2001, foreign earnings of $12.4 billion and domestic earnings
of $880.9 million have been retained indefinitely by subsidiary companies for
reinvestment. No provision is made for income taxes that would be payable upon
the distribution of such earnings, and it is not practicable to determine the
amount of the related unrecognized deferred income tax liability. These earnings
include income from manufacturing operations in Ireland, which were tax-exempt
through 1990 and are taxed at 10% thereafter. In addition, the Company has
domestic subsidiaries operating in Puerto Rico under a tax incentive grant that
expires in 2008.
The Company's federal income tax returns have been audited through 1992.
16. Earnings per Share
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:
Years Ended December 31 2001 2000 1999
- --------------------------------------------------------------------------------
Average common shares
outstanding ............................ 2,288.3 2,306.9 2,349.0
Common shares issuable/(1)/ ............... 34.0 46.3 55.6
- --------------------------------------------------------------------------------
Average common shares
outstanding assuming dilution .......... 2,322.3 2,353.2 2,404.6
================================================================================
/(1)/ Issuable primarily under stock option plans.
17. Comprehensive Income
Upon the adoption of FAS 133 on January 1, 2001, the Company recorded a
favorable cumulative effect of accounting change of $45.5 million in Other
comprehensive income (loss). This amount represented the mark to fair value of
purchased local currency put options maturing throughout 2001 which hedged
anticipated foreign currency denominated sales over that same period. At
December 31, 2001, $7.3 million of deferred gain is associated with options
maturing in the next 12 months which hedge anticipated foreign currency
denominated sales over that same period.
The components of Other comprehensive income (loss) are as follows:
<TABLE>
<CAPTION>
After
Pretax/(1)/ Tax Tax
- --------------------------------------------------------------------------------
Year Ended December 31, 2001
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative effect of
accounting change ................... $ 76.9 $ (31.4) $ 45.5
Net unrealized gain on
derivatives ......................... 49.7 (20.3) 29.4
Net income realization ................. (114.3) 46.7 (67.6)
- --------------------------------------------------------------------------------
Derivatives ............................ 12.3 (5.0) 7.3
- --------------------------------------------------------------------------------
Net unrealized gain on
investments ......................... 44.7 35.3 80.0
Net income realization ................. (73.7) 4.8 (68.9)
- --------------------------------------------------------------------------------
Investments ............................ (29.0) 40.1 11.1
- --------------------------------------------------------------------------------
Minimum pension liability .............. (87.1) 48.5 (38.6)
- --------------------------------------------------------------------------------
$ (103.8) $ 83.6 $ (20.2)
- --------------------------------------------------------------------------------
Year Ended December 31, 2000
- --------------------------------------------------------------------------------
Net unrealized gain on
investments ......................... $ .7 $ 28.5 $ 29.2
Net income realization ................. (1.4) (3.5) (4.9)
- --------------------------------------------------------------------------------
Investments ............................ (.7) 25.0 24.3
Minimum pension liability .............. 5.3 (6.9) (1.6)
- --------------------------------------------------------------------------------
$ 4.6 $ 18.1 $ 22.7
- --------------------------------------------------------------------------------
Year Ended December 31, 1999
- --------------------------------------------------------------------------------
Net unrealized gain on
investments ......................... $ 91.0 $ (64.9) $ 26.1
Net income realization ................. (6.7) 6.2 (.5)
- --------------------------------------------------------------------------------
Investments ............................ 84.3 (58.7) 25.6
Minimum pension liability .............. 9.7 (5.9) 3.8
- --------------------------------------------------------------------------------
$ 94.0 $ (64.6) $ 29.4
================================================================================
</TABLE>
/(1)/ Net of applicable minority interest.
The components of Accumulated other comprehensive income are as follows:
<TABLE>
<CAPTION>
December 31 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C>
Net unrealized gain
on derivatives ..................................... $ 7.3 $ -
Net unrealized gain
on investments ..................................... 83.3 72.2
Minimum pension liability ............................. (80.0) (41.4)
- --------------------------------------------------------------------------------
$ 10.6 $ 30.8
================================================================================
</TABLE>
36 Merck & Co., Inc. 2001 Annual Report Financial Section
<PAGE>
18. Segment Reporting
The Company's operations are principally managed on a products and services
basis and are comprised of two reportable segments: Merck Pharmaceutical, which
includes products marketed either directly or through joint ventures, and
Merck-Medco. Merck Pharmaceutical products consist of therapeutic and preventive
agents, sold by prescription, for the treatment of human disorders. Merck-Medco
revenues are derived from the filling and management of prescriptions and health
management programs. All Other includes non-reportable human and animal health
segments. Revenues and profits for these segments are as follows:
<TABLE>
<CAPTION>
Merck
Pharm- Merck- All
aceutical Medco Other Total
- --------------------------------------------------------------------------------
Year Ended December 31, 2001
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Segment revenues ............ $ 19,731.5 $ 29,693.4 $ 1,265.9 $ 50,690.8
Segment profits ............. 12,199.9 731.4 977.5 13,908.8
Included in segment
profits:
Equity income (loss)
from affiliates ..... 203.2 (3.0) 190.7 390.9
Depreciation and
amortization ........ (165.6) (141.6) (5.2) (312.4)
- --------------------------------------------------------------------------------
Year Ended December 31, 2000
- --------------------------------------------------------------------------------
Segment revenues ............ $ 18,577.3 $ 23,319.6 $ 1,211.6 $ 43,108.5
Segment profits ............. 11,563.6 683.0 924.8 13,171.4
Included in segment
profits:
Equity income (loss)
from affiliates ..... 307.1 - 188.4 495.5
Depreciation and
amortization ........ (140.1) (107.1) (4.5) (251.7)
- --------------------------------------------------------------------------------
Year Ended December 31, 1999
- --------------------------------------------------------------------------------
Segment revenues ............ $ 15,998.4 $ 18,109.0 $ 1,109.9 $ 35,217.3
Segment profits ............. 10,238.5 578.3 819.8 11,636.6
Included in segment
profits:
Equity income (loss)
from affiliates ..... 312.0 - 169.4 481.4
Depreciation and
amortization ........ (113.6) (84.8) (4.4) (202.8)
================================================================================
</TABLE>
Segment profits are comprised of segment revenues less certain elements of
materials and production costs and operating expenses, including components of
equity income (loss) from affiliates and depreciation and amortization expenses.
The Company does not internally allocate the vast majority of indirect
production costs, research and development expenses and general and
administrative expenses, all predominantly related to the Merck pharmaceutical
business, as well as the cost of financing these activities. Separate divisions
maintain responsibility for monitoring and managing these costs, including
depreciation related to fixed assets utilized by these divisions and, therefore,
they are not included in the marketing segment profits. The vast majority of
goodwill and other intangibles amortization, predominantly related to the
Merck-Medco business, as well as the cost of financing capital employed, also
are not allocated internally and, therefore, are not included in the marketing
segment profits.
A reconciliation of total segment revenues to consolidated sales is as
follows:
<TABLE>
<CAPTION>
Years Ended December 31 2001 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Segment revenues ................ $ 50,690.8 $ 43,108.5 $ 35,217.3
Other revenues .................. 349.6 434.0 373.4
Adjustments ..................... (3,324.7) (3,179.3) (2,876.7)
- --------------------------------------------------------------------------------
$ 47,715.7 $ 40,363.2 $ 32,714.0
================================================================================
</TABLE>
Other revenues are primarily comprised of miscellaneous corporate revenues,
sales related to divested products or businesses and other supply sales.
Adjustments represent the elimination of receipts reported as revenues in the
internal management system which are not reportable as revenues under GAAP.
Consolidated sales included $39.9 billion, $33.0 billion and $25.7 billion of
revenues derived from the United States and $7.8 billion, $7.4 billion and $7.0
billion of revenues derived from foreign operations in 2001, 2000 and 1999,
respectively.
A reconciliation of total segment profits to consolidated income before taxes
is as follows:
<TABLE>
<CAPTION>
Years Ended December 31 2001 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Segment profits .................... $ 13,908.8 $ 13,171.4 $ 11,636.6
Other profits ...................... 267.7 339.1 218.9
Adjustments ........................ 395.3 545.5 252.1
Unallocated:
Interest income ................. 490.1 470.6 364.7
Interest expense ................ (464.7) (484.4) (316.9)
Equity income (loss)
from affiliates ............... 295.0 269.4 280.6
Depreciation and
amortization .................. (1,151.4) (1,025.6) (942.0)
Research and
development ................... (2,456.4) (2,343.8) (2,068.3)
Other expenses, net ............. (881.8) (1,118.1) (806.2)
- --------------------------------------------------------------------------------
$ 10,402.6 $ 9,824.1 $ 8,619.5
================================================================================
</TABLE>
Other profits are primarily comprised of miscellaneous corporate profits as
well as operating profits related to divested products or businesses and other
supply sales. Adjustments represent the elimination of the effect of double
counting certain items of income and expense. Equity income (loss) from
affiliates includes taxes paid at the joint venture level and a portion of
equity income that is not reported in segment profits. Other expenses, net,
include expenses from corporate and manufacturing cost centers and other
miscellaneous income (expense), net.
Net property, plant and equipment included $9.9 billion, $8.8 billion and
$7.4 billion of assets located in the United States and $3.2 billion, $2.7
billion and $2.3 billion of assets located outside the United States in 2001,
2000 and 1999, respectively. The Company does not disaggregate assets on a
products and services basis for internal management reporting and, therefore,
such information is not presented.
In January 2002, the Company announced plans to establish Merck-Medco as a
separate, publicly-traded company. The Company plans an initial public offering
of a portion of the new company by mid-2002, subject to market conditions.
Alternatives for the distribution of the remaining shares in the new company are
under evaluation. The full separation of Merck-Medco should be completed within
12 months of the initial public offering, subject to receipt of an Internal
Revenue Service ruling that such an event would be tax-free to shareholders and
to other customary conditions.
Merck & Co., Inc. 2001 Annual Report 37
<PAGE>
Management's Report
- --------------------------------------------------------------------------------
Primary responsibility for the integrity and objectivity of the Company's
financial statements rests with management. The financial statements report on
management's stewardship of Company assets. These statements are prepared in
conformity with generally accepted accounting principles and, accordingly,
include amounts that are based on management's best estimates and judgments.
Nonfinancial information included in the Annual Report has also been prepared by
management and is consistent with the financial statements.
To assure that financial information is reliable and assets are safeguarded,
management maintains an effective system of internal controls and procedures,
important elements of which include: careful selection, training and development
of operating and financial managers; an organization that provides appropriate
division of responsibility, and communications aimed at assuring that Company
policies and procedures are understood throughout the organization. In
establishing internal controls, management weighs the costs of such systems
against the benefits it believes such systems will provide. A staff of internal
auditors regularly monitors the adequacy and application of internal controls on
a worldwide basis.
To insure that personnel continue to understand the system of internal
controls and procedures, and policies concerning good and prudent business
practices, the Company periodically conducts the Management's Stewardship
Program for key management and financial personnel. This program reinforces the
importance and understanding of internal controls by reviewing key corporate
policies, procedures and systems. In addition, an ethical business practices
program has been implemented to reinforce the Company's long-standing commitment
to high ethical standards in the conduct of its business.
The independent public accountants have audited the Company's consolidated
financial statements as described in their report. Although their audits were
not designed for the purpose of forming an opinion on internal controls, the
Company's accounting systems, procedures and internal controls were subject to
testing and other auditing procedures sufficient to enable the independent
public accountants to render their opinion on the Company's financial
statements.
The recommendations of the internal auditors and independent public
accountants are reviewed by management. Control procedures have been implemented
or revised as appropriate to respond to these recommendations. No material
control weaknesses have been brought to the attention of management. In
management's opinion, for the year ended December 31, 2001, the internal control
system was strong and accomplished the objectives discussed herein.
/s/ Raymond V. Gilmartin /s/ Judy C. Lewent
Raymond V. Gilmartin Judy C. Lewent
Chairman, President and Executive Vice President and
Chief Executive Officer Chief Financial Officer
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Stockholders and
Board of Directors of Merck & Co., Inc.:
We have audited the accompanying consolidated balance sheet of Merck & Co., Inc.
(a New Jersey corporation) and subsidiaries as of December 31, 2001 and 2000,
and the related consolidated statements of income, retained earnings,
comprehensive income and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Merck & Co., Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
/s/ Arthur Andersen LLP
New York, New York ARTHUR ANDERSEN LLP
January 22, 2002
38 Merck & Co., Inc. 2001 Annual Report Financial Section
<PAGE>
Audit Committee's Report
- --------------------------------------------------------------------------------
The Audit Committee of the Board of Directors, comprised of four outside
directors, held three meetings during 2001.
The Audit Committee met with the independent public accountants, management
and internal auditors to assure that all were carrying out their respective
responsibilities. The Committee reviewed the performance and fees of the
independent public accountants prior to recommending their appointment, and met
with them to discuss the scope and results of their audit work, including the
adequacy of internal controls and the quality of financial reporting. The
Committee discussed with the independent public accountants their judgments
regarding the quality and acceptability of the Company's accounting principles,
the clarity of its disclosures and the degree of aggressiveness or conservatism
of its accounting principles and underlying estimates. The Committee discussed
with and received a letter from the independent public accountants confirming
their independence. Both the independent public accountants and the internal
auditors had full access to the Committee, including regular meetings without
management present. Additionally, the Committee reviewed and discussed the
audited financial statements with management and recommended to the Board of
Directors that these financial statements be included in the Company's Form 10-K
filing with the Securities and Exchange Commission.
Heidi G. Miller William B. Harrison, Jr.
Chairperson Thomas E. Shenk
Samuel O. Thier
Compensation and Benefits Committee's Report
- --------------------------------------------------------------------------------
The Compensation and Benefits Committee, comprised of four outside directors,
held three meetings during 2001.
The Compensation and Benefits Committee's major responsibilities include
providing for senior management succession and overseeing the Company's
compensation and benefit programs. The Committee seeks to provide rewards which
are highly leveraged to performance and clearly linked to Company and individual
results. The objective is to ensure that compensation and benefits are at levels
which enable Merck to attract and retain high-quality employees. The Committee
views stock ownership as a vehicle to align the interests of employees with
those of the stockholders. A long-term focus is essential for success in the
pharmaceutical industry and is encouraged by making a high proportion of
executive officer compensation dependent on long-term performance and on
enhancing stockholder value.
Lawrence A. Bossidy William G. Bowen
Chairperson Johnnetta B. Cole
William N. Kelley
Merck & Co., Inc. 2001 Annual Report 39
<PAGE>
- --------------------------------------------------------------------------------
Selected Financial Data/(1)/
Merck & Co., Inc. and Subsidiaries
<TABLE>
<CAPTION>
($ in millions except
per share amounts) 2001 2000 1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Results for Year:
Sales .................... $47,715.7 $40,363.2 $32,714.0 $ 26,898.2 $ 23,636.9 $ 19,828.7 $ 16,681.1 $ 14,969.8
Materials and production
costs .................. 28,976.5 22,443.5 17,534.2 13,925.4 11,790.3 9,319.2 7,456.3 5,962.7
Marketing and
administrative
expenses ............. 6,224.4 6,167.7 5,199.9 4,511.4 4,299.2 3,841.3 3,297.8 3,177.5
Research and development
expenses ............. 2,456.4 2,343.8 2,068.3 1,821.1 1,683.7 1,487.3 1,331.4 1,230.6
Acquired research ........ -- -- -- 1,039.5 -- -- -- --
Equity (income) loss
from affiliates ...... (685.9) (764.9) (762.0) (884.3) (727.9) (600.7) (346.3) (56.6)
Gains on sales of
businesses ............... -- -- -- (2,147.7) (213.4) -- (682.9) --
Restructuring charge ..... -- -- -- -- -- -- -- --
Other (income) expense,
net .................... 341.7 349.0 54.1 499.7 342.7 240.8 827.6 240.4
Income before taxes ...... 10,402.6 9,824.1 8,619.5 8,133.1 6,462.3 5,540.8 4,797.2 4,415.2
Taxes on income .......... 3,120.8 3,002.4 2,729.0 2,884.9 1,848.2 1,659.5 1,462.0 1,418.2
Net income ............... 7,281.8 6,821.7 5,890.5 5,248.2 4,614.1 3,881.3 3,335.2 2,997.0
Basic earnings per
common share ......... $ 3.18 $ 2.96 $ 2.51 $2.21 $1.92 $1.60 $1.35 $1.19
Earnings per common share
assuming dilution .... $ 3.14 $ 2.90 $ 2.45 $2.15 $1.87 $1.56 $1.32 $1.17
Dividends declared ....... 3,156.1 2,905.7 2,629.3 2,353.0 2,094.8 1,793.4 1,578.0 1,463.1
Dividends paid per
common share ......... $ 1.37 $ 1.21 $ 1.10 $ .95 $ .85 $ .71 $ .62 $ .57
Capital expenditures ..... 2,724.7 2,727.8 2,560.5 1,973.4 1,448.8 1,196.7 1,005.5 1,009.3
Depreciation ............. 1,080.4 905.5 771.2 700.0 602.4 521.7 463.3 475.6
- ------------------------------------------------------------------------------------------------------------------
Year-End Position:
Working capital .......... $ 1,417.4 $ 3,643.8 $ 2,500.4 $ 4,159.7 $ 2,644.4 $ 2,897.4 $ 3,870.2 $ 2,291.4
Property, plant and
equipment (net) ...... 13,103.4 11,482.1 9,676.7 7,843.8 6,609.4 5,926.7 5,269.1 5,296.3
Total assets ............. 44,006.7 40,154.9 35,933.7 31,853.4 25,735.9 24,266.9 23,831.8 21,856.6
Long-term debt ........... 4,798.6 3,600.7 3,143.9 3,220.8 1,346.5 1,155.9 1,372.8 1,145.9
Stockholders' equity ..... 16,050.1 14,832.4 13,241.6 12,801.8 12,594.6 11,964.0 11,735.7 11,139.0
- ------------------------------------------------------------------------------------------------------------------
Financial Ratios:
Net income as a % of:
Sales ................ 15.3% 16.9% 18.0% 19.5% 19.5% 19.6% 20.0% 20.0%
Average total
assets ............. 17.3% 17.9% 17.4% 18.2% 18.5% 16.1% 14.6% 14.3%
- ------------------------------------------------------------------------------------------------------------------
Year-End Statistics:
Average common shares
outstanding
(millions) ........... 2,288.3 2,306.9 2,349.0 2,378.8 2,409.0 2,427.2 2,472.3 2,514.3
Average common shares
outstanding assuming
dilution (millions) .. 2,322.3 2,353.2 2,404.6 2,441.1 2,469.5 2,489.6 2,527.3 2,557.7
Number of stockholders
of record ............ 256,200 265,700 280,500 269,600 263,900 247,300 243,000 244,700
Number of employees ...... 78,100 69,300 62,300 57,300 53,800 49,100 45,200 47,500
==================================================================================================================
<CAPTION>
($ in millions except
per share amounts) 1993 1992/(2)/ 1991
- ----------------------------------------------------------------
<S> <C> <C> <C>
Results for Year:
Sales ...................... $10,498.2 $ 9,662.5 $8,602.7
Materials and production
costs....................... 2,497.6 2,096.1 1,934.9
Marketing and
administrative
expenses ............... 2,913.9 2,963.3 2,570.3
Research and development
expenses ............... 1,172.8 1,111.6 987.8
Acquired research .......... -- -- --
Equity (income) loss
from affiliates ........ 26.1 (25.8) 21.1
Gains on sales of
businesses ............. -- -- --
Restructuring charge ....... 775.0 -- --
Other (income) expense,
net .................... 10.1 (46.3) (78.1)
Income before taxes ........ 3,102.7 3,563.6 3,166.7
Taxes on income ............ 936.5 1,117.0 1,045.0
Net income ................. 2,166.2 2,446.6 2,121.7
Basic earnings per
common share ........... $ .94 $1.06 $ .91
Earnings per common share
assuming dilution ...... $ .93 $1.05 $ .91
Dividends declared ......... 1,239.0 1,106.9 920.3
Dividends paid per
common share ........... $ .52 $ .46 $ .39
Capital expenditures ....... 1,012.7 1,066.6 1,041.5
Depreciation ............... 348.4 290.3 242.7
- ----------------------------------------------------------------
Year-End Position:
Working capital ............ $ 541.6 $ 1,241.1 $1,496.5
Property, plant and
equipment (net) ........ 4,894.6 4,271.1 3,504.5
Total assets ............... 19,927.5 11,086.0 9,498.5
Long-term debt ............. 1,120.8 495.7 493.7
Stockholders' equity ....... 10,021.7 5,002.9 4,916.2
- ----------------------------------------------------------------
Financial Ratios:
Net income as a % of:
Sales .................. 20.6% 25.3% 24.7%
Average total assets ... 14.0% 24.1% 24.2%
- ----------------------------------------------------------------
Year-End Statistics:
Average common shares
outstanding
(millions) ............. 2,313.0 2,307.0 2,319.8
Average common shares
outstanding assuming
dilution (millions) .... 2,332.0 2,330.6 2,343.3
Number of stockholders
of record .............. 231,300 161,200 91,100
Number of employees ........ 47,100/(3)/ 38,400 37,700
================================================================
</TABLE>
/(1)/ Amounts after 1992 include the impact of the Medco acquisition on November
18, 1993.
/(2)/ Results of operations for 1992 exclude the cumulative effect of accounting
changes.
/(3)/ Increase in 1993 is due to the inclusion of 10,300 Merck-Medco employees.
40 Merck & Co., Inc. 2001 Annual Report Financial Section
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>7
<FILENAME>dex21.txt
<DESCRIPTION>LIST OF SUBSIDIARIES
<TEXT>
<PAGE>
Exhibit 21
]
MERCK & CO., INC. SUBSIDIARIES
as of 12/31/2001
Each of the subsidiaries set forth below does business under the name
stated. A subsidiary of a subsidiary is indicated by indentation under the
immediate parent. All voting securities of the subsidiaries named are owned
directly or indirectly by the Company, except where otherwise indicated.
<TABLE>
<CAPTION>
Country or State
Name of Incorporation
- ---- ----------------
<S> <C>
Chibret A/S Denmark
Hangzhou MSD Pharmaceutical Company Limited/1/ China
Hawk and Falcon L.L.C. Delaware
International Indemnity Ltd. Bermuda
Johnson & Johnson - Merck Consumer Pharmaceuticals Company/1/ New Jersey
Laboratorios Prosalud S.A. Peru
MCM Vaccine Co./1/ Pennsylvania
Merck and Company, Incorporated Delaware
Merck SH Inc. Delaware
Merial Limited/LLC/1/ Great Britain/
Delaware
British United Turkeys Limited Great Britain
Turkey Research & Development Limited Great Britain
Merck Capital Investments, Inc. Delaware
Merck Capital Resources, Inc. Delaware
MSD Technology, L.P. Delaware
Merck Finance Co., Inc. Delaware
Merck Hamilton, Inc. California
Merck Cardiovascular Health Company Nevada
MSP Distribution Services (C) LLC/1/ Nevada
MSP Marketing Services (C) LLC/1/ Nevada
Merck Enterprises Canada, Ltd. Canada
Merck Foreign Sales Corporation Ltd. Bermuda
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Country or State
Name of Incorporation
- ---- ----------------
<S> <C>
Merck Holdings, Inc. Delaware
Chippewa Holdings LLC Delaware
Algonquin SarL Luxembourg
Frosst Laboratories, Inc. Delaware
Frosst Portuguesa - Produtos Farmaceuticos, Lda. Portugal
Istituto Gentili S.p.A./Inc. Italy/Delaware
KBI Inc. Delaware
KBI Sub Inc. Delaware
KBI-E Inc. Delaware
KBI-P Inc. Delaware
Merck Borinquen Holdings, Inc. Delaware
Merck Sharp & Dohme Quimica de Puerto Rico, Inc. Delaware
Merck-Medco Holdings II Corp. Delaware
Cloverleaf International Holdings S.A. Luxembourg
BRC Ltd Bermuda
Coordinated Patient Care Scandinavia AS Norway
Infodoc AS/1/ Norway
Infodoc International AS1/1/ Norway
Medco Holdings S. de R.L. de C.V. Mexico
Medco de Mexico Managed Care S. de R.L. de C.V. Mexico
Medco Servicios de Mexico, S. de R.L. de C.V. Mexico
Coordination Medicale et Pharmaceutique, S.A. France
Farmacox-Companhia Farmaceutica, Lda Portugal
Farmasix-Produtos Farmaceuticos, Lda Portugal
Fontelabor-Produtos Farmaceuticos, Lda. Portugal
Gestion Integrada De Salud, Analisis De Resultados Y Evidencia
Medichip, S.L. Spain
Merck Sharp & Dohme Asia Pacific Services Pte Ltd. Singapore
Merck Sharp & Dohme (Australia) Pty. Limited Australia
AMRAD Pharmaceuticals Pty. Ltd. Australia
Merck Sharp & Dohme Finance Europe Limited Great Britain
Merck Sharp & Dohme B.V. Netherlands
Abello Farmacia, S.L./1/ Spain
Financiere MSD S.A.S. France
Aventis Pasteur MSD Gestion S.A./1/ France
Aventis Pasteur MSD SNC/1/ France
Aventis Pasteur MSD A/S Denmark
Aventis Pasteur MSD GmbH Austria
Aventis Pasteur MSD GmbH Germany
Aventis Pasteur MSD Ltd. Great Britain
Aventis Pasteur MSD Ltd. Ireland
Aventis Pasteur MSD N.V./S.A. Belgium
Aventis Pasteur MSD S.A. Spain
Aventis Pasteur MSD S.p.A. Italy
Pasteur Vaccins S.A. France
Laboratoires Martin-Johnson & Johnson-MSD S.A.S./1/ France
Laboratoires Merck Sharp & Dohme-Chibret SNC France
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Country or State
Name of Incorporation
- ---- ----------------
<S> <C>
MSD (Nippon Holdings) BV Netherlands
Banyu Pharmaceutical Company, Ltd./1/ Japan
Banyu-A.S.C. Co., Ltd. Japan
Nippon Merck-Banyu Co., Ltd. Japan
Laboratorios Biopat, S.A. Spain
Laboratorios Chibret, S.A. Spain
Laboratorios Frosst, S.A. Spain
Merck Sharp & Dohme GmbH Austria
Merck Sharp & Dohme Holdings de Mexico, S.A. de C.V. Mexico
Merck Sharp & Dohme de Mexico, S.A. de C.V. Mexico
Merck Sharp & Dohme (Israel - 1996) Company Ltd. Israel
Merck Sharp & Dohme (Italia) S.p.A. Italy
Centra Medicamenta OTC SpA/1/ Italy
Istituto Di Richerche Di Biologia Molecolare S.p.A./1/ Italy
MSD (Proprietary) Limited South Africa
MSD Sharp & Dohme GmbH Germany
Chibret Pharmazeutische GmbH Germany
Dieckmann Arzneimittel GmbH Germany
Woelm Pharma GmbH & Co./1/ Germany
MSD Chibropharm GmbH Germany
MSD Unterstutzungskasse GmbH Germany
Varipharm Arzneimittel GmbH Germany
Sharp & Dohme, S.A. Spain
Merck Sharp & Dohme Chibret A.G. Switzerland
Merck Sharp & Dohme de Venezuela S.R.L. Venezuela
Merck Sharp & Dohme (Holdings) Limited Great Britain
Charles E. Frosst (U.K.) Limited Great Britain
Merck Sharp & Dohme Limited Great Britain
Johnson & Johnson-MSD Consumer Pharmaceuticals/1/ Great Britain
Propecia Limited Great Britain
The MSD Foundation Limited Great Britain
Thomas Morson & Son Limited Great Britain
Merck Sharp & Dohme IDEA, Inc. Switzerland
Merck Sharp & Dohme (Sweden) A.B. Sweden
Merck Sharp & Dohme Trading & Service Limited Liability Company Hungary
MSD Ireland (Holdings) S.A. Luxembourg
Fregenal Holdings S.A. Panama
Frosst Iberica, S.A. Spain
Laboratorios Abello, S.A. Spain
Laboratorios Quimico-Farmaceuticos Chibret, Lda. Portugal
Merck Sharp & Dohme de Espana, S.A. Spain
Merck Sharp & Dohme, Limitada Portugal
MSD Finance, B.V. Netherlands
MSD Overseas Manufacturing Co. Bermuda
Blue Jay Investments C.V. Netherlands
MSD Ireland (Investment) Ltd. Bermuda
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Country or State
Name of Incorporation
- ---- ----------------
<S> <C>
MSD Overseas Manufacturing Co. (Ireland) Ireland
Tradewinds Manufacturing SRL Barbados
MSD Technology Singapore Pte. Ltd. Singapore
MSP Singapore Company, LLC/1/ Delaware
MSP Singapore-Sub, LLC Delaware
MSD Warwick (Manufacturing) Ltd. Bermuda
MSD Somerset Ltd. Bermuda
Crosswinds B.V. Netherlands
Merck Sharp & Dohme (Ireland) Ltd. Bermuda
MSD Pembroke Ltd. Bermuda
Merck Sharp & Dohme (Puerto Rico) Ltd. Bermuda
Merck Sharp & Dohme (Singapore) Ltd. Bermuda
Neopharmed S.p.A. Italy
MSD (Norge) A/S Norway
MSD Ventures Singapore Pte. Ltd. Singapore
Ruskin Limited Bermuda
Suomen MSD Oy Finland
Kiinteisto Oy Viistotie 11 Finland
Merck Frosst Canada & Co. Canada
Maple Leaf Holdings SRL Barbados
Merck Sharp & Dohme (I.A.) Corp. Delaware
Merck Sharp & Dohme (Argentina) Inc. Delaware
MSD Korea Ltd. Korea/Delaware
Merck Sharp Dohme Ilaclari Limited Sirketi Turkey
Merck Sharp & Dohme Farmaceutica Ltda. Brazil
Prodome Quimica e Farmaceutica Ltda./1/ Brazil
Merck Sharp & Dohme (International) Limited Bermuda
Merck Sharp & Dohme (Asia) Limited Hong Kong
Merck Sharp & Dohme (China) Limited Hong Kong
Merck Sharp & Dohme S.A. France
Merck Sharp & Dohme International Services B.V. Netherlands
Merck Sharp & Dohme - Lebanon S.A.L. Lebanon
Merck Sharp & Dohme L.L.C. Russian Federation
Merck Sharp & Dohme (Middle East) Limited Cyprus
Merck Sharp & Dohme of Pakistan Limited Pakistan
Merck Sharp & Dohme S.A.R.L. Morocco
Merck Technology (U.S.) Company, Inc. Nevada
MSP Technology (U.S.) Company, LLC/1/ Delaware
Merck Ventures, Inc. Delaware
MSD Lakemedel (Scandinavia) Aktiebolog Sweden
Readington Holdings, Inc. New Jersey
STELLARx, Inc. Nevada
TELERx Marketing Inc. Pennsylvania
Merck Institute for Vaccinology Delaware
Merck Investment Co., Inc. Delaware
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Country or State
Name of Incorporation
- ---- ----------------
<S> <C>
Merck Liability Management Company Delaware
Merck LMC Cash Management (Bermuda) Ltd. Bermuda
Merck LMC Cash Management, Inc. Delaware
Merck-Medco Managed Care, L.L.C. Delaware
CM Delaware Corporation Delaware
DM-MG, L.L.C. Delaware
Medco Containment Insurance Company of New Jersey New Jersey
Medco Containment Insurance Company of New York New York
Medco Containment Life Insurance Company Pennsylvania
Merck Capital Ventures, LLC Delaware
merckmedco.com, L.L.C. New Jersey
Merck-Medco Managed Care of California, Inc. California
Merck-Medco of Willingboro Urban Renewal, L.L.C. New Jersey
Merck-Medco Rx Services of Florida No. 2, L.C. Florida
Merck-Medco Rx Services of Florida No. 4, L.L.C. Delaware
Merck-Medco Rx Services of Florida No. 5, L.C. Florida
Merck-Medco Rx Services of Florida, L.C. Florida
Merck-Medco Rx Services of Massachusetts, L.L.C. Massachusetts
Merck-Medco Rx Services of Nevada, Inc. Nevada
Merck-Medco Rx Services of New Jersey, L.L.C. New Jersey
Merck-Medco Rx Services of New York, L.L.C. New York
Merck-Medco Rx Services of Ohio, Ltd. Ohio
Merck-Medco Rx Services of Ohio No. 2, Ltd. Ohio
Merck-Medco Rx Services of Oklahoma, L.L.C. Oklahoma
Merck-Medco Rx Services of Pennsylvania, L.L.C. Pennsylvania
Merck-Medco Rx Services of Pennsylvania No. 2, L.L.C. Pennsylvania
Merck-Medco Rx Services of Texas, L.L.C. Texas
Merck-Medco Rx Services of Virginia, L.L.C. Virginia
Merck-Medco Rx Services of Washington, Inc. Washington
Merck-Medco Rx Services of Willingboro New Jersey, L.L.C. New Jersey
Mergerco Delaware No. 4, L.L.C. Delaware
MW Holdings, L.L.C. Delaware
NJRE, L.L.C. New Jersey
National Rx Services, Inc. of Missouri Missouri
National Rx Services No. 3, Inc. of Ohio Ohio
New York Independent Practice Association, L.L.C. New York
NRx Federal Corp. Delaware
Paid Direct, Inc. Delaware
PAID Prescriptions, L.L.C. Nevada
ProVantage Health Services, Inc. Delaware
Bravell, Inc. Wisconsin
PharMark Corporation Delaware
ProVantage Mail Services, Inc. Minnesota
PROVMED, LLC Wisconsin
PVHS, Inc. Delaware
Replacement Distribution Center, Inc. Ohio
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Country or State
Name of Incorporation
- ---- ----------------
<S> <C>
RxHub, L.L.C. Delaware
The Institute for Effectiveness Research, L.L.C. Delaware
Systemed, L.L.C. Delaware
Systemed Pharmacy of Iowa, L.L.C. Delaware
Systemed Pharmacy of Ohio, Ltd. Ohio
Xceleron Health, L.L.C. Delaware
Merck Resource Management, Inc. Delaware
Merck Respiratory Health Company Nevada
MSP Distribution Services (R) LLC/1/ Nevada
MSP Marketing Services (R) LLC/1/ Nevada
Merck Sharp & Dohme (Europe) Inc. Delaware
Merck Sharp & Dohme Industria Quimica e Veterinaria Limitada Brazil
Merck Sharp & Dohme (New Zealand) Limited New Zealand
Merck Sharp & Dohme Overseas Finance N.V. Neth. Antilles
Merck Sharp & Dohme (Panama) S.A. Panama
Merck Sharp & Dohme Peru SRL Peru
Merck Sharp & Dohme (Philippines) Inc. Philippines
MSD International Holdings, Inc. Delaware
MSD (Japan) Co., Ltd. Japan
Rosetta Inpharmatics, Inc. Delaware
- ------------
</TABLE>
/1/own less than 100%
6
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-24
<SEQUENCE>8
<FILENAME>dex24.txt
<DESCRIPTION>POWER OF ATTORNEY
<TEXT>
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
-----------------
Each of the undersigned does hereby appoint CELIA A. COLBERT and
KENNETH C. FRAZIER and each of them, severally, his/her true and lawful attorney
or attorneys to execute on behalf of the undersigned (whether on behalf of the
Company, or as an officer or director thereof, or by attesting the seal of the
Company, or otherwise) the Form 10-K Annual Report of Merck & Co., Inc. for the
fiscal year ended December 31, 2001 under the Securities Exchange Act of 1934,
including amendments thereto and all exhibits and other documents in connection
therewith.
IN WITNESS WHEREOF, this instrument has been duly executed as of
the 26th day of February, 2002.
<TABLE>
<S> <C>
MERCK & CO., Inc.
By /s/ Raymond V. Gilmartin
---------------------------------
Raymond V. Gilmartin
(Chairman of the Board, President
and Chief Executive Officer)
/s/ Raymond V. Gilmartin Chairman of the Board, President
- ------------------------------------- and Chief Executive Officer
Raymond V. Gilmartin (Principal Executive Officer; Director)
/s/ Judy C. Lewent Executive Vice President and Chief Financial Officer
- ------------------------------------- (Principal Financial Officer)
Judy C. Lewent
/s/ Richard C. Henriques, Jr. Vice President, Controller
- ------------------------------------- (Principal Accounting Officer)
Richard C. Henriques, Jr.
DIRECTORS
/s/ Lawrence A. Bossidy /s/ Heidi G. Miller
- ------------------------------------- ---------------------------------------
Lawrence A. Bossidy Heidi G. Miller
/s/ William G. Bowen /s/ Edward M. Scolnick
- ------------------------------------- ---------------------------------------
William G. Bowen Edward M. Scolnick
/s/ Johnnetta B. Cole /s/ Thomas E. Shenk
- ------------------------------------- ---------------------------------------
Johnnetta B. Cole Thomas E. Shenk
/s/ Niall FitzGerald
- ------------------------------------- ---------------------------------------
Niall FitzGerald Anne M. Tatlock
/s/ Samuel O. Thier
- ------------------------------------- ---------------------------------------
William B. Harrison, Jr. Samuel O. Thier
/s/ William N. Kelley
- -------------------------------------
William N. Kelley
</TABLE>
<PAGE>
I, Debra A. Bollwage, Assistant Secretary of MERCK & CO.,
Inc., a Corporation duly organized and existing under the laws of the State of
New Jersey, do hereby certify that the following is a true copy of a resolution
adopted at a meeting of the Directors of said Corporation held in New York City,
New York, on February 26, 2002, duly called in accordance with the provisions of
the By-Laws of said Corporation, and at which a quorum of Directors was present:
"Special Resolution No. 10 - 2002
-------------------------------
RESOLVED, that the proposed form of Form 10-K Annual Report of
the Company for the fiscal year ended December 31, 2001 presented to
this meeting is hereby approved with such changes as the proper
officers of the Company, with the advice of counsel, deem appropriate;
and
RESOLVED, that each officer and director who may be required
to execute the aforesaid Form 10-K Annual Report or any amendments
thereto (whether on behalf of the Company or as an officer or director
thereof, or by attesting the seal of the Company, or otherwise) is
hereby authorized to execute a power of attorney appointing Celia A.
Colbert and Kenneth C. Frazier and each of them, severally, his/her
true and lawful attorney or attorneys to execute in his/her name, place
and stead (in any such capacity) such Form 10-K Annual Report and any
and all amendments thereto and any and all exhibits and other documents
necessary or incidental in connection therewith and to file the same
with the Securities and Exchange Commission, each of said attorneys to
have power to act with or without the others, and to have full power
and authority to do and perform in the name and on behalf of each of
said officers and directors, or both, as the case may be, every act
whatsoever necessary or advisable to be done in the premises as fully
and to all intents and purposes as any such officer or director might
or could do in person."
IN WITNESS WHEREOF, I have hereunto subscribed my signature
and affixed the seal of the Corporation this 18th day of March, 2002.
[Corporate Seal] /s/ Debra A. Bollwage
---------------------------
Debra A. Bollwage
Assistant Secretary
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>9
<FILENAME>dex99.txt
<DESCRIPTION>LETTER FROM REGISTRANT TO SEC
<TEXT>
<PAGE>
Exhibit 99
Merck & Co., Inc.
One Merck Drive
P.O. Box 100
Whitehouse Station, NJ 08889-0100
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
March 21, 2002
Ladies and Gentlemen:
This will confirm that Merck & Co., Inc. (the "Company") has received a letter
from Arthur Andersen LLP ("Arthur Andersen") with respect to Arthur Andersen's
audit of the Company's consolidated financial statements for the year ended
December 31, 2001. Arthur Andersen's letter certifies that the audit was subject
to Arthur Andersen's quality control system for the U.S. accounting and auditing
practice to provide reasonable assurance that the engagement was conducted in
compliance with professional standards, that there was appropriate continuity of
Arthur Andersen personnel working on the audit, availability of national office
consultation, and availability of personnel at foreign affiliates of Arthur
Andersen to conduct the relevant portions of the audit.
Very truly yours,
Richard C. Henriques, Jr.
Vice President, Controller
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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