10-K
As filed with the Securities and Exchange Commission on February 26, 2016
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
_________________________________
FORM 10-K
(MARK ONE)
 
ý
Annual Report Pursuant to Section 13 or 15(d)
 
 
of the Securities Exchange Act of 1934
 
 
For the Fiscal Year Ended December 31, 2015
 
 
or
 
o
Transition Report Pursuant to Section 13 or 15(d)
 
 
of the Securities Exchange Act of 1934
 
 
For the transition period from                  to                 

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

Table of Contents

Table of Contents
 
 
 
Page
Item 1.
Item 1A.
 
Item 1B.
Item 2.
Item 3.
Item 4.
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
 
(a)
 
 
 
 
 
(b)
Item 9.
Item 9A.
 
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
 

Table of Contents

PART I
 
Item 1.
Business.
Merck & Co., Inc. (Merck or the Company) is a global health care company that delivers innovative health solutions through its prescription medicines, vaccines, biologic therapies and animal health products, which it markets directly and through its joint ventures. The Company’s operations are principally managed on a products basis and are comprised of four operating segments, the Pharmaceutical, Animal Health, Alliances and Healthcare Services segments. The Pharmaceutical segment is the only reportable segment. The Pharmaceutical segment includes human health pharmaceutical and vaccine products marketed either directly by the Company or through joint ventures. Human health pharmaceutical products consist of therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. The Company sells these human health pharmaceutical products primarily to drug wholesalers and retailers, hospitals, government agencies and managed health care providers such as health maintenance organizations, pharmacy benefit managers and other institutions. Vaccine products consist of preventive pediatric, adolescent and adult vaccines, primarily administered at physician offices. The Company sells these human health vaccines primarily to physicians, wholesalers, physician distributors and government entities. The Company also has animal health operations that discover, develop, manufacture and market animal health products, including vaccines, which the Company sells to veterinarians, distributors and animal producers. Merck’s Alliances segment primarily includes results from the Company’s relationship with AstraZeneca LP until the termination of that relationship on June 30, 2014. The Company’s Healthcare Services segment provides services and solutions that focus on engagement, health analytics and clinical services to improve the value of care delivered to patients. On October 1, 2014, the Company divested its Consumer Care segment that developed, manufactured and marketed over-the-counter, foot care and sun care products. The Company was incorporated in New Jersey in 1970.
For financial information and other information about the Company’s segments, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8. “Financial Statements and Supplementary Data” below.
All product or service marks appearing in type form different from that of the surrounding text are trademarks or service marks owned, licensed to, promoted or distributed by Merck, its subsidiaries or affiliates, except as noted. All other trademarks or services marks are those of their respective owners.
Product Sales
Sales of the Company’s top pharmaceutical products, as well as total sales of animal health products, were as follows:
($ in millions)
2015
 
2014
 
2013
Total Sales
$
39,498

 
$
42,237

 
$
44,033

Pharmaceutical
34,782

 
36,042

 
37,437

Januvia
3,863

 
3,931

 
4,004

Zetia
2,526

 
2,650

 
2,658

Janumet
2,151

 
2,071

 
1,829

Gardasil/Gardasil 9
1,908

 
1,738

 
1,831

Remicade
1,794

 
2,372

 
2,271

Isentress
1,511

 
1,673

 
1,643

ProQuad/M-M-R II/Varivax
1,505

 
1,394

 
1,306

Vytorin
1,251

 
1,516

 
1,643

Cubicin
1,127

 
25

 
24

Singulair
931

 
1,092

 
1,196

Animal Health
3,324

 
3,454

 
3,362

Consumer Care(1)
3

 
1,547

 
1,894

Other Revenues(2)
1,389

 
1,194

 
1,340

(1) 
On October 1, 2014, the Company divested its Consumer Care segment that developed, manufactured and marketed over-the-counter, foot care and sun care products.
(2) 
Other revenues are primarily comprised of miscellaneous corporate revenues, including revenue hedging activities, and third-party manufacturing sales.

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Pharmaceutical
The Company’s pharmaceutical products include therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. Certain of the products within the Company’s franchises are as follows:
Primary Care and Women’s Health
Cardiovascular: Zetia (ezetimibe) (marketed as Ezetrol in most countries outside the United States); and Vytorin (ezetimibe/simvastatin) (marketed as Inegy outside the United States), cholesterol modifying medicines.
Diabetes: Januvia (sitagliptin) and Janumet (sitagliptin/metformin HCl) for the treatment of type 2 diabetes.
General Medicine and Women’s Health: NuvaRing (etonogestrel/ethinyl estradiol vaginal ring), a vaginal contraceptive product; Implanon (etonogestrel implant), a single-rod subdermal contraceptive implant/Nexplanon (etonogestrel implant), a single, radiopaque, rod-shaped subdermal contraceptive implant; Dulera Inhalation Aerosol (mometasone furoate/formoterol fumarate dihydrate), a combination medicine for the treatment of asthma; and Follistim AQ (follitropin beta injection) (marketed as Puregon in most countries outside the United States), a fertility treatment.
Hospital and Specialty
Hepatitis: Zepatier (elbasvir and grazoprevir), approved by the U.S. Food and Drug Administration (FDA) in January 2016, for the treatment of adult patients with chronic hepatitis C virus (HCV) genotype (GT) 1 or GT4 infection, with or without ribavirin; and PegIntron (peginterferon alpha-2b) and Victrelis (boceprevir), medicines for the treatment of chronic HCV.
HIV: Isentress (raltegravir), an HIV integrase inhibitor for use in combination with other antiretroviral agents for the treatment of HIV-1 infection.
Hospital Acute Care: Cubicin (daptomycin for injection), an I.V. antibiotic for complicated skin and skin structure infections or bacteremia, when caused by designated susceptible organisms; Cancidas (caspofungin acetate), an anti-fungal product; Invanz (ertapenem sodium) for the treatment of certain infections; Noxafil (posaconazole) for the prevention of invasive fungal infections; Bridion (sugammadex) Injection, a medication for the reversal of two types of neuromuscular blocking agents used during surgery; and Primaxin (imipenem and cilastatin sodium), an anti-bacterial product.
Immunology: Remicade (infliximab), a treatment for inflammatory diseases, and Simponi (golimumab), a once-monthly subcutaneous treatment for certain inflammatory diseases, which the Company markets in Europe, Russia and Turkey.
Oncology
Keytruda (pembrolizumab) for the treatment of advanced melanoma and metastatic non-small-cell lung cancer (NSCLC) in patients whose tumors express PD-L1 with disease progression following other therapies; Emend (aprepitant) for the prevention of chemotherapy-induced and post-operative nausea and vomiting; and Temodar (temozolomide) (marketed as Temodal outside the United States), a treatment for certain types of brain tumors.
Diversified Brands
Respiratory: Singulair (montelukast), a medicine indicated for the chronic treatment of asthma and the relief of symptoms of allergic rhinitis; Nasonex (mometasone furoate monohydrate), an inhaled nasal corticosteroid for the treatment of nasal allergy symptoms; and Clarinex (desloratadine), a non-sedating antihistamine.
Other: Cozaar (losartan potassium) and Hyzaar (losartan potassium and hydrochlorothiazide), treatments for hypertension; Arcoxia (etoricoxib) for the treatment of arthritis and pain, which the Company markets outside the United States; Fosamax (alendronate sodium) (marketed as Fosamac in Japan) for the treatment and prevention of osteoporosis; Zocor (simvastatin), a statin for modifying cholesterol; and Propecia (finasteride), a product for the treatment of male pattern hair loss.

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Vaccines
Gardasil (Human Papillomavirus Quadrivalent [Types 6, 11, 16 and 18] Vaccine, Recombinant)/Gardasil 9 (Human Papillomavirus 9-valent Vaccine, Recombinant), vaccines to help prevent certain diseases caused by certain types of human papillomavirus (HPV); ProQuad (Measles, Mumps, Rubella and Varicella Virus Vaccine Live), a pediatric combination vaccine to help protect against measles, mumps, rubella and varicella; M-M-R II (Measles, Mumps and Rubella Virus Vaccine Live), a vaccine to help prevent measles, mumps and rubella; Varivax (Varicella Virus Vaccine Live), a vaccine to help prevent chickenpox (varicella); Zostavax (Zoster Vaccine Live), a vaccine to help prevent shingles (herpes zoster); RotaTeq (Rotavirus Vaccine, Live Oral, Pentavalent), a vaccine to help protect against rotavirus gastroenteritis in infants and children; and Pneumovax 23 (pneumococcal vaccine polyvalent), a vaccine to help prevent pneumococcal disease.
Animal Health
The Animal Health segment discovers, develops, manufactures and markets animal health products, including vaccines. Principal products in this segment include:
Livestock Products: Nuflor antibiotic range for use in cattle and swine; Bovilis/Vista vaccine lines for infectious diseases in cattle; Banamine bovine and swine anti-inflammatory; Estrumate for the treatment of fertility disorders in cattle; Matrix fertility management for swine; Resflor, a combination broad-spectrum antibiotic and non-steroidal anti-inflammatory drug for bovine respiratory disease; Zuprevo for bovine respiratory disease; Zilmax and Revalor to improve production efficiencies in beef cattle; Safe-Guard de-wormer for cattle; M+Pac swine pneumonia vaccine; and Porcilis and Circumvent vaccine lines for infectious diseases in swine.
Poultry Products: Nobilis/Innovax, vaccine lines for poultry; and Paracox and Coccivac coccidiosis vaccines.
Companion Animal Products: Bravecto, a chewable tablet that kills fleas and ticks in dogs for up to 12 weeks; Nobivac vaccine lines for flexible dog and cat vaccination; Otomax/Mometamax/Posatex ear ointments for acute and chronic otitis; Caninsulin/Vetsulin diabetes mellitus treatment for dogs and cats; Panacur/Safeguard broad-spectrum anthelmintic (de-wormer) for use in many animals; Regumate fertility management for horses; Prestige vaccine line for horses; and Activyl/Scalibor/Exspot for protecting against bites from fleas, ticks, mosquitoes and sandflies.
Aquaculture Products: Slice parasiticide for sea lice in salmon; Aquavac/Norvax vaccines against bacterial and viral disease in fish; Compact PD vaccine for salmon; and Aquaflor antibiotic for farm-raised fish.
For a further discussion of sales of the Company’s products, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below.

Product Approvals
In January 2016, Merck announced that the FDA approved Zepatier for the treatment of adult patients with chronic HCV GT1 or GT4 infection, with or without ribavirin.
In December 2015, Merck announced that the FDA approved an expanded age indication for Gardasil 9, Merck’s 9-valent HPV vaccine, to include use in males 16 through 26 years of age for the prevention of anal cancers, precancerous or dysplastic lesions and genital warts caused by certain HPV types. Gardasil 9 includes the greatest number of HPV types in any available HPV vaccine.
Also, in December 2015, the Company announced that the FDA approved an expanded indication for Keytruda, an anti-PD-1 (programmed death receptor-1) therapy, to include the first-line treatment of patients with unresectable or metastatic melanoma. Additionally, the FDA approved an update to the product labeling for Keytruda for the treatment of patients with ipilimumab-refractory advanced melanoma.
In October 2015, the FDA granted accelerated approval of Keytruda at a dose of 2mg/kg every three weeks for the treatment of patients with metastatic NSCLC whose tumors express PD-L1 as determined by an FDA-approved test and who have disease progression on or after platinum-containing chemotherapy. Patients with EGFR or ALK genomic tumor aberrations should have disease progression on FDA-approved therapy for these aberrations prior to receiving Keytruda. In addition to approving Keytruda for NSCLC, the FDA approved the first companion diagnostic that will enable physicians to determine the level of PD-L1 expression in a patient’s tumor.

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In September 2015, Merck announced that the Japanese Pharmaceuticals and Medical Devices Agency approved Marizev (omarigliptin) 25 mg and 12.5 mg tablets, an oral, once-weekly dipeptidyl peptidase-4 (DPP-4) inhibitor indicated for the treatment of adults with type 2 diabetes. Japan is the first country to have approved omarigliptin.
Joint Ventures
Sanofi Pasteur MSD
In 1994, Merck and Pasteur Mérieux Connaught (now Sanofi Pasteur S.A.) formed a joint venture to market human vaccines in Europe and to collaborate in the development of combination vaccines for distribution in the then-existing European Union (EU) and the European Free Trade Association. Merck and Sanofi Pasteur contributed, among other things, their European vaccine businesses for equal shares in the joint venture, known as Pasteur Mérieux MSD, S.N.C. (now Sanofi Pasteur MSD, S.N.C.) (SPMSD). The joint venture maintains a presence, directly or through affiliates or branches, in Belgium, Italy, Germany, Spain, France, Austria, Ireland, Sweden, Portugal, the Netherlands, Switzerland and the United Kingdom (UK) and through distributors in the rest of its territory.
Licenses
In 1998, a subsidiary of Schering-Plough Corporation (Schering-Plough) entered into a licensing agreement with Centocor Ortho Biotech Inc. (Centocor), a Johnson & Johnson (J&J) company, to market Remicade, which is prescribed for the treatment of inflammatory diseases. In 2005, Schering-Plough’s subsidiary exercised an option under its contract with Centocor for license rights to develop and commercialize Simponi, a fully human monoclonal antibody. The Company has marketing rights to both products throughout Europe, Russia and Turkey. In 2007, Schering-Plough and Centocor revised their distribution agreement regarding the development, commercialization and distribution of both Remicade and Simponi, extending the Company’s rights to exclusively market Remicade to match the duration of the Company’s exclusive marketing rights for Simponi. In addition, Schering-Plough and Centocor agreed to share certain development costs relating to Simponi’s auto-injector delivery system. In 2009, the European Commission (EC) approved Simponi as a treatment for rheumatoid arthritis and other immune system disorders in two presentations — a novel auto-injector and a prefilled syringe. As a result, the Company’s marketing rights for both products extend for 15 years from the first commercial sale of Simponi in the EU following the receipt of pricing and reimbursement approval within the EU. Remicade lost market exclusivity in major European markets in February 2015 and the Company no longer has market exclusivity in any of its marketing territories. The Company continues to have market exclusivity for Simponi in all of its marketing territories. All profits derived from Merck’s distribution of the two products in these countries are equally divided between Merck and J&J.
Competition and the Health Care Environment
Competition
The markets in which the Company conducts its business and the pharmaceutical industry in general are highly competitive and highly regulated. The Company’s competitors include other worldwide research-based pharmaceutical companies, smaller research companies with more limited therapeutic focus, generic drug manufacturers and animal health care companies. The Company’s operations may be adversely affected by generic and biosimilar competition as the Company’s products mature, as well as technological advances of competitors, industry consolidation, patents granted to competitors, competitive combination products, new products of competitors, the generic availability of competitors’ branded products, and new information from clinical trials of marketed products or post-marketing surveillance. In addition, patent rights are increasingly being challenged by competitors, and the outcome can be highly uncertain. An adverse result in a patent dispute can preclude commercialization of products or negatively affect sales of existing products and could result in the recognition of an impairment charge with respect to intangible assets associated with certain products. Competitive pressures have intensified as pressures in the industry have grown.
Pharmaceutical competition involves a rigorous search for technological innovations and the ability to market these innovations effectively. With its long-standing emphasis on research and development, the Company is well positioned to compete in the search for technological innovations. Additional resources required to meet market challenges include quality control, flexibility to meet customer specifications, an efficient distribution system and a strong technical information service. The Company is active in acquiring and marketing products through external alliances, such as licensing arrangements, and has been refining its sales and marketing efforts to further address

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changing industry conditions. However, the introduction of new products and processes by competitors may result in price reductions and product displacements, even for products protected by patents. For example, the number of compounds available to treat a particular disease typically increases over time and can result in slowed sales growth or reduced sales for the Company’s products in that therapeutic category.
The highly competitive animal health business is affected by several factors including regulatory and legislative issues, scientific and technological advances, product innovation, the quality and price of the Company’s products, effective promotional efforts and the frequent introduction of generic products by competitors.
Health Care Environment and Government Regulation
Global efforts toward health care cost containment continue to exert pressure on product pricing and market access. In the United States, federal and state governments for many years also have pursued methods to reduce the cost of drugs and vaccines for which they pay. For example, federal laws require the Company to pay specified rebates for medicines reimbursed by Medicaid and to provide discounts for outpatient medicines purchased by certain Public Health Service entities and hospitals serving a disproportionate share of low income or uninsured patients.
Against this backdrop, the United States enacted major health care reform legislation in 2010 (the Patient Protection and Affordable Care Act), which began to be implemented in 2010. Various insurance market reforms have advanced and state and federal insurance exchanges were launched in 2014. By the end of the decade, the law is expected to expand access to health care to about 32 million Americans who did not previously have insurance coverage. With respect to the effect of the law on the pharmaceutical industry, the law increased the mandated Medicaid rebate from 15.1% to 23.1%, expanded the rebate to Medicaid managed care utilization, and increased the types of entities eligible for the federal 340B drug discount program. The law also requires pharmaceutical manufacturers to pay a 50% point of service discount to Medicare Part D beneficiaries when they are in the Medicare Part D coverage gap (i.e., the so-called “donut hole”). Approximately $550 million, $430 million and $280 million was recorded by Merck as a reduction to revenue in 2015, 2014 and 2013, respectively, related to the donut hole provision. Also, pharmaceutical manufacturers are now required to pay an annual non-tax deductible health care reform fee. The total annual industry fee was $3.0 billion in 2015 and will remain $3.0 billion in 2016. The fee is assessed on each company in proportion to its share of prior year branded pharmaceutical sales to certain government programs, such as Medicare and Medicaid. The Company recorded $173 million, $390 million and $151 million of costs within Marketing and administrative expenses in 2015, 2014 and 2013, respectively, for the annual health care reform fee. The higher expenses in 2014 reflect final regulations on the annual health care reform fee issued by the Internal Revenue Service (IRS) on July 28, 2014. The final IRS regulations accelerated the recognition criteria for the fee obligation by one year to the year in which the underlying sales used to allocate the fee occurred rather than the year in which the fee was paid. As a result of this change, Merck recorded an additional year of expense of $193 million in 2014. On January 21, 2016, the Centers for Medicare & Medicaid Services issued the Medicaid Rebate Final Rule that implements provisions of the Patient Protection and Affordable Care Act effective April 1, 2016. The rule provides comprehensive guidance on the calculation of Average Manufacturer Price and Best Price; two metrics utilized to determine the rebates drug manufacturers are required to pay to state Medicaid programs. Merck is still evaluating the rule to determine whether it will have a material impact on Merck’s Medicaid rebate liability.
The Company also faces increasing pricing pressure globally from managed care organizations, government agencies and programs that could negatively affect the Company’s sales and profit margins. In the United States, these include (i) practices of managed care organizations, federal and state exchanges, and institutional and governmental purchasers, and (ii) U.S. federal laws and regulations related to Medicare and Medicaid, including the Medicare Prescription Drug Improvement and Modernization Act of 2003 and the Patient Protection and Affordable Care Act. Changes to the health care system enacted as part of health care reform in the United States, as well as increased purchasing power of entities that negotiate on behalf of Medicare, Medicaid, and private sector beneficiaries, could result in further pricing pressures. As an example, health care reform is contributing to an increase in the number of patients in the Medicaid program under which sales of pharmaceutical products are subject to substantial rebates.
In addition, in the effort to contain the U.S. federal deficit, the pharmaceutical industry could be considered a potential source of savings via legislative proposals that have been debated but not enacted. These types of revenue generating or cost saving proposals include additional direct price controls in the Medicare prescription drug program (Part D). In addition, Congress may again consider proposals to allow, under certain conditions, the importation of

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medicines from other countries. It remains very uncertain as to what proposals, if any, may be included as part of future federal budget deficit reduction proposals that would directly or indirectly affect the Company.
Efforts toward health care cost containment remain intense in several European countries. Many countries have continued to announce and execute austerity measures, which include the implementation of pricing actions to reduce prices of generic and patented drugs and mandatory switches to generic drugs. While the Company is taking steps to mitigate the impact in these countries, the austerity measures continued to negatively affect the Company’s revenue performance in 2015 and the Company anticipates the austerity measures will continue to negatively affect revenue performance in 2016. In addition, a majority of countries attempt to contain drug costs by engaging in reference pricing in which authorities examine pre-determined markets for published prices of drugs by brand. The authorities then use price data from those markets to set new local prices for brand-name drugs, including the Company’s. Guidelines for examining reference pricing are usually set in local markets and can be changed pursuant to local regulations.
In addition, in Japan, the pharmaceutical industry is subject to government-mandated biennial price reductions of pharmaceutical products and certain vaccines, which will occur again in 2016. Furthermore, the government can order repricings for classes of drugs if it determines that it is appropriate under applicable rules.
Certain markets outside of the United States have also implemented other cost management strategies, such as health technology assessments, which require additional data, reviews and administrative processes, all of which increase the complexity, timing and costs of obtaining product reimbursement and exert downward pressure on available reimbursement.
The Company’s focus on emerging markets has increased. Governments in many emerging markets are also focused on constraining health care costs and have enacted price controls and related measures, such as compulsory licenses, that aim to put pressure on the price of pharmaceuticals and constrain market access. The Company anticipates that pricing pressures and market access challenges will continue in 2016 to varying degrees in the emerging markets.
Beyond pricing and market access challenges, other conditions in emerging market countries can affect the Company’s efforts to continue to grow in these markets, including potential political instability, significant currency fluctuation and controls, financial crises, limited or changing availability of funding for health care, and other developments that may adversely impact the business environment for the Company. Further, the Company may engage third-party agents to assist in operating in emerging market countries, which may affect its ability to realize continued growth and may also increase the Company’s risk exposure.
In addressing cost containment pressures, the Company engages in public policy advocacy with policymakers and continues to work to demonstrate that its medicines provide value to patients and to those who pay for health care. The Company advocates with government policymakers to encourage a long-term approach to sustainable health care financing that ensures access to innovative medicines and does not disproportionately target pharmaceuticals as a source of budget savings. In markets with historically low rates of health care spending, the Company encourages those governments to increase their investments and adopt market reforms in order to improve their citizens’ access to appropriate health care, including medicines.
Operating conditions have become more challenging under the global pressures of competition, industry regulation and cost containment efforts. Although no one can predict the effect of these and other factors on the Company’s business, the Company continually takes measures to evaluate, adapt and improve the organization and its business practices to better meet customer needs and believes that it is well positioned to respond to the evolving health care environment and market forces.
The pharmaceutical industry is also subject to regulation by regional, country, state and local agencies around the world focused on standards and processes for determining drug safety and effectiveness, as well as conditions for sale or reimbursement.
Of particular importance is the FDA in the United States, which administers requirements covering the testing, approval, safety, effectiveness, manufacturing, labeling, and marketing of prescription pharmaceuticals. In some cases, the FDA requirements and practices have increased the amount of time and resources necessary to develop new products and bring them to market in the United States. At the same time, the FDA has committed to expediting the development and review of products bearing the “breakthrough therapy” designation, which appears to have accelerated the regulatory review process for medicines with this designation.

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The EU has adopted directives and other legislation concerning the classification, labeling, advertising, wholesale distribution, integrity of the supply chain, enhanced pharmacovigilance monitoring and approval for marketing of medicinal products for human use. These provide mandatory standards throughout the EU, which may be supplemented or implemented with additional regulations by the EU member states. 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.
The Company believes that it will continue to be able to conduct its operations, including launching new drugs, in this regulatory environment. (See “Research and Development” below for a discussion of the regulatory approval process.)
Access to Medicines
As a global health care company, Merck’s primary role is to discover and develop innovative medicines and vaccines. The Company also recognizes that it has an important role to play in helping to improve access to its products around the world. The Company’s efforts in this regard are wide-ranging and include a set of principles that the Company strives to embed into its operations and business strategies to guide the Company’s worldwide approach to expanding access to health care. In addition, the Company has many far-reaching philanthropic programs. The Merck Patient Assistance Program provides medicines and adult vaccines for free to people in the United States who do not have prescription drug or health insurance coverage and who, without the Company’s assistance, cannot afford their Merck medicine and vaccines. In 2011, Merck launched “Merck for Mothers,” a long-term effort with global health partners to end preventable deaths from complications of pregnancy and childbirth. Merck has also provided funds to the Merck Foundation, an independent organization, which has partnered with a variety of organizations dedicated to improving global health.
Privacy and Data Protection
The Company is subject to a significant number of privacy and data protection laws and regulations globally, many of which place restrictions on the Company’s ability to efficiently transfer, access and use personal data across its business. The legislative and regulatory landscape for privacy and data protection continues to evolve. There has been increased attention to privacy and data protection issues in both developed and emerging markets with the potential to affect directly the Company’s business, including a new EU General Data Protection Regulation, which will become effective in 2018 and impose penalties up to four percent of global revenue, additional laws and regulations enacted in the United States, Europe, Asia and Latin America, increased enforcement and litigation activity in the United States and other developed markets, and increased regulatory cooperation among privacy authorities globally. The Company has adopted a comprehensive global privacy program to manage these evolving risks which has been certified as compliant with the Asia Pacific Economic Cooperation Cross-Border Privacy Rules System and is under regulatory review in the EU.
In October 2015, the Court of Justice of the EU invalidated a 2000 decision of the EC, which had held that the U.S.-EU Safe Harbor Framework (Safe Harbor) provided adequate protection for transfers of personal data from the European Economic Area to the United States. Merck had annually self-certified adherence to the Safe Harbor since 2001 and relied on the Safe Harbor for a significant number of data transfers across its business. Since November 2014, Merck has been working toward regulatory recognition of its global privacy program as meeting the EU’s binding corporate rules requirements, an alternative legal mechanism for internal company transfers. At the end of January 2016, EU review for the Company’s binding corporate rules application was completed for the 21 EU member states that participate in the EU mutual recognition process. Completion of the final EU cooperation review phase is expected in the first quarter of 2016. Binding corporate rules approval in the EU is expected to reduce the operational impact of the Safe Harbor invalidation on our global business. Cross-border data transfers to third parties that support the Company’s business will not be directly facilitated by its binding corporate rules, once approved. However, the Company anticipates that the standards its global privacy program has met through its binding corporate rules review will support its ability to comply with the new EU-U.S. Privacy Shield, a transatlantic data transfer agreement to replace the Safe Harbor, which was announced on February 2, 2016, as well as to continue to implement other data transfer mechanisms as necessary to support its business.

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Distribution
The Company sells its human health pharmaceutical products primarily to drug wholesalers and retailers, hospitals, government agencies and managed health care providers, such as health maintenance organizations, pharmacy benefit managers and other institutions. Human health vaccines are sold primarily to physicians, wholesalers, physician distributors and government entities. The Company’s professional representatives communicate the effectiveness, safety and value of the Company’s pharmaceutical and vaccine products to health care professionals in private practice, group practices, hospitals and managed care organizations. The Company sells its animal health products to veterinarians, distributors and animal producers.
Raw Materials
Raw materials and supplies, which are generally available from multiple sources, are purchased worldwide and are normally available in quantities adequate to meet the needs of the Company’s business.
Patents, Trademarks and Licenses
Patent protection is considered, in the aggregate, to be of material importance in the Company’s marketing of its 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 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.
The Food and Drug Administration Modernization Act 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. Current U.S. patent law provides additional patent term under Patent Term Restoration for periods when the patented product was under regulatory review by the FDA.

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Patent portfolios developed for products introduced by the Company normally provide market exclusivity. The Company has the following key U.S. patent protection (including the potential for Patent Term Restoration and Pediatric Exclusivity where indicated) for the following marketed products:
Product
Year of Expiration (in the U.S.)(1)
Invanz
2016 (compound)/2017 (composition)
Cubicin(2)
2016 (composition)
Zostavax
2016 (use)
Dulera
2017 (formulation)/2020 (combination)
Zetia(3)/Vytorin
2017
Asmanex
2018 (formulation)
Nasonex(4)
2018 (formulation)
NuvaRing
2018 (delivery system)
Emend for Injection(5)
2019
Noxafil(5)
2019
RotaTeq
2019
Intron A
2020
Recombivax
2020 (method of making/vectors)
Januvia(5)/Janumet(5)/Janumet XR(5)
2022
Isentress(5)
2023
Bridion(5)
2026 (with pending Patent Term Restoration)
Nexplanon
2026 (device)/2027 (device with applicator)
Grastek
2026 (use)
Ragwitek
2026 (use)
Bravecto
2027 (with pending Patent Term Restoration)
Zontivity(5)
2027 (with pending Patent Term Restoration)
Gardasil/Gardasil 9
2028
Keytruda
2028
Zerbaxa(5)
2028 (with pending Patent Term Restoration)
Sivextro(5)
2028 (with pending Patent Term Restoration)
Belsomra(5)
2029
Zepatier(5)
2031
(1) 
Compound patent unless otherwise noted. Certain of the products listed may be the subject of patent litigation. See Item 8. “Financial Statements and Supplementary Data,” Note 10. “Contingencies and Environmental Liabilities” below.
(2) 
In a December 2014 decision of a district court action against Hospira, Inc. (Hospira), the June 2016 patent was found to be valid and infringed. Later patents for Cubicin, expiring in September 2019 and November 2020, were found to be invalid. In November 2015, the U.S. Court of Appeals for the Federal Circuit (CAFC) affirmed the lower court decision. Hospira’s application to the FDA will not be approved until at least June 2016. An earlier district court action against Teva resulted in a settlement whereby Teva can launch a generic version of Cubicin at the latest in December 2017, or earlier under certain conditions, but in no event before June 2016.
(3) 
By agreement, a generic manufacturer may launch a generic version of Zetia in the United States in December 2016.
(4) 
A district court decision (upheld on appeal to the CAFC) found that a proposed generic product by Apotex, a generic manufacturer, would not infringe on Merck’s Nasonex formulation patent. Thus, if Apotex’s application is approved by the FDA, it can enter the market in the United States with a generic version of Nasonex.
(5) 
Eligible for 6 months Pediatric Exclusivity.
While the expiration of a product patent normally results in a loss of market exclusivity for the covered pharmaceutical 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 and certain other countries, market exclusivity that may be available under relevant law. The effect of product patent expiration on pharmaceutical products 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.
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 an

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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.
The Company has the following key U.S. patent protection for drug candidates under review in the United States by the FDA. Additional patent term may be provided for these pipeline candidates based on Patent Term Restoration and Pediatric Exclusivity. 
Under Review
Currently Anticipated
Year of Expiration (in the U.S.)
V419 (pediatric hexavalent combination vaccine)
2020 (method of making/vectors)
MK-6072 (bezlotoxumab)
2025
The Company also has the following key U.S. patent protection for drug candidates in Phase 3 development: 
Phase 3 Drug Candidate
Currently Anticipated
Year of Expiration (in the U.S.)
V212 (inactivated varicella zoster virus (VZV) vaccine)
2016 (use)
V920 (ebola vaccine)
2023
MK-0822 (odanacatib)
2024
MK-8228 (letermovir)
2025
MK-8237 (allergy, house dust mites)
2026 (use)
MK-0859 (anacetrapib)
2027
MK-7655A (relebactam + imipenem/cilastatin)
2029
MK-3102 (omarigliptin)
2030
MK-8931 (verubecestat)
2030
MK-8835 (ertugliflozin)
2030
MK-8835A (ertugliflozin + sitagliptin)
2030
MK-8835B (ertugliflozin + metformin)
2030
MK-1439 (doravirine)
2031
MK-8342B (contraception, next generation ring)
2034
Unless otherwise noted, the patents in the above charts are compound patents. Each patent is subject to any future patent term restoration of up to five years and six month pediatric market exclusivity, either or both of which may be available. In addition, depending on the circumstances surrounding any final regulatory approval of the compound, there may be other listed patents or patent applications pending that could have relevance to the product as finally approved; the relevance of any such application would depend upon the claims that ultimately may be granted and the nature of the final regulatory approval of the product. Also, regulatory exclusivity tied to the protection of clinical data is complementary to patent protection and, in some cases, may provide more effective or longer lasting marketing exclusivity than a compound’s patent estate. In the United States, the data protection generally runs five years from first marketing approval of a new chemical entity, extended to seven years for an orphan drug indication and 12 years from first marketing approval of a biological product.
For further information with respect to the Company’s patents, see Item 1A. “Risk Factors” and Item 8. “Financial Statements and Supplementary Data,” Note 10. “Contingencies and Environmental Liabilities” below.
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.
Royalty income in 2015 on patent and know-how licenses and other rights amounted to $221 million. Merck also incurred royalty expenses amounting to $1.2 billion in 2015 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. Research and development expenses were $6.7 billion in 2015, $7.2 billion in 2014 and

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$7.5 billion in 2013 (which included restructuring costs and acquisition and divestiture-related costs in all years). The Company prioritizes its research and development efforts and focuses on candidates that it believes represent breakthrough science that will make a difference for patients and payers.
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. The Company’s research and development model is designed to increase productivity and improve the probability of success by prioritizing the Company’s research and development resources on candidates the Company believes are capable of providing unambiguous, promotable advantages to patients and payers and delivering the maximum value of its approved medicines and vaccines through new indications and new formulations. Merck is pursuing emerging product opportunities independent of therapeutic area or modality (small molecule, biologics and vaccines) and is building its biologics capabilities. The Company is committed to making externally sourced programs a greater component of its pipeline strategy, with a renewed focus on supplementing its internal research with a licensing and external alliance strategy focused on the entire spectrum of collaborations from early research to late-stage compounds, as well as access to new technologies.
The Company also reviews its pipeline to examine candidates which may provide more value through out-licensing. The Company continues to evaluate certain late-stage clinical development and platform technology assets to determine their out-licensing or sale potential.
The Company’s clinical pipeline includes candidates in multiple disease areas, including atherosclerosis, cancer, cardiovascular diseases, diabetes, infectious diseases, inflammatory/autoimmune diseases, neurodegenerative diseases, osteoporosis, respiratory diseases and women’s health.
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 or vaccine may be marketed in the United States, recorded data on preclinical and clinical experience are included in the New Drug Application (NDA) for a drug or the Biologics License Application (BLA) for a vaccine or biologic submitted to the FDA for the required approval.
Once the Company’s scientists discover a new small molecule compound or biologics molecule that they believe has promise to treat a medical condition, the Company commences preclinical testing with that compound. Preclinical testing includes laboratory testing and animal safety studies to gather data on chemistry, pharmacology, immunogenicity and toxicology. Pending acceptable preclinical data, the Company will initiate clinical testing in accordance with established regulatory requirements. The clinical testing begins with Phase 1 studies, which are designed to assess safety, tolerability, pharmacokinetics, and preliminary pharmacodynamic activity of the compound in humans. If favorable, additional, larger Phase 2 studies are initiated to determine the efficacy of the compound in the affected population, define appropriate dosing for the compound, as well as identify any adverse effects that could limit the compound’s usefulness. In some situations, the clinical program incorporates adaptive design methodology to use accumulating data to decide how to modify aspects of the ongoing clinical study as it continues, without undermining the validity and integrity of the trial. One type of adaptive clinical trial is an adaptive Phase 2a/2b trial design, a two-stage trial design consisting of a Phase 2a proof-of-concept stage and a Phase 2b dose-optimization finding stage. If data from the Phase 2 trials are satisfactory, the Company commences large-scale Phase 3 trials to confirm the compound’s efficacy and safety. Another type of adaptive clinical trial is an adaptive Phase 2/3 trial design, a study that includes an interim analysis and an adaptation that changes the trial from having features common in a Phase 2 study (e.g. multiple dose groups) to a design similar to a Phase 3 trial. An adaptive Phase 2/3 trial design reduces timelines by eliminating activities which would be required to start a separate study. Upon completion of Phase 3 trials, if satisfactory, the Company submits regulatory filings with the appropriate regulatory agencies around the world to have the product candidate approved for marketing. 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.
Vaccine development follows the same general pathway as for drugs. Preclinical testing focuses on the vaccine’s safety and ability to elicit a protective immune response (immunogenicity). Pre-marketing vaccine clinical trials are typically done in three phases. Initial Phase 1 clinical studies are conducted in normal subjects to evaluate the safety, tolerability and immunogenicity of the vaccine candidate. Phase 2 studies are dose-ranging studies. Finally, Phase 3 trials provide the necessary data on effectiveness and safety. If successful, the Company submits regulatory

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filings with the appropriate regulatory agencies. Also during this stage, the proposed manufacturing facility undergoes a pre-approval inspection during which production of the vaccine as it is in progress is examined in detail.
In the United States, the FDA review process begins once a complete NDA or BLA is submitted, received and accepted for review by the agency. Within 60 days after receipt, the FDA determines if the application is sufficiently complete to permit a substantive review. The FDA also assesses, at that time, whether the application will be granted a priority review or standard review. Pursuant to the Prescription Drug User Fee Act V (PDUFA), the FDA review period target for NDAs or original BLAs is either six months, for priority review, or ten months, for a standard review, from the time the application is deemed sufficiently complete. Once the review timelines are determined, the FDA will generally act upon the application within those timelines, unless a major amendment has been submitted (either at the Company’s own initiative or the FDA’s request) to the pending application. If this occurs, the FDA may extend the review period to allow for review of the new information, but by no more than three months. Extensions to the review period are communicated to the Company. The FDA can act on an application either by issuing an approval letter or by issuing a Complete Response Letter (CRL) stating that the application will not be approved in its present form and describing all deficiencies that the FDA has identified. Should the Company wish to pursue an application after receiving a CRL, it can resubmit the application with information that addresses the questions or issues identified by the FDA in order to support approval. Resubmissions are subject to review period targets, which vary depending on the underlying submission type and the content of the resubmission.
The FDA has four program designations — Fast Track, Breakthrough Therapy, Accelerated Approval, and Priority Review — to facilitate and expedite development and review of new drugs to address unmet medical needs in the treatment of serious or life-threatening conditions. The Fast Track designation provides pharmaceutical manufacturers with opportunities for frequent interactions with FDA reviewers during the product’s development and the ability for the manufacturer to do a rolling submission of the NDA/BLA. A rolling submission allows completed portions of the application to be submitted and reviewed by the FDA on an ongoing basis. The Breakthrough Therapy designation provides manufacturers with all of the features of the Fast Track designation as well as intensive guidance on implementing an efficient development program for the product and a commitment by the FDA to involve senior managers and experienced staff in the review. The Accelerated Approval designation allows the FDA to approve a product based on an effect on a surrogate or intermediate endpoint that is reasonably likely to predict a product’s clinical benefit and generally requires the manufacturer to conduct required post-approval confirmatory trials to verify the clinical benefit. The Priority Review designation means that the FDA’s goal is to take action on the NDA/BLA within six months, compared to ten months under standard review.
In addition, under the Generating Antibiotic Incentives Now Act, the FDA may grant Qualified Infectious Disease Product (QIDP) status to antibacterial or antifungal drugs intended to treat serious or life threatening infections including those caused by antibiotic or antifungal resistant pathogens, novel or emerging infectious pathogens, or other qualifying pathogens. QIDP designation offers certain incentives for development of qualifying drugs, including Priority Review of the NDA when filed, eligibility for Fast Track designation, and a five-year extension of applicable exclusivity provisions under the Food, Drug and Cosmetic Act.
The primary method the Company uses to obtain marketing authorization of pharmaceutical products in the EU is through the “centralized procedure.” This procedure is compulsory for certain pharmaceutical products, in particular those using biotechnological processes, and is also available for certain new chemical compounds and products. A company seeking to market an innovative pharmaceutical product through the centralized procedure must file a complete set of safety data and efficacy data as part of a Marketing Authorization Application (MAA) with the European Medicines Agency (EMA). After the EMA evaluates the MAA, it provides a recommendation to the EC and the EC then approves or denies the MAA. It is also possible for new chemical products to obtain marketing authorization in the EU through a “mutual recognition procedure” in which an application is made to a single member state and, if the member state approves the pharmaceutical product under a national procedure, the applicant may submit that approval to the mutual recognition procedure of some or all other member states.
Outside of the United States and the EU, the Company submits marketing applications to national regulatory authorities. Examples of such are the Pharmaceuticals and Medical Devices Agency in Japan, Health Canada, Agência Nacional de Vigilância Sanatária in Brazil, Korea Food and Drug Administration in South Korea, Therapeutic Goods Administration in Australia and China Food and Drug Administration. Each country has a separate and independent review process and timeline. In many markets, approval times can be longer as the regulatory authority requires approval

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in a major market, such as the United States or the EU, and issuance of a Certificate of Pharmaceutical Product from that market before initiating their local review process.
Research and Development Update
The Company currently has several candidates under regulatory review in the United States or internationally.
Keytruda is an FDA-approved anti-PD-1 therapy in clinical development for expanded indications in different cancer types. Keytruda is currently approved for the treatment of melanoma, advanced melanoma and NSCLC.
In December 2015, Merck announced results from the pivotal KEYNOTE-010 study to evaluate the potential of an immunotherapy compared to chemotherapy based on prospective measurement of PD-L1 expression in patients with advanced NSCLC. In the Phase 2/3 study, Keytruda significantly improved overall survival compared to chemotherapy in patients with any level of PD-L1 expression. Based on these data, Merck has submitted a supplemental BLA to the FDA and has filed an MAA with the EMA.
In November 2015, Merck announced that the FDA granted Breakthrough Therapy designation to Keytruda for the treatment of patients with microsatellite instability high metastatic colorectal cancer. Keytruda was previously granted Breakthrough Therapy status for advanced melanoma and advanced NSCLC.
The Keytruda clinical development program consists of more than 200 clinical trials, including over 100 trials that combine Keytruda with other cancer treatments. These studies encompass more than 30 cancer types including: bladder, colorectal, esophageal, gastric, head and neck, melanoma, multiple myeloma, non-small-cell lung, and triple negative breast, several of which are currently in Phase 3 clinical development.
MK-6072, bezlotoxumab, is an investigational antitoxin for the prevention of Clostridium difficile (C. difficile) infection recurrence currently under review with the FDA and EMA. In January 2016, Merck announced that the FDA accepted for review the BLA for bezlotoxumab and granted Priority Review with a PDUFA action date of July 23, 2016. In September 2015, Merck announced that the two pivotal Phase 3 clinical studies for bezlotoxumab met their primary efficacy endpoint: the reduction in C. difficile recurrence through week 12 compared to placebo, when used in conjunction with standard of care antibiotics for the treatment of C. difficile. The Company is also seeking approval in the EU and intends to file in Canada in 2016. Currently, there are no therapies approved for the prevention of recurrent disease caused by C. difficile.
MK-1293 is an insulin glargine candidate for the treatment of patients with type 1 and type 2 diabetes being developed in collaboration with Samsung Bioepis. In December 2015, the Company submitted an application for regulatory approval in the EU and plans to submit MK-1293 to the FDA in 2016.
MK-5172A, Zepatier, currently under review in the EU for the treatment of chronic HCV, is a once-daily, fixed-dose combination tablet containing the NS5A inhibitor elbasvir (50 mg) and the NS3/4A protease inhibitor grazoprevir (100 mg). Zepatier was approved by the FDA in January 2016 for the treatment of adult patients with chronic HCV GT1 or GT4 infection, with or without ribavirin.
V419 is an investigational pediatric hexavalent combination vaccine, DTaP5-IPV-Hib-HepB, under review with the FDA that is being developed and, if approved, will be commercialized through a partnership of Merck and Sanofi Pasteur. This vaccine is designed to help protect against six important diseases - diphtheria, tetanus, pertussis (whooping cough), polio (poliovirus types 1, 2, and 3), invasive disease caused by Haemophilus influenzae type b (Hib), and hepatitis B. On November 2, 2015, the FDA issued a CRL with respect to the BLA for V419. Both companies are reviewing the CRL and plan to have further communication with the FDA. In February 2016, the EC granted marketing authorization for V419 for prophylaxis against diphtheria, tetanus, pertussis, hepatitis B, poliomyelitis, and invasive disease caused by Hib, in infants and toddlers from the age of 6 weeks. V419 will be marketed as Vaxelis in the EU through SPMSD, the Company’s joint venture with Sanofi Pasteur.
In addition to the candidates under regulatory review, the Company has several drug candidates in Phase 3 clinical development in addition to the Keytruda programs discussed above. The Company anticipates filing applications for regulatory approval with the FDA with respect to certain of these candidates in 2016, including MK-1293 as noted above.
MK-0822, odanacatib, is an oral, once-weekly investigational treatment for patients with osteoporosis. Osteoporosis is a disease that reduces bone density and strength and results in an increased risk of bone fractures.

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Odanacatib is a cathepsin K inhibitor that selectively inhibits the cathepsin K enzyme. Cathepsin K is known to play a central role in the function of osteoclasts, which are cells that break down existing bone tissue, particularly the protein components of bone. Inhibition of cathepsin K is a novel approach to the treatment of osteoporosis. In September 2014, Merck announced data from the pivotal Phase 3 fracture outcomes study for odanacatib in postmenopausal women with osteoporosis. In the Long-Term Odanacatib Fracture Trial (LOFT), odanacatib met its primary endpoints and significantly reduced the risk of three types of osteoporotic fractures (radiographically-assessed vertebral, clinical hip, and clinical non-vertebral) compared to placebo and also reduced the risk of the secondary endpoint of clinical vertebral fractures. In addition, treatment with odanacatib led to progressive increases over five years in bone mineral density at the lumbar spine and total hip. The rates of adverse events overall in LOFT were generally balanced between patients taking odanacatib and placebo. Adjudicated events of morphea-like skin lesions and atypical femoral fractures occurred more often in the odanacatib group than in the placebo group. Adjudicated major adverse cardiovascular events were generally balanced overall between the treatment groups. There were numerically more adjudicated stroke events with odanacatib than with placebo. Adjudicated atrial fibrillation was reported more often in the odanacatib group than in the placebo group. A numeric imbalance in mortality was observed; this numeric difference does not appear to be related to a particular reported cause or causes of death. Merck continues to collect data from the blinded extension study and is planning additional analyses of data from the trial, including an independent re-adjudication of major adverse cardiovascular events (MACE), in support of regulatory submissions. Merck plans to submit an NDA to the FDA for odanacatib in 2016 following completion of the independent adjudication and analysis of MACE. Merck also plans to submit applications to the EMA and the Ministry of Health, Labour, and Welfare in Japan.
MK-3102, omarigliptin, is an investigational once-weekly DPP-4 inhibitor in development for the treatment of adults with type 2 diabetes. In September 2015, the Company announced that omarigliptin achieved its primary efficacy endpoint in a Phase 3 study. Omarigliptin was found to be non-inferior to Januvia, at reducing patients’ A1C (an estimate of a person’s blood glucose over a two-to three-month period) levels from baseline, with similar A1C reductions achieved in both groups. The head-to-head study was designed to evaluate once-weekly treatment with omarigliptin 25 mg compared to 100 mg of Januvia once daily. Results were presented during an oral session at the 51st European Association for the Study of Diabetes Annual Meeting. Also, in September 2015, Merck announced that the Japanese Pharmaceuticals and Medical Devices Agency approved Marizev (omarigliptin) 25 mg and 12.5 mg tablets. Japan is the first country to have approved omarigliptin. Merck plans to submit omarigliptin for regulatory approval in the United States in 2016. Other worldwide regulatory submissions will follow.
MK-8835, ertugliflozin, is an investigational oral sodium glucose cotransporter-2 (SGLT2) inhibitor being evaluated for the treatment of type 2 diabetes in collaboration with Pfizer Inc. Ertugliflozin is also being studied in combination with Januvia (sitagliptin) and metformin. Merck expects to submit applications for regulatory approval in the United States for ertugliflozin and the two fixed-dose combination tablets by the end of 2016.
MK-8237 is an investigational allergy immunotherapy tablet for house dust mite allergy that is part of a North America partnership between Merck and ALK-Abello. Merck plans to submit an NDA to the FDA for MK-8237 in the first half of 2016.
MK-8931, verubecestat, is Merck’s novel investigational oral ß-amyloid precursor protein site-cleaving enzyme (BACE) inhibitor for the treatment of Alzheimer’s disease being studied in a Phase 3 trial (APECS) designed to evaluate the safety and efficacy of MK-8931 versus placebo in patients with amnestic mild cognitive impairment due to Alzheimer’s disease, also known as prodromal Alzheimer’s disease. MK-8931 is also being studied in another Phase 2/3 randomized, placebo-controlled, study in patients with mild-to-moderate Alzheimer’s disease (EPOCH). The EPOCH study completed enrollment in the fourth quarter of 2015 and is estimated to reach primary trial completion in mid-2017.
MK-0859, anacetrapib, is an investigational inhibitor of the cholesteryl ester transfer protein (CETP) in development for raising HDL-C and reducing LDL-C. Anacetrapib is being evaluated in a 30,000 patient, event-driven cardiovascular clinical outcomes trial sponsored by Oxford University, REVEAL (Randomized EValuation of the Effects of Anacetrapib Through Lipid-modification), involving patients with preexisting vascular disease, which is projected to conclude in early 2017. In November 2015, Merck announced that the Data Monitoring Committee (DMC) of the REVEAL outcomes study completed its planned review of unblinded study data and recommended the study continue with no changes. The DMC reviewed safety and efficacy data from the study, which included an assessment of futility. Merck remains blinded to the actual results of this analysis and to other REVEAL safety and efficacy data.

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The REVEAL Steering Committee and Merck will continue to monitor the progress of the study. No additional interim efficacy analyses are planned.
MK-7655A is a combination of relebactam, an investigational beta-lactamase inhibitor, and imipenem/cilastatin (an approved carbapenem antibiotic). The FDA has designated this combination a QIDP with designated Fast Track status for the treatment of hospital-acquired bacterial pneumonia, ventilator-associated bacterial pneumonia, complicated intra-abdominal infections and complicated urinary tract infections.
MK-8228, letermovir, is an investigational oral, once-daily antiviral candidate for the prevention and treatment of Human Cytomegalovirus infection. Letermovir has received Orphan Drug Status in the EU and in the United States, where it has also been granted Fast Track designation.
MK-8342B, referred to as the Next Generation Ring, is an investigational combination (etonogestrel and 17β-estradiol) vaginal ring for contraception and the treatment of dysmenorrhea in women seeking contraception.
MK-0431J is an investigational fixed-dose combination of sitagliptin and ipragliflozin under development for commercialization in Japan in collaboration with Astellas Pharma Inc. (Astellas). Ipragliflozin, an SGLT2 inhibitor, co-developed by Astellas and Kotobuki Pharmaceutical Co., Ltd. (Kotobuki), is approved for use in Japan and is being co-promoted with Merck and Kotobuki.
V920 is an investigational rVSV-ZEBOV (Ebola) vaccine candidate being studied in large scale Phase 2/3 clinical trials currently underway in West Africa. In November 2014, Merck and NewLink Genetics announced an exclusive licensing and collaboration agreement for the investigational Ebola vaccine. In December 2015, Merck announced that the application for Emergency Use Assessment and Listing (EUAL) for V920 has been accepted for review by the World Health Organization (WHO). According to the WHO, the EUAL process is designed to expedite the availability of vaccines needed for public health emergencies such as another outbreak of Ebola. The procedure is intended to assist United Nations’ procurement agencies and Member States on the acceptability of using a vaccine candidate in an emergency-use setting. EUAL designation is not prequalification by the WHO, but rather is a special procedure implemented when there is an outbreak of a disease with high rates of morbidity and/or mortality and a lack of treatment and/or prevention options. In such instances, the WHO may recommend making a vaccine available for a limited time, while further clinical trial data are being gathered for formal regulatory agency review by a national regulatory authority. The decision to grant V920 EUAL status will be based on data regarding quality, safety, and efficacy/effectiveness; as well as a risk/benefit analysis for emergency use. While EUAL designation allows for emergency use, the vaccine remains investigational and has not yet been licensed for commercial distribution.
V212 is an inactivated varicella zoster virus (VZV) vaccine in development for the prevention of herpes zoster. The Company is conducting two Phase 3 trials, one in autologous hematopoietic cell transplant patients and the other in patients with solid tumor malignancies undergoing chemotherapy and hematological malignancies.
MK-1439, doravirine, is an investigational, once-daily oral next-generation non-nucleoside reverse transcriptase inhibitor being developed by Merck for the treatment of HIV-1 infection.
In 2015, the Company also divested or discontinued certain drug candidates.
In July 2015, Merck and Allergan plc (Allergan) entered into an agreement pursuant to which Allergan acquired the exclusive worldwide rights to MK-1602 and MK-8031, Merck’s investigational small molecule oral calcitonin gene-related peptide receptor antagonists, which are being developed for the treatment and prevention of migraine.
MK-4261, surotomycin, is an investigational oral antibiotic in development for the treatment of C. difficile associated diarrhea. Merck acquired surotomycin as part of its purchase of Cubist. During the second quarter of 2015, the Company received unfavorable efficacy data from a randomized, double-blinded, active-controlled study in patients with C. difficile associated diarrhea. The evaluation of this data, combined with an assessment of the commercial opportunity for surotomycin, resulted in the discontinuation of the program.
MK-2402, bevenopran, is an oral investigational therapy in development as a potential treatment for opioid-induced constipation in patients with chronic, non-cancer pain. Merck acquired bevenopran as a part of its purchase of Cubist. The Company has made the decision not to continue development of this program and is seeking to out-license the asset.

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MK-8962, corifollitropin alfa injection, is an investigational fertility treatment for controlled ovarian stimulation in women participating in assisted reproductive technology. In July 2014, Merck received a CRL from the FDA for its NDA for corifollitropin alfa injection. Merck has made a decision to discontinue development of corifollitropin alfa injection in the United States for business reasons. Corifollitropin alfa injection is marketed as Elonva in certain markets outside of the United States.
The chart below reflects the Company’s research pipeline as of February 19, 2016. Candidates shown in Phase 3 include specific products and the date such candidate entered into Phase 3 development. Candidates shown in Phase 2 include the most advanced compound with a specific mechanism or, if listed compounds have the same mechanism, they are each currently intended for commercialization in a given therapeutic area. Small molecules and biologics are given MK-number designations and vaccine candidates are given V-number designations. Except as otherwise noted, candidates in Phase 1, additional indications in the same therapeutic area and additional claims, line extensions or formulations for in-line products are not shown.

Phase 2
Phase 3 (Phase 3 entry date)
Under Review
Alzheimer’s Disease
MK-7622
Asthma
MK-1029
Cancer
MK-3475 Keytruda
Hodgkin Lymphoma
PMBCL (Primary Mediastinal
Large B-Cell Lymphoma)
Advanced Solid Tumors
MK-2206
MK-8628
Diabetes
MK-8521
Heart Failure
MK-1242 (vericiguat)(1)
Hepatitis C
MK-3682B (MK-3682/MK-8408/
MK-5172 (grazoprevir))
Pneumoconjugate Vaccine
V114
Allergy
MK-8237, House Dust Mite (March 2014)(1,2)
Alzheimer’s Disease
MK-8931 (verubecestat) (December 2013)
Atherosclerosis
MK-0859 (anacetrapib) (May 2008)
Bacterial Infection
MK-7655A (relebactam+imipenem/cilastatin)
(October 2015)
Cancer
MK-3475 Keytruda
Bladder (October 2014)
Breast (October 2015)
Colorectal (November 2015)
Esophageal (December 2015)
Gastric (May 2015)
Head and Neck (November 2014)
Multiple Myeloma (December 2015)
CMV Prophylaxis in Transplant Patients
MK-8228 (letermovir) (June 2014)
Contraception, Next Generation Ring
MK-8342B (September 2015)
Diabetes Mellitus
MK-3102 (omarigliptin) (September 2012)
MK-8835 (ertugliflozin) (November 2013)(1)
MK-8835A (ertugliflozin+sitagliptin)
(September 2015)(1)
MK-8835B (ertugliflozin+metformin)
(August 2015)(1)
MK-1293 (February 2014) (U.S.)(1)
MK-0431J (sitagliptin+ipragliflozin)
(October 2015) (Japan)(1)
Ebola Vaccine
V920 (March 2015)
Herpes Zoster
V212 (inactivated VZV vaccine) (December 2010)
HIV
MK-1439 (doravirine) (December 2014)
Osteoporosis
MK-0822 (odanacatib) (September 2007)
Cancer
MK-3475 Keytruda
Non-Small-Cell Lung (EU)
Clostridium difficile Infection
MK-6072 (bezlotoxumab) (U.S./EU)
Diabetes Mellitus
MK-1293 (EU)(1)
Hepatitis C
MK-5172A Zepatier (EU)
Pediatric Hexavalent Combination Vaccine
V419 (U.S.)(3)

Footnotes:
(1) Being developed in a collaboration.
(2)  North American rights only.
(3) V419 is an investigational pediatric hexavalent combination vaccine, DTaP5-IPV-Hib-HepB, that is being developed and, if approved, will be commercialized through a partnership of Merck and Sanofi Pasteur. On November 2, 2015, the FDA issued a CRL with respect to V419. Both companies are reviewing the CRL and plan to have further communication with the FDA.

Employees
As of December 31, 2015, the Company had approximately 68,000 employees worldwide, with approximately 26,200 employed in the United States, including Puerto Rico. Approximately 32% of worldwide employees of the Company are represented by various collective bargaining groups.
2013 Restructuring Program
In 2013, the Company initiated actions under a global restructuring program (the 2013 Restructuring Program) as part of a global initiative to sharpen its commercial and research and development focus. The actions under

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this program primarily include the elimination of positions in sales, administrative and headquarters organizations, as well as research and development. Additionally, these actions include the reduction of the Company’s global real estate footprint and improvements in the efficiency of its manufacturing and supply network. Since inception of the 2013 Restructuring Program through December 31, 2015, Merck has eliminated approximately 8,630 positions comprised of employee separations, as well as the elimination of contractors and vacant positions. The actions under the 2013 Restructuring Program were substantially completed by the end of 2015.
Merger Restructuring Program
In 2010, subsequent to the Merck and Schering-Plough merger (Merger), the Company commenced actions under a global restructuring program (the Merger Restructuring Program) designed to streamline the cost structure of the combined company. Further actions under this program were initiated in 2011. The actions under this program primarily include the elimination of positions in sales, administrative and headquarters organizations, as well as the sale or closure of certain manufacturing and research and development sites and the consolidation of office facilities. Since inception of the Merger Restructuring Program through December 31, 2015, Merck has eliminated approximately 29,645 positions comprised of employee separations, as well as the elimination of contractors and vacant positions. The non-facility related restructuring actions under the Merger Restructuring Program are substantially completed.
Environmental Matters
The Company believes that there are no compliance issues associated with applicable environmental laws and regulations that would have a material adverse effect on the Company. The Company is also remediating environmental contamination resulting from past industrial activity at certain of its sites. Expenditures for remediation and environmental liabilities were $8 million in 2015, and are estimated at $59 million in the aggregate for the years 2016 through 2020. These amounts do not consider potential recoveries from other parties. The Company has taken an active role in identifying and accruing for these costs and, in management’s opinion, the liabilities for all environmental matters that are probable and reasonably estimable have been accrued and totaled $109 million and $125 million at December 31, 2015 and 2014, respectively. 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 $57 million in the aggregate. Management also does not believe that these expenditures should have a material adverse effect on the Company’s financial position, results of operations, liquidity or capital resources for any year.
Merck believes that climate change could present risks to its business. Some of the potential impacts of climate change to its business include increased operating costs due to additional regulatory requirements, physical risks to the Company’s facilities, water limitations and disruptions to its supply chain. These potential risks are integrated into the Company’s business planning including investment in reducing energy, water use and greenhouse gas emissions. The Company does not believe these risks are material to its business at this time.
Geographic Area Information
The Company’s operations outside the United States are conducted primarily through subsidiaries. Sales worldwide by subsidiaries outside the United States as a percentage of total Company sales were 56% of sales in 2015, 60% of sales in 2014 and 59% of sales in 2013.
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.
Merck has expanded its operations in countries located in Latin America, the Middle East, Africa, Eastern Europe and Asia Pacific. Business in these developing areas, while sometimes less stable, offers important opportunities for growth over time.
Financial information about geographic areas of the Company’s business is provided in Item 8. “Financial Statements and Supplementary Data” below.

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Available Information
The Company’s Internet website address is www.merck.com. The Company will make available, free of charge at the “Investors” portion of its website, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the U.S. Securities and Exchange Commission (the SEC).
The Company’s corporate governance guidelines and the charters of the Board of Directors’ four standing committees are available on the Company’s website at www.merck.com/about/leadership and all such information is available in print to any stockholder who requests it from the Company.
Item 1A.
Risk Factors.
Investors should carefully consider all of the information set forth in this Form 10-K, including the following risk factors, before deciding to invest in any of the Company’s securities. The risks below are not the only ones the Company faces. Additional risks not currently known to the Company or that the Company presently deems immaterial may also impair its business operations. The Company’s business, financial condition, results of operations or prospects could be materially adversely affected by any of these risks. This Form 10-K also contains forward-looking statements that involve risks and uncertainties. The Company’s results could materially differ from those anticipated in these forward-looking statements as a result of certain factors, including the risks it faces described below and elsewhere. See “Cautionary Factors that May Affect Future Results” below.
The Company is dependent on its patent rights, and if its patent rights are invalidated or circumvented, its business would be adversely affected.
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 covering products that it has introduced normally provide market exclusivity, which is important for the successful marketing and sale of its products. The Company seeks patents covering each of its products in each of the markets where it intends to sell the products and where meaningful patent protection is available.
Even if the Company succeeds in obtaining patents covering its products, third parties or government authorities may challenge or seek to invalidate or circumvent its patents and patent applications. It is important for the Company’s business to defend successfully the patent rights that provide market exclusivity for its products. The Company is often involved in patent disputes relating to challenges to its patents or infringement and similar claims against the Company. The Company aggressively defends its important patents both within and outside the United States, including by filing claims of infringement against other parties. See Item 8. “Financial Statements and Supplementary Data,” Note 10. “Contingencies and Environmental Liabilities” below. In particular, manufacturers of generic pharmaceutical products from time to time file Abbreviated New Drug Applications with the FDA seeking to market generic forms of the Company’s products prior to the expiration of relevant patents owned by the Company. The Company normally responds by vigorously defending its patent, including by filing lawsuits alleging patent infringement. Patent litigation and other challenges to the Company’s patents are costly and unpredictable and may deprive the Company of market exclusivity for a patented product or, in some cases, third-party patents may prevent the Company from marketing and selling a product in a particular geographic area.
Additionally, certain foreign governments have indicated that compulsory licenses to patents may be granted in the case of national emergencies or in other circumstances, which could diminish or eliminate sales and profits from those regions and negatively affect the Company’s results of operations. Further, court decisions relating to other companies’ patents, potential legislation relating to patents, as well as regulatory initiatives may result in further erosion of intellectual property protection.
If one or more important products lose patent protection in profitable markets, sales of those products are likely to decline significantly as a result of generic versions of those products becoming available and, in the case of certain products, such a loss could result in a material non-cash impairment charge. The Company’s results of operations may be adversely affected by the lost sales unless and until the Company has successfully launched commercially successful replacement products.

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A chart listing the U.S. patent protection for certain of the Company’s marketed products, candidates under review and Phase 3 candidates is set forth above in Item 1. “Business — Patents, Trademarks and Licenses.”
As the Company’s products lose market exclusivity, the Company generally experiences a significant and rapid loss of sales from those products.
The Company depends upon patents to provide it with exclusive marketing rights for its products for some period of time. Loss of patent protection for one of the Company’s products typically leads to a significant and rapid loss of sales for that product, as lower priced generic versions of that drug become available. In the case of products that contribute significantly to the Company’s sales, the loss of patent protection can have a material adverse effect on the Company’s business, cash flow, results of operations, financial position and prospects. For example, a court has ruled that a proposed generic form of Nasonex does not infringe the Company’s U.S. patent for Nasonex. If the generic form of Nasonex receives marketing approval in the United States, the Company will experience a loss of Nasonex sales. In addition, the Company will lose U.S. patent protection for Cubicin in June 2016. Also, pursuant to an agreement with a generic manufacturer, that manufacturer may launch in the United States a generic version of Zetia in December 2016.
Key Company products generate a significant amount of the Company’s profits and cash flows, and any events that adversely affect the markets for its leading products could have a material and negative impact on results of operations and cash flows.
The Company’s ability to generate profits and operating cash flow depends largely upon the continued profitability of the Company’s key products, such as Januvia, Zetia, Janumet, Gardasil/Gardasil 9, Isentress, and Vytorin. As a result of the Company’s dependence on key products, any event that adversely affects any of these products or the markets for any of these products could have a significant impact on results of operations and cash flows. These events could include loss of patent protection, increased costs associated with manufacturing, generic or over-the-counter availability of the Company’s product or a competitive product, the discovery of previously unknown side effects, results of post-market trials, increased competition from the introduction of new, more effective treatments and discontinuation or removal from the market of the product for any reason. If any of these events had a material adverse effect on the sales of certain products, such an event could result in a material non-cash impairment charge.
The Company’s research and development efforts may not succeed in developing commercially successful products and the Company may not be able to acquire commercially successful products in other ways; in consequence, the Company may not be able to replace sales of successful products that have lost patent protection.
Like other major pharmaceutical companies, in order to remain competitive, the Company must continue to launch new products each year. Expected declines in sales of products after the loss of market exclusivity mean that the Company’s future success is dependent on its pipeline of new products, including new products which it may develop through joint ventures and products which it is able to obtain through license or acquisition. To accomplish this, the Company commits substantial effort, funds and other resources to research and development, both through its own dedicated resources and through various collaborations with third parties. There is a high rate of failure inherent in the research and development process for new drugs. As a result, there is a high risk that funds invested by the Company in research programs will not generate financial returns. This risk profile is compounded by the fact that this research has a long investment cycle. To bring a pharmaceutical compound from the discovery phase to market may take a decade or more and failure can occur at any point in the process, including later in the process after significant funds have been invested.
For a description of the research and development process, see Item 1. “Business — Research and Development” above. Each phase of testing is highly regulated and during each phase there is a substantial risk that the Company will encounter serious obstacles or will not achieve its goals, therefore, the Company may abandon a product in which it has invested substantial amounts of time and resources. Some of the risks encountered in the research and development process include the following: pre-clinical testing of a new compound may yield disappointing results; competing products from other manufacturers may reach the market first; clinical trials of a new drug may not be successful; a new drug may not be effective or may have harmful side effects; a new drug may not be approved by the regulators for its intended use; it may not be possible to obtain a patent for a new drug; payers may refuse to cover or reimburse the new product; or sales of a new product may be disappointing.

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The Company cannot state with certainty when or whether any of its products now under development will be approved or launched; whether it will be able to develop, license or otherwise acquire compounds, product candidates or products; or whether any products, once launched, will be commercially successful. The Company must maintain a continuous flow of successful new products and successful new indications or brand extensions for existing products sufficient both to cover its substantial research and development costs and to replace sales that are lost as profitable products lose market exclusivity or are displaced by competing products or therapies. Failure to do so in the short term or long term would have a material adverse effect on the Company’s business, results of operations, cash flow, financial position and prospects.
The Company’s success is dependent on the successful development and marketing of new products, which are subject to substantial risks.
Products that appear promising in development may fail to reach the market or fail to succeed for numerous reasons, including the following:
•
findings of ineffectiveness, superior safety or efficacy of competing products, or harmful side effects in clinical or pre-clinical testing;
•
failure to receive the necessary regulatory approvals, including delays in the approval of new products and new indications, and uncertainties about the time required to obtain regulatory approvals and the benefit/risk standards applied by regulatory agencies in determining whether to grant approvals;
•
failure in certain markets to obtain reimbursement commensurate with the level of innovation and clinical benefit presented by the product;
•
lack of economic feasibility due to manufacturing costs or other factors; and
•
preclusion from commercialization by the proprietary rights of others.
In the future, if certain pipeline programs are cancelled or if the Company believes that their commercial prospects have been reduced, the Company may recognize material non-cash impairment charges for those programs that were measured at fair value and capitalized in connection with acquisitions.
The Company’s products, including products in development, can not be marketed unless the Company obtains and maintains regulatory approval.
The Company’s activities, including research, preclinical testing, clinical trials and manufacturing and marketing its products, are subject to extensive regulation by numerous federal, state and local governmental authorities in the United States, including the FDA, and by foreign regulatory authorities, including in the EU. In the United States, the FDA is of particular importance to the Company, as it 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. Regulation outside the United States also is primarily focused on drug safety and effectiveness and, in many cases, cost reduction. The FDA and foreign regulatory authorities have substantial discretion to require additional testing, to delay or withhold registration and marketing approval and to otherwise preclude distribution and sale of a product.
Even if the Company is successful in developing new products, it will not be able to market any of those products unless and until it has obtained all required regulatory approvals in each jurisdiction where it proposes to market the new products. Once obtained, the Company must maintain approval as long as it plans to market its new products in each jurisdiction where approval is required. The Company’s failure to obtain approval, significant delays in the approval process, or its failure to maintain approval in any jurisdiction will prevent it from selling the new products in that jurisdiction until approval is obtained, if ever. The Company would not be able to realize revenues for those new products in any jurisdiction where it does not have approval.

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Developments following regulatory approval may adversely affect sales of the Company’s products.
Even after a product reaches market, certain developments following regulatory approval, including results in post-marketing Phase 4 trials or other studies, may decrease demand for the Company’s products, including the following:
•
the re-review of products that are already marketed;
•
new scientific information and evolution of scientific theories;
•
the recall or loss of marketing approval of products that are already marketed;
•
changing government standards or public expectations regarding safety, efficacy or labeling changes; and
•
greater scrutiny in advertising and promotion.
In the past several years, clinical trials and post-marketing surveillance of certain marketed drugs of the Company and of competitors within the industry have raised concerns that have led to recalls, withdrawals or adverse labeling of marketed products. Clinical trials and post-marketing surveillance of certain marketed drugs also have raised concerns among some prescribers and patients relating to the safety or efficacy of pharmaceutical products in general that have negatively affected the sales of such products. In addition, increased scrutiny of the outcomes of clinical trials has led to increased volatility in market reaction. Further, these matters often attract litigation and, even where the basis for the litigation is groundless, considerable resources may be needed to respond.
In addition, following the wake of product withdrawals and other significant safety issues, health authorities such as the FDA, the EMA and Japan’s Pharmaceutical and Medical Device Agency have increased their focus on safety when assessing the benefit/risk balance of drugs. Some health authorities appear to have become more cautious when making decisions about approvability of new products or indications and are re-reviewing select products that are already marketed, adding further to the uncertainties in the regulatory processes. There is also greater regulatory scrutiny, especially in the United States, on advertising and promotion and, in particular, direct-to-consumer advertising.
If previously unknown side effects are discovered or if there is an increase in negative publicity regarding known side effects of any of the Company’s products, it could significantly reduce demand for the product or require the Company to take actions that could negatively affect sales, including removing the product from the market, restricting its distribution or applying for labeling changes. Further, in the current environment in which all pharmaceutical companies operate, the Company is at risk for product liability and consumer protection claims and civil and criminal governmental actions related to its products, research and/or marketing activities.
The Company faces intense competition from lower cost-generic products.
In general, the Company faces increasing competition from lower-cost generic products. The patent rights that protect its products are of varying strengths and durations. In addition, in some countries, patent protection is significantly weaker than in the United States or in the EU. In the United States and the EU, political pressure to reduce spending on prescription drugs has led to legislation and other measures which encourages the use of generic products. Although it is the Company’s policy to actively protect its patent rights, generic challenges to the Company’s products can arise at any time, and the Company’s patents may not prevent the emergence of generic competition for its products.
Loss of patent protection for a product typically is followed promptly by generic substitutes, reducing the Company’s sales of that product. Availability of generic substitutes for the Company’s drugs may adversely affect its results of operations and cash flow. In addition, proposals emerge from time to time in the United States and other countries for legislation to further encourage the early and rapid approval of generic drugs. Any such proposal that is enacted into law could worsen this substantial negative effect on the Company’s sales and, potentially, its business, cash flow, results of operations, financial position and prospects.
The Company faces intense competition from competitors’ products which, in addition to other factors, could in certain circumstances lead to non-cash impairment charges.
The Company’s products face intense competition from competitors’ products. This competition may increase as new products enter the market. In such an event, the competitors’ products may be safer or more effective,

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more convenient to use or more effectively marketed and sold than the Company’s products. Alternatively, in the case of generic competition, including the generic availability of competitors’ branded products, they may be equally safe and effective products that are sold at a substantially lower price than the Company’s products. As a result, if the Company fails to maintain its competitive position, this could have a material adverse effect on its business, cash flow, results of operations, financial position and prospects. In addition, if products that were measured at fair value and capitalized in connection with acquisitions experience difficulties in the market that negatively impact product cash flows, the Company may recognize material non-cash impairment charges with respect to the value of those products.
The Company faces pricing pressure with respect to its products.
The Company faces increasing pricing pressure globally and, particularly in mature markets, from managed care organizations, government agencies and programs that could negatively affect the Company’s sales and profit margins. In the United States, these include (i) practices of managed care groups and institutional and governmental purchasers, and (ii) U.S. federal laws and regulations related to Medicare and Medicaid, including the Medicare Prescription Drug Improvement and Modernization Act of 2003 and the Patient Protection and Affordable Care Act of 2010. Changes to the health care system enacted as part of health care reform in the United States, as well as increased purchasing power of entities that negotiate on behalf of Medicare, Medicaid, and private sector beneficiaries, could result in further pricing pressures. The Company also faces the risk of litigation with the government over its pricing calculations. In addition, in the U.S., larger customers may, in the future, ask for and receive higher rebates on drugs in certain highly competitive categories. The Company must also compete to be placed on formularies of managed care organizations. Exclusion of a product from a formulary can lead to reduced usage in the managed care organization.
Outside the United States, numerous major markets, including the EU and Japan, have pervasive government involvement in funding health care and, in that regard, fix the pricing and reimbursement of pharmaceutical and vaccine products. Consequently, in those markets, the Company is subject to government decision making and budgetary actions with respect to its products.
The Company expects pricing pressures to increase in the future.
The health care industry in the United States will continue to be subject to increasing regulation and political action.
The Company believes that the health care industry will continue to be subject to increasing regulation as well as political and legal action, as future proposals to reform the health care system are considered by Congress and state legislatures.
In 2010, the United States enacted major health care reform legislation (the Patient Protection and Affordable Care Act). Various insurance market reforms have advanced and state and federal insurance exchanges were launched in 2014. By the end of the decade, the law is expected to expand access to health care to about 32 million Americans who did not previously have insurance coverage. With respect to the effect of the law on the pharmaceutical industry, the law increased the mandated Medicaid rebate from 15.1% to 23.1%, expanded the rebate to Medicaid managed care utilization, and increased the types of entities eligible for the federal 340B drug discount program.
The law also requires pharmaceutical manufacturers to pay a 50% point of service discount to Medicare Part D beneficiaries when they are in the Medicare Part D coverage gap (i.e., the so-called “donut hole”). Also, pharmaceutical manufacturers are now required to pay an annual non-tax deductible health care reform fee. The total annual industry fee was $3.0 billion in 2015 and will remain $3.0 billion in 2016. The fee is assessed on each company in proportion to its share of prior year branded pharmaceutical sales to certain government programs, such as Medicare and Medicaid.
On January 21, 2016, the Centers for Medicare & Medicaid Services issued the Medicaid Rebate Final Rule that implements provisions of the Patient Protection and Affordable Care Act effective April 1, 2016. The rule provides comprehensive guidance on the calculation of Average Manufacturer Price and Best Price; two metrics utilized to determine the rebates drug manufacturers are required to pay to state Medicaid programs. Merck is still evaluating the rule to determine whether it will have a material impact on Merck’s Medicaid rebate liability.

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The Company cannot predict the likelihood of future changes in the health care industry in general, or the pharmaceutical industry in particular, or what impact they may have on the Company’s results of operations, financial condition or business.
The uncertainty in global economic conditions together with austerity measures being taken by certain governments could negatively affect the Company’s operating results.
The uncertainty in global economic conditions may result in a further slowdown to the global economy that could affect the Company’s business by reducing the prices that drug wholesalers and retailers, hospitals, government agencies and managed health care providers may be able or willing to pay for the Company’s products or by reducing the demand for the Company’s products, which could in turn negatively impact the Company’s sales and result in a material adverse effect on the Company’s business, cash flow, results of operations, financial position and prospects.
Global efforts toward health care cost containment continue to exert pressure on product pricing and market access. In many international markets, government-mandated pricing actions have reduced prices of generic and patented drugs. In addition, other austerity measures negatively affected the Company’s revenue performance in 2015. The Company anticipates these pricing actions, including the biennial price reductions in Japan that will occur again in 2016, and other austerity measures will continue to negatively affect revenue performance in 2016.
If credit and economic conditions worsen, the resulting economic and currency impacts in the affected markets and globally could have a material adverse effect on the Company’s results.
The Company has significant global operations, which expose it to additional risks, and any adverse event could have a material negative impact on the Company’s results of operations.
The extent of the Company’s operations outside the United States is significant. Risks inherent in conducting a global business include:
•
changes in medical reimbursement policies and programs and pricing restrictions in key markets;
•
multiple regulatory requirements that could restrict the Company’s ability to manufacture and sell its products in key markets;
•
trade protection measures and import or export licensing requirements;
•
foreign exchange fluctuations;
•
diminished protection of intellectual property in some countries; and
•
possible nationalization and expropriation.
In addition, there may be changes to the Company’s business and political position if there is instability, disruption or destruction in a significant geographic region, regardless of cause, including war, terrorism, riot, civil insurrection or social unrest; and natural or man-made disasters, including famine, flood, fire, earthquake, storm or disease.
In the past, the Company has experienced difficulties and delays in manufacturing of certain of its products.
As previously disclosed, Merck has, in the past, experienced difficulties in manufacturing certain of its vaccines and other products. The Company may, in the future, experience difficulties and delays inherent in manufacturing its products, such as (i) failure of the Company or any of its vendors or suppliers to comply with Current Good Manufacturing Practices and other applicable regulations and quality assurance guidelines that could lead to manufacturing shutdowns, product shortages and delays in product manufacturing; (ii) construction delays related to the construction of new facilities or the expansion of existing facilities, including those intended to support future demand for the Company’s products; and (iii) other manufacturing or distribution problems including changes in manufacturing production sites and limits to manufacturing capacity due to regulatory requirements, changes in types of products produced, or physical limitations that could impact continuous supply. Manufacturing difficulties can result in product shortages, leading to lost sales and reputational harm to the Company.

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The Company may not be able to realize the expected benefits of its investments in emerging markets.
The Company has been taking steps to increase its sales in emerging markets. However, there is no guarantee that the Company’s efforts to expand sales in these markets will succeed. Some countries within emerging markets may be especially vulnerable to periods of global financial instability or may have very limited resources to spend on health care. In order for the Company to successfully implement its emerging markets strategy, it must attract and retain qualified personnel. The Company may also be required to increase its reliance on third-party agents within less developed markets. In addition, many of these countries have currencies that fluctuate substantially and if such currencies devalue and the Company cannot offset the devaluations, the Company’s financial performance within such countries could be adversely affected.
In addition, in China, commercial and economic conditions may adversely affect the Company’s growth prospects in that market. While the Company continues to believe that China represents an important growth opportunity, these events, coupled with heightened scrutiny of the health care industry, may continue to have an impact on product pricing and market access generally. The Company anticipates that the reported inquiries made by various governmental authorities involving multinational pharmaceutical companies in China may continue.
For all these reasons, sales within emerging markets carry significant risks. However, a failure to continue to expand the Company’s business in emerging markets could have a material adverse effect on the business, financial condition or results of the Company’s operations.
The Company is exposed to market risk from fluctuations in currency exchange rates and interest rates.
The Company operates in multiple jurisdictions and virtually all sales are denominated in currencies of the local jurisdiction. Additionally, the Company has entered and will enter into acquisition, licensing, borrowings or other financial transactions that may give rise to currency and interest rate exposure.
Since the Company cannot, with certainty, foresee and mitigate against such adverse fluctuations, fluctuations in currency exchange rates and interest rates could negatively affect the Company’s results of operations, financial position and cash flows as occurred with respect to Venezuela in 2015.
In order to mitigate against the adverse impact of these market fluctuations, the Company will from time to time enter into hedging agreements. While hedging agreements, such as currency options and interest rate swaps, may limit some of the exposure to exchange rate and interest rate fluctuations, such attempts to mitigate these risks may be costly and not always successful.
The Company is subject to evolving and complex tax laws, which may result in additional liabilities that may affect results of operations.
The Company is subject to evolving and complex tax laws in the jurisdictions in which it operates. Significant judgment is required for determining the Company’s tax liabilities, and the Company’s tax returns are periodically examined by various tax authorities. The Company believes that its accrual for tax contingencies is adequate for all open years based on past experience, interpretations of tax law, and judgments about potential actions by tax authorities; however, due to the complexity of tax contingencies, the ultimate resolution of any tax matters may result in payments greater or less than amounts accrued.
In March 2014, President Obama’s administration re-proposed significant changes to the U.S. international tax laws, including changes that would tax companies on “excess returns” attributable to certain offshore intangible assets, limit U.S. tax deductions for expenses related to un-repatriated foreign-source income and modify the U.S. foreign tax credit rules. Other potentially significant changes to the U.S. international laws, including a move toward a territorial tax system and taxing currently the accumulated unrepatriated foreign earnings of controlled foreign corporations, have been set out by various Congressional committees. The Company cannot determine whether these proposals will be enacted into law or what, if any, changes may be made to such proposals prior to their being enacted into law. If these or other changes to the U.S. international tax laws are enacted, they could have a significant impact on the financial results of the Company.

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In addition, the Company may be affected by changes in tax laws, including tax rate changes, changes to the laws related to the remittance of foreign earnings (deferral), or other limitations impacting the U.S. tax treatment of foreign earnings, new tax laws, and revised tax law interpretations in domestic and foreign jurisdictions.
Pharmaceutical products can develop unexpected safety or efficacy concerns.
Unexpected safety or efficacy concerns can arise with respect to marketed products, whether or not scientifically justified, leading to product recalls, withdrawals, or declining sales, as well as product liability, consumer fraud and/or other claims, including potential civil or criminal governmental actions.
Reliance on third party relationships and outsourcing arrangements could adversely affect the Company’s business.
The Company depends on third parties, including suppliers, alliances with other pharmaceutical and biotechnology companies, and third party service providers, for key aspects of its business including development, manufacture and commercialization of its products and support for its information technology systems. Failure of these third parties to meet their contractual, regulatory and other obligations to the Company or the development of factors that materially disrupt the relationships between the Company and these third parties could have a material adverse effect on the Company’s business.
The Company is increasingly dependent on sophisticated information technology and infrastructure.
The Company is increasingly dependent on sophisticated information technology and infrastructure. A significant breakdown, invasion, corruption, destruction or interruption of critical information technology systems or infrastructure, by the Company’s workforce, others with authorized access to the Company’s systems, or unauthorized persons could negatively impact operations. The ever-increasing use and evolution of technology, including cloud-based computing, creates opportunities for the unintentional dissemination, intentional destruction of confidential information stored in the Company’s systems or in non-encrypted portable media or storage devices. The Company could also experience a business interruption, intentional theft of confidential information, or reputational damage from espionage attacks, malware or other cyber-attacks, or insider threat attacks, which may compromise the Company’s system infrastructure or lead to data leakage, either internally or at the Company’s third-party providers. Although the aggregate impact on the Company’s operations and financial condition has not been material to date, the Company has been the target of events of this nature and expects them to continue. The Company monitors its data, information technology and personnel usage of Company systems to reduce these risks and continues to do so on an ongoing basis for any current or potential threats. There can be no assurance that the Company’s efforts to protect its data and systems will prevent service interruption or the loss of critical or sensitive information from the Company’s or the Company’s third party providers’ databases or systems that could result in financial, legal, business or reputational harm to the Company.
Negative events in the animal health industry could have a negative impact on future results of operations.
Future sales of key animal health products could be adversely affected by a number of risk factors including certain risks that are specific to the animal health business. For example, the outbreak of disease carried by animals, such as Bovine Spongiform Encephalopathy or mad cow disease, could lead to their widespread death and precautionary destruction as well as the reduced consumption and demand for animals, which could adversely impact the Company’s results of operations. Also, the outbreak of any highly contagious diseases near the Company’s main production sites could require the Company to immediately halt production of vaccines at such sites or force the Company to incur substantial expenses in procuring raw materials or vaccines elsewhere. Other risks specific to animal health include epidemics and pandemics, government procurement and pricing practices, weather and global agribusiness economic events. As the Animal Health segment of the Company’s business becomes more significant, the impact of any such events on future results of operations would also become more significant.

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Biologics carry unique risks and uncertainties, which could have a negative impact on future results of operations.
The successful development, testing, manufacturing and commercialization of biologics, particularly human and animal health vaccines, is a long, expensive and uncertain process. There are unique risks and uncertainties with biologics, including:
•
There may be limited access to and supply of normal and diseased tissue samples, cell lines, pathogens, bacteria, viral strains and other biological materials. In addition, government regulations in multiple jurisdictions, such as the United States and the EU, could result in restricted access to, or transport or use of, such materials. If the Company loses access to sufficient sources of such materials, or if tighter restrictions are imposed on the use of such materials, the Company may not be able to conduct research activities as planned and may incur additional development costs.
•
The development, manufacturing and marketing of biologics are subject to regulation by the FDA, the EMA and other regulatory bodies. These regulations are often more complex and extensive than the regulations applicable to other pharmaceutical products. For example, in the United States, a BLA, including both preclinical and clinical trial data and extensive data regarding the manufacturing procedures, is required for human vaccine candidates and FDA approval is required for the release of each manufactured commercial lot.
•
Manufacturing biologics, especially in large quantities, is often complex and may require the use of innovative technologies to handle living micro-organisms. Each lot of an approved biologic must undergo thorough testing for identity, strength, quality, purity and potency. Manufacturing biologics requires facilities specifically designed for and validated for this purpose, and sophisticated quality assurance and quality control procedures are necessary. Slight deviations anywhere in the manufacturing process, including filling, labeling, packaging, storage and shipping and quality control and testing, may result in lot failures, product recalls or spoilage. When changes are made to the manufacturing process, the Company may be required to provide pre-clinical and clinical data showing the comparable identity, strength, quality, purity or potency of the products before and after such changes.
•
Biologics are frequently costly to manufacture because production ingredients are derived from living animal or plant material, and most biologics cannot be made synthetically. In particular, keeping up with the demand for vaccines may be difficult due to the complexity of producing vaccines.
•
The use of biologically derived ingredients can lead to allegations of harm, including infections or allergic reactions, or closure of product facilities due to possible contamination. Any of these events could result in substantial costs.
Product liability insurance for products may be limited, cost prohibitive or unavailable.
As a result of a number of factors, product liability insurance has become less available while the cost has increased significantly. With respect to product liability, the Company self-insures substantially all of its risk, as the availability of commercial insurance has become more restrictive. The Company has evaluated its risks and has determined that the cost of obtaining product liability insurance outweighs the likely benefits of the coverage that is available and, as such, has no insurance for certain product liabilities effective August 1, 2004, including liability for legacy Merck products first sold after that date. The Company will continually assess the most efficient means to address its risk; however, there can be no guarantee that insurance coverage will be obtained or, if obtained, will be sufficient to fully cover product liabilities that may arise.
Changes in laws and regulations could adversely affect the Company’s business.
All aspects of the Company’s business, including research and development, manufacturing, marketing, pricing, sales, litigation and intellectual property rights, are subject to extensive legislation and regulation. Changes in applicable federal and state laws and agency regulations could have a material adverse effect on the Company’s business.

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Social media platforms present risks and challenges.
The inappropriate and/or unauthorized use of certain media vehicles could cause brand damage or information leakage or could lead to legal implications, including from the improper collection and/or dissemination of personally identifiable information. In addition, negative or inaccurate posts or comments about the Company on any social networking web site could damage the Company’s reputation, brand image and goodwill. Further, the disclosure of non-public Company-sensitive information by the Company’s workforce or others through external media channels could lead to information loss. Although there is an internal Company Social Media Policy that guides employees on appropriate personal and professional use of social media about the Company, the processes in place may not completely secure and protect information. Identifying new points of entry as social media continues to expand presents new challenges.
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 based on management’s current expectations and are subject to risks and uncertainties which may cause results to differ materially from those set forth in the statements. One can identify these forward-looking statements by their use of words such as “anticipates,” “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 development, product approvals, product potential, and development programs. One must carefully consider any such statement and should understand that many factors could cause actual results to differ materially 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. The Company cautions you not to place undue reliance on these forward-looking statements. Although it is not possible to predict or identify all such factors, they may include the following:
•Competition from generic products as the Company’s products lose patent protection.
•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 drug 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.
•Changes in government laws and regulations, including laws governing intellectual property, and the enforcement thereof affecting the Company’s business.
•Efficacy or safety concerns with respect to marketed products, whether or not scientifically justified, leading to product recalls, withdrawals or declining sales.
•Significant changes in customer relationships or changes in the behavior and spending patterns of purchasers of health care products and services, including delaying medical procedures, rationing prescription medications, reducing the frequency of physician visits and foregoing health care insurance coverage.
•Legal factors, including product liability claims, antitrust litigation and governmental investigations, including tax disputes, 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.

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•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. The legislative and regulatory landscape for privacy and data protection continues to evolve, and there has been an increasing amount of focus on privacy and data protection issues with the potential to affect directly the Company’s business, including recently enacted laws in a majority of states in the United States requiring security breach notification.
•Changes in tax laws including changes related to the taxation of foreign earnings.
•Changes in accounting pronouncements promulgated by standard-setting or regulatory bodies, including the Financial Accounting Standards Board and the SEC, that are adverse to the Company.
•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. See “Risk Factors” above.
Item 1B.
Unresolved Staff Comments.
None.
Item 2.
Properties.
The Company’s corporate headquarters is located in Kenilworth, New Jersey. The Company’s U.S. commercial operations are headquartered in Upper Gwynedd, Pennsylvania. The Company’s U.S. pharmaceutical business is conducted through divisional headquarters located in Upper Gwynedd and Cokesbury, New Jersey. The Company’s vaccines business is conducted through divisional headquarters located in West Point, Pennsylvania. Merck’s Animal Health global headquarters function is located in Madison, New Jersey. Principal U.S. research facilities are located in Rahway and Kenilworth, New Jersey, West Point, Pennsylvania, Palo Alto, California, Boston, Massachusetts, and Elkhorn, Nebraska (Animal Health). Principal research facilities outside the United States are located in Switzerland and China. Merck’s manufacturing operations are headquartered in Whitehouse Station, New Jersey. The Company also has production facilities for human health products at nine locations in the United States and Puerto Rico. Outside the United States, through subsidiaries, the Company owns or has an interest in manufacturing plants or other properties in Japan, Singapore, South Africa, and other countries in Western Europe, Central and South America, and Asia.
Capital expenditures were $1.3 billion in 2015, $1.3 billion in 2014 and $1.5 billion in 2013. In the United States, these amounted to $879 million in 2015, $873 million in 2014 and $902 million in 2013. Abroad, such expenditures amounted to $404 million in 2015, $444 million in 2014 and $646 million in 2013.
The Company and its subsidiaries own their principal facilities and manufacturing plants under titles that 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 information called for by this Item is incorporated herein by reference to Item 8. “Financial Statements and Supplementary Data,” Note 10. “Contingencies and Environmental Liabilities”.
Item 4.
Mine Safety Disclosures.
Not Applicable

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Executive Officers of the Registrant (ages as of February 1, 2016)
KENNETH C. FRAZIER — Age 61
December 2011 — Chairman, President and Chief Executive Officer
January 2011 — President and Chief Executive Officer
May 2010 — President — responsible for the Company’s three largest global divisions - Global Human Health, Merck Manufacturing Division and Merck Research Laboratories
Prior to May 2010, Mr. Frazier was Executive Vice President and President, Global Human Health from 2007 to 2010.
ADELE D. AMBROSE — Age 59
November 2009 — Senior Vice President and Chief Communications Officer — responsible for the Global Communications organization
ROBERT M. DAVIS — Age 49
April 2014 — Executive Vice President and Chief Financial Officer — responsible for the Company’s global financial organization, investor relations, corporate strategy and business development, global facilities, and the Company’s joint venture relationships
Prior to April 2014, Mr. Davis was Corporate Vice President and President, Medical Products of Baxter International, Inc. (Baxter) from 2010 to 2014, Corporate Vice President and President, Renal Division of Baxter in 2010 and Baxter’s Corporate Vice President and Chief Financial Officer from 2006 to 2010
WILLIE A. DEESE — Age 60
November 2009 — Executive Vice President and President, Merck Manufacturing Division — responsible for the Company’s global manufacturing, procurement, and distribution and logistics functions
RICHARD R. DELUCA, JR. — Age 53
September 2011 — Executive Vice President and President, Merck Animal Health — responsible for the Merck Animal Health organization
Prior to September 2011, Mr. DeLuca was Chief Financial Officer, Becton Dickinson Biosciences (a medical technology company) since 2010 and President, Wyeth’s Fort Dodge Animal Health division from 2007 to 2010.
JULIE L. GERBERDING, M.D., M.P.H. — Age 60
January 2015 — Executive Vice President for Strategic Communications, Global Public Policy and Population Health — responsible for Merck’s Global Public Policy, Corporate Responsibility and Global Communications functions
January 2010 — President, Merck Vaccines — responsible for Merck’s portfolio of vaccines, planning for the introduction of vaccines from the Company’s pipeline, and accelerating efforts to broaden access to Merck’s vaccines around the world

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CLARK GOLESTANI — Age 49
December 2012 — Executive Vice President and Chief Information Officer — responsible for the Company’s global information technology (IT) organization
August 2008 — Vice President, Merck Research Laboratories Information Technology — responsible for global IT for the Company’s Research & Development division, including Basic Research, Pre-Clinical, Clinical and Regulatory
MIRIAN M. GRADDICK-WEIR — Age 61
November 2009 — Executive Vice President, Human Resources — responsible for the Global Human Resources organization
MICHAEL J. HOLSTON — Age 53
July 2015 — Executive Vice President and General Counsel — responsible for the Company’s legal function
June 2012 — Executive Vice President and Chief Ethics and Compliance Officer — responsible for the Company’s global compliance function, including Global Safety & Environment, Systems Assurance, Ethics and Privacy and security organization
Prior to June 2012, Mr. Holston was Executive Vice President, General Counsel and Board Secretary for Hewlett-Packard Company since 2007, where he oversaw the legal, compliance, government affairs, privacy and ethics operations.
RITA A. KARACHUN — Age 52
March 2014 — Senior Vice President Finance - Global Controller — responsible for the Company’s global controller’s organization including all accounting, controls, external reporting and financial standards and policies
November 2009 — Assistant Controller — responsible for the global consolidation of the Company’s entities as well as acting as controller for the U.S.-based entities
ROGER M. PERLMUTTER, M.D., Ph.D. — Age 63
April 2013 — Executive Vice President and President, Merck Research Laboratories — responsible for the Company’s global research and development efforts
Prior to April 2013, Dr. Perlmutter was Executive Vice President of Research and Development, Amgen Inc. from 2001 to 2012.
MICHAEL ROSENBLATT, M.D. — Age 68
December 2009 — Executive Vice President and Chief Medical Officer — the Company’s primary voice to the global medical community on critical issues such as patient safety and benefit:risk of medications
ADAM H. SCHECHTER — Age 51
May 2010 — Executive Vice President and President, Global Human Health — responsible for the Company’s global pharmaceutical and vaccine business
November 2009 — President, Global Human Health, U.S. Market and Integration Leader — commercial responsibility in the United States for the Company’s portfolio of prescription medicines. Leader for the integration efforts for the Merck/Schering-Plough merger across all divisions and functions.
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.

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PART II
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The principal market for trading of the Company’s Common Stock is the New York Stock Exchange (NYSE) under the symbol MRK. The Common Stock market price information set forth in the table below is based on historical NYSE market prices.
The following table also sets forth, for the calendar periods indicated, the dividend per share information.
 
Cash Dividends Paid per Common Share
 
 
 
 
 
 
 
 
 
 
 
Year

 
4th Q

 
3rd Q

 
2nd Q

 
1st Q

 
2015
$
1.80

 
$
0.45

 
$
0.45

 
$
0.45

 
$
0.45

 
2014
$
1.76

 
$
0.44

 
$
0.44

 
$
0.44

 
$
0.44

 
Common Stock Market Prices
 
 
2015
 
 
4th Q

 
3rd Q

 
2nd Q

 
1st Q

 
High
 
 
$
55.77

 
$
60.07

 
$
61.70

 
$
63.62

 
Low
 
 
$
48.35

 
$
45.69

 
$
56.22

 
$
55.64

 
2014
 
 
 
 
 
 
 
 
 
 
High
 
 
$
62.20

 
$
61.33

 
$
59.84

 
$
57.65

 
Low
 
 
$
52.49

 
$
55.57

 
$
54.40

 
$
49.30


As of January 31, 2016, there were approximately 135,000 shareholders of record.

Issuer purchases of equity securities for the three months ended December 31, 2015 were as follows:
Issuer Purchases of Equity Securities
 
 
 
 
 
 
($ in millions)
Period
 
Total Number
of Shares
Purchased(1)
 
Average Price
Paid Per
Share
 
Approximate Dollar Value of Shares
That May Yet Be Purchased
Under the Plans or Programs(1)
October 1 — October 31
 
8,968,000
 
$50.45
 
$9,218
November 1 — November 30
 
6,136,400
 
$54.25
 
$8,885
December 1 — December 31
 
7,464,600
 
$53.06
 
$8,489
Total
 
22,569,000
 
$52.35
 
$8,489

(1) 
All shares purchased during the period were made as part of a plan approved by the Board of Directors in March 2015 to purchase up to $10 billion in Merck shares.

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Performance Graph
The following graph assumes a $100 investment on December 31, 2010, and reinvestment of all dividends, in each of the Company’s Common Shares, the S&P 500 Index, and a composite peer group of the major U.S.-based pharmaceutical companies, which are: AbbVie Inc., Bristol-Myers Squibb Company, Johnson & Johnson, Eli Lilly and Company, and Pfizer Inc.
Comparison of Five-Year Cumulative Total Return
Merck & Co., Inc., Composite Peer Group and S&P 500 Index
 
End of
Period Value
 
2015/2010
CAGR**
MERCK
$
177

 
12
%
PEER GRP.**
244

 
20
%
S&P 500
181

 
13
%

 
2010
2011
2012
2013
2014
2015
MERCK
100.00
109.40
123.72
156.90
183.56
176.53
PEER GRP.
100.00
122.23
141.20
196.84
229.34
244.08
S&P 500
100.00
102.10
118.44
156.78
178.22
180.67

*
Compound Annual Growth Rate
**
Peer group average was calculated on a market cap weighted basis. In addition, AbbVie Inc. replaced Abbott Laboratories in the peer group beginning 2013 following the spin off from Abbott Laboratories.

This Performance Graph will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities and Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference. In addition, the Performance Graph will not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, other than as provided in Regulation S-K, or to the liabilities of section 18 of the Securities Exchange Act of 1934, except to the extent that the Company specifically requests that such information be treated as soliciting material or specifically incorporates it by reference into a filing under the Securities Act or the Exchange Act.


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Item 6.
Selected Financial Data.                        
The following selected financial data should be read in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and consolidated financial statements and notes thereto contained in Item 8. “Financial Statements and Supplementary Data” of this report.
Merck & Co., Inc. and Subsidiaries
($ in millions except per share amounts)
 
2015 (1)
 
2014 (2)
 
2013
 
2012(3)
 
2011(4)
Results for Year:
 
 
 
 
 
 
 
 
 
Sales
$
39,498

 
$
42,237

 
$
44,033

 
$
47,267

 
$
48,047

Materials and production
14,934

 
16,768

 
16,954

 
16,446

 
16,871

Marketing and administrative
10,313

 
11,606

 
11,911

 
12,776

 
13,733

Research and development
6,704

 
7,180

 
7,503

 
8,168

 
8,467

Restructuring costs
619

 
1,013

 
1,709

 
664

 
1,306

Other (income) expense, net
1,527

 
(11,613
)
 
411

 
474

 
336

Income before taxes
5,401

 
17,283

 
5,545

 
8,739

 
7,334

Taxes on income
942

 
5,349

 
1,028

 
2,440

 
942

Net income
4,459

 
11,934

 
4,517

 
6,299

 
6,392

Less: Net income attributable to noncontrolling interests
17

 
14

 
113

 
131

 
120

Net income attributable to Merck & Co., Inc.
4,442

 
11,920

 
4,404

 
6,168

 
6,272

Basic earnings per common share attributable to Merck & Co., Inc. common shareholders
$
1.58

 
$
4.12

 
$
1.49

 
$
2.03

 
$
2.04

Earnings per common share assuming dilution attributable to Merck & Co., Inc. common shareholders
$
1.56

 
$
4.07

 
$
1.47

 
$
2.00

 
$
2.02

Cash dividends declared
5,115

 
5,156

 
5,132

 
5,173

 
4,818

Cash dividends declared per common share
$
1.81

 
$
1.77

 
$
1.73

 
$
1.69

 
$
1.56

Capital expenditures
1,283

 
1,317

 
1,548

 
1,954

 
1,723

Depreciation
1,593

 
2,471

 
2,225

 
1,999

 
2,351

Average common shares outstanding (millions)
2,816

 
2,894

 
2,963

 
3,041

 
3,071

Average common shares outstanding assuming dilution (millions)
2,841

 
2,928

 
2,996

 
3,076

 
3,094

Year-End Position:
 
 
 
 
 
 
 
 
 
Working capital (5)
$
10,561

 
$
14,208

 
$
17,469

 
$
15,926

 
$
16,128

Property, plant and equipment, net
12,507

 
13,136

 
14,973

 
16,030

 
16,297

Total assets (5)
101,779

 
98,167

 
105,440

 
105,921

 
104,699

Long-term debt
23,929

 
18,699

 
20,539

 
16,254

 
15,525

Total equity
44,767

 
48,791

 
52,326

 
55,463

 
56,943

Year-End Statistics:
 
 
 
 
 
 
 
 
 
Number of stockholders of record
135,500

 
142,000

 
149,400

 
157,400

 
166,100

Number of employees
68,000

 
70,000

 
77,000

 
83,000

 
86,000

(1) 
Amounts for 2015 include a net charge related to the settlement of Vioxx shareholder class action litigation, foreign exchange losses related to Venezuela, gains on the dispositions of businesses and other assets and the favorable benefit of certain tax items.
(2) 
Amounts for 2014 reflect the divestiture of Merck’s Consumer Care business on October 1, 2014, including a gain on the sale, as well as a gain recognized on an option exercise by AstraZeneca, gains on the dispositions of other businesses and assets, and a loss on extinguishment of debt.
(3) 
Amounts for 2012 include a net charge recorded in connection with the settlement of certain shareholder litigation.
(4) 
Amounts for 2011 include an arbitration settlement charge.
(5)  
Amounts have been restated to give effect to the early adoption of accounting guidance issued by the Financial Accounting Standards Board. See Note 2 to Item 8(a). “Financial Statements.”



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Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Description of Merck’s Business
Merck & Co., Inc. (Merck or the Company) is a global health care company that delivers innovative health solutions through its prescription medicines, vaccines, biologic therapies and animal health products, which it markets directly and through its joint ventures. The Company’s operations are principally managed on a products basis and are comprised of four operating segments, the Pharmaceutical, Animal Health, Alliances and Healthcare Services segments. The Pharmaceutical segment is the only reportable segment. The Pharmaceutical segment includes human health pharmaceutical and vaccine products marketed either directly by the Company or through joint ventures. Human health pharmaceutical products consist of therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. The Company sells these human health pharmaceutical products primarily to drug wholesalers and retailers, hospitals, government agencies and managed health care providers such as health maintenance organizations, pharmacy benefit managers and other institutions. Vaccine products consist of preventive pediatric, adolescent and adult vaccines, primarily administered at physician offices. The Company sells these human health vaccines primarily to physicians, wholesalers, physician distributors and government entities. The Company also has animal health operations that discover, develop, manufacture and market animal health products, including vaccines, which the Company sells to veterinarians, distributors and animal producers. Merck’s Alliances segment primarily includes results from the Company’s relationship with AstraZeneca LP until the termination of that relationship on June 30, 2014. The Company’s Healthcare Services segment provides services and solutions that focus on engagement, health analytics and clinical services to improve the value of care delivered to patients. On October 1, 2014, the Company divested its Consumer Care segment that developed, manufactured and marketed over-the-counter, foot care and sun care products.
Overview
During 2015, Merck continued to execute its research and development focused-strategy, advance its pipeline and commercial portfolio while maintaining a disciplined approach to cost management and delivering capital returns to shareholders. The Company received several product approvals in 2015 that include expanded indications for Keytruda, the Company’s anti-PD-1 (programmed death receptor-1) therapy for the treatment of advanced melanoma and metastatic non-small-cell lung cancer (NSCLC) in patients whose tumors express PD-L1 with disease progression following other therapies, as well as U.S. Food and Drug Administration (FDA) approval for Bridion (sugammadex) Injection, a medication for the reversal of two types of neuromuscular blocking agents used during surgery. Additionally, in January 2016, the FDA approved Zepatier, a once-daily, single tablet combination therapy in the treatment of chronic hepatitis C virus (HCV) genotype (GT) 1 or GT4 infection, with or without ribavirin. Business development is a critical part of the Company’s strategy as Merck looks to combine internal and external innovation to enhance its pipeline. During 2015, Merck acquired Cubist Pharmaceuticals, Inc. (Cubist), a leader in the development of new therapies to treat serious and potentially life-threatening infections caused by a broad range of increasingly drug-resistant bacteria, and cCAM Biotherapuetics Ltd. (cCAM), a biopharmaceutical company focused on the discovery and development of novel cancer immunotherapies. Also in 2015, Merck entered into a multi-year collaboration with NGM Biopharmaceuticals, Inc. (NGM) to research, discover, develop and commercialize novel biologic therapies across a wide range of therapeutic areas. In January 2016, Merck acquired IOmet Pharma Ltd (IOmet), a drug discovery company focused on the development of innovative medicines for the treatment of cancer, with a particular emphasis on the fields of cancer immunotherapy and cancer metabolism.
Worldwide sales were $39.5 billion in 2015, a decline of 6% compared with 2014, including a 6% unfavorable effect from foreign exchange. The acquisition of Cubist in 2015, the divestiture of Merck’s Consumer Care business (MCC) in 2014, as well as product divestitures and the termination in 2014 of the Company’s relationship with AstraZeneca LP (AZLP) had a net unfavorable impact to sales of approximately 3%. Sales performance was also unfavorably affected by the ongoing impacts of the loss of market exclusivity for several products. These unfavorable impacts were partially offset by volume growth in oncology, diabetes, women’s health and vaccine products, and positive performance from Merck’s Animal Health business.
Merck continues to support its in-line portfolio, as well as ongoing and upcoming product launches. Keytruda, initially approved by the FDA in September 2014 for the treatment of advanced melanoma in patients with disease progression after other therapies, is launching in more than 40 markets, including in the European Union (EU). In 2015, Merck achieved multiple additional regulatory milestones for Keytruda including accelerated approval from the FDA

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for the treatment of patients with metastatic NSCLC whose tumors express PD-L1 as determined by an FDA-approved test and who have disease progression on or after platinum-containing chemotherapy. In addition, the FDA approved an expanded indication for Keytruda to include the first-line treatment of patients with unresectable or metastatic melanoma. Additionally, in 2015, the European Commission (EC) approved Keytruda for the treatment of advanced (unresectable or metastatic) melanoma in adults. The Keytruda clinical trials program currently includes more than 30 tumor types in more than 200 clinical trials, including over 100 trials that combine Keytruda with other cancer treatments (see “Research and Development” below). The Company is also launching Zepatier and Bridion in the United States.
While the Company continues to execute its strategy of pursuing business development opportunities to complement its internal research capabilities, as part of Merck’s prioritization efforts, the Company also continues to review its existing assets to determine whether they can provide the best short- and longer-term value with Merck or elsewhere. In connection with its portfolio assessment process, the Company divested its remaining ophthalmics business in international markets during 2015. The Company’s portfolio assessment process is ongoing and future divestitures may occur.
Merck is focusing its research efforts on the therapeutic areas that it believes can make the most impact on addressing critical areas of unmet medical need, such as cancer, hepatitis C, cardiometabolic disease, resistant microbial infection and Alzheimer’s disease. During 2015, the Company continued to make strides in its late-stage pipeline. MK-6072, bezlotoxumab, is an investigational antitoxin for the prevention of Clostridium difficile (C. difficile) infection recurrence that is currently under review with the FDA and the European Medicines Agency (EMA). MK-1293, an insulin glargine candidate for the treatment of patients with type 1 and type 2 diabetes being developed in a collaboration, is also under review in the EU, as is Zepatier. Keytruda is under review in the EU for the treatment of NSCLC.
In addition to Phase 3 programs for Keytruda in the therapeutic areas of bladder, breast, colorectal, gastric, head and neck, multiple myeloma, and esophageal cancers, the Company also has more than 10 candidates in Phase 3 clinical development in its core therapeutic areas, as well as other areas with significant potential, including MK-3102, omarigliptin, an investigational once-weekly dipeptidyl peptidase-4 (DPP-4) inhibitor in development for the treatment of adults with type 2 diabetes; MK-0822, odanacatib, an oral, once-weekly investigational treatment for patients with osteoporosis; MK-8835, ertugliflozin, an investigational oral sodium glucose cotransporter-2 (SGLT2) inhibitor being evaluated alone and in combination with Januvia (sitagliptin) and metformin for the treatment of type 2 diabetes; and MK-8237, an investigational allergy immunotherapy tablet for house dust mite allergy. Merck expects to submit applications for regulatory approval in the United States for each of these candidates, as well as MK-1293 described above, in 2016.
As a result of continued portfolio prioritization, the Company is out-licensing or discontinuing selected late-stage clinical development assets. During 2015, the Company out-licensed MK-1602 and MK-8031, investigational small molecule oral calcitonin gene-related peptide (CGRP) receptor antagonists, which are being developed for the treatment and prevention of migraine.
The Company continued to make strong progress in 2015 reducing its cost base. As a result of disciplined cost management, Merck has achieved its overall savings goal in 2015 as noted below. The Company has in turn invested its resources to grow its strongest brands and to support the most promising assets in its pipeline. Marketing and administrative expenses declined in 2015 as compared with 2014 reflecting in part this continued focus by the Company on prioritizing its resources to the highest growth areas.
In 2013, the Company initiated actions under a global restructuring program (the 2013 Restructuring Program) as part of a global initiative to sharpen its commercial and research and development focus. The actions under this program primarily include the elimination of positions in sales, administrative and headquarters organizations, as well as research and development. Additionally, these actions include the reduction of the Company’s global real estate footprint and improvements in the efficiency of its manufacturing and supply network. The Company recorded total pretax costs of $527 million in 2015 and $1.2 billion in both 2014 and 2013 related to this restructuring program. The actions under the 2013 Restructuring Program were substantially completed by the end of 2015. The Company has met its projected $2.0 billion in annual net cost savings for actions under the 2013 Restructuring Program. When the actions under the 2013 Restructuring Program are combined with the actions under the Merger Restructuring Program (discussed below), the Company has also met its annual net cost savings projection of $2.5 billion compared with full-year 2012 expense levels.

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The global restructuring program (the Merger Restructuring Program) that was initiated in 2010 subsequent to the Merck and Schering-Plough Corporation (Schering-Plough) merger (the Merger) is intended to streamline the cost structure of the combined company. The actions under this plan include the elimination of positions in sales, administrative and headquarters organizations, as well as the sale or closure of certain manufacturing and research and development sites and the consolidation of office facilities. The Company recorded total pretax costs of $583 million in 2015, $730 million in 2014 and $1.1 billion in 2013 related to this restructuring program. The non-facility related restructuring actions under the Merger Restructuring Program are substantially complete.
Beginning January 1, 2016, the remaining restructuring actions under both plans, which primarily relate to ongoing facility rationalizations, will be accounted for in the aggregate prospectively. The Company expects to complete such actions by the end of 2017 and incur approximately $1.5 billion of additional pretax costs.
Costs associated with the Company’s restructuring actions are included in Materials and production costs, Marketing and administrative expenses, Research and development expenses and Restructuring costs. The Company estimates that approximately two-thirds of the cumulative pretax costs relate to cash outlays, primarily related to employee separation expense. Approximately one-third of the cumulative pretax costs are non-cash, relating primarily to the accelerated depreciation of facilities to be closed or divested.
In November 2015, Merck’s Board of Directors raised the Company’s quarterly dividend to $0.46 per share from $0.45 per share. During 2015, the Company returned $9.3 billion to shareholders through dividends and share repurchases.
In January 2016, Merck announced that it had reached an agreement with plaintiffs to resolve Vioxx shareholder class action litigation pending in New Jersey federal court. Under the agreement, Merck will pay $830 million to resolve the settlement class members’ claims, plus an additional amount for approved attorneys’ fees and expenses. In connection with the settlement, Merck recorded a net pretax charge of $680 million in the fourth quarter of 2015, which includes anticipated insurance recoveries. See Note 10 to the consolidated financial statements.
Earnings per common share assuming dilution attributable to common shareholders (EPS) for 2015 were $1.56 compared with $4.07 in 2014. EPS in both years reflect the impact of acquisition and divestiture-related costs and restructuring costs, as well as certain other items, which in 2014 include an $11.2 billion gain recognized in connection with the divestiture of MCC. Non-GAAP EPS, which excludes these items, were $3.59 in 2015 and $3.49 in 2014 (see “Non-GAAP Income and Non-GAAP EPS” below).
Competition and the Health Care Environment
Competition
The markets in which the Company conducts its business and the pharmaceutical industry in general are highly competitive and highly regulated. The Company’s competitors include other worldwide research-based pharmaceutical companies, smaller research companies with more limited therapeutic focus, generic drug manufacturers and animal health care companies. The Company’s operations may be adversely affected by generic and biosimilar competition as the Company’s products mature, as well as technological advances of competitors, industry consolidation, patents granted to competitors, competitive combination products, new products of competitors, the generic availability of competitors’ branded products, and new information from clinical trials of marketed products or post-marketing surveillance. In addition, patent rights are increasingly being challenged by competitors, and the outcome can be highly uncertain. An adverse result in a patent dispute can preclude commercialization of products or negatively affect sales of existing products and could result in the recognition of an impairment charge with respect to intangible assets associated with certain products. Competitive pressures have intensified as pressures in the industry have grown.
Pharmaceutical competition involves a rigorous search for technological innovations and the ability to market these innovations effectively. With its long-standing emphasis on research and development, the Company is well positioned to compete in the search for technological innovations. Additional resources required to meet market challenges include quality control, flexibility to meet customer specifications, an efficient distribution system and a strong technical information service. The Company is active in acquiring and marketing products through external alliances, such as licensing arrangements, and has been refining its sales and marketing efforts to further address changing industry conditions. However, the introduction of new products and processes by competitors may result in price reductions and product displacements, even for products protected by patents. For example, the number of

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compounds available to treat a particular disease typically increases over time and can result in slowed sales growth or reduced sales for the Company’s products in that therapeutic category.
The highly competitive animal health business is affected by several factors including regulatory and legislative issues, scientific and technological advances, product innovation, the quality and price of the Company’s products, effective promotional efforts and the frequent introduction of generic products by competitors.

Health Care Environment and Government Regulation
Global efforts toward health care cost containment continue to exert pressure on product pricing and market access. In the United States, federal and state governments for many years also have pursued methods to reduce the cost of drugs and vaccines for which they pay. For example, federal laws require the Company to pay specified rebates for medicines reimbursed by Medicaid and to provide discounts for outpatient medicines purchased by certain Public Health Service entities and hospitals serving a disproportionate share of low income or uninsured patients.
Against this backdrop, the United States enacted major health care reform legislation in 2010 (the Patient Protection and Affordable Care Act), which began to be implemented in 2010. Various insurance market reforms have advanced and state and federal insurance exchanges were launched in 2014. By the end of the decade, the law is expected to expand access to health care to about 32 million Americans who did not previously have insurance coverage. With respect to the effect of the law on the pharmaceutical industry, the law increased the mandated Medicaid rebate from 15.1% to 23.1%, expanded the rebate to Medicaid managed care utilization, and increased the types of entities eligible for the federal 340B drug discount program. The law also requires pharmaceutical manufacturers to pay a 50% point of service discount to Medicare Part D beneficiaries when they are in the Medicare Part D coverage gap (i.e., the so-called “donut hole”). Approximately $550 million, $430 million and $280 million was recorded by Merck as a reduction to revenue in 2015, 2014 and 2013, respectively, related to the donut hole provision. Also, pharmaceutical manufacturers are now required to pay an annual non-tax deductible health care reform fee. The total annual industry fee was $3.0 billion in 2015 and will remain $3.0 billion in 2016. The fee is assessed on each company in proportion to its share of prior year branded pharmaceutical sales to certain government programs, such as Medicare and Medicaid. The Company recorded $173 million, $390 million and $151 million of costs within Marketing and administrative expenses in 2015, 2014 and 2013, respectively, for the annual health care reform fee. The higher expenses in 2014 reflect final regulations on the annual health care reform fee issued by the Internal Revenue Service (IRS) on July 28, 2014. The final IRS regulations accelerated the recognition criteria for the fee obligation by one year to the year in which the underlying sales used to allocate the fee occurred rather than the year in which the fee was paid. As a result of this change, Merck recorded an additional year of expense of $193 million in 2014. On January 21, 2016, the Centers for Medicare & Medicaid Services issued the Medicaid Rebate Final Rule that implements provisions of the Patient Protection and Affordable Care Act effective April 1, 2016. The rule provides comprehensive guidance on the calculation of Average Manufacturer Price and Best Price; two metrics utilized to determine the rebates drug manufacturers are required to pay to state Medicaid programs. Merck is still evaluating the rule to determine whether it will have a material impact on Merck’s Medicaid rebate liability.
The Company also faces increasing pricing pressure globally from managed care organizations, government agencies and programs that could negatively affect the Company’s sales and profit margins. In the United States, these include (i) practices of managed care organizations, federal and state exchanges, and institutional and governmental purchasers, and (ii) U.S. federal laws and regulations related to Medicare and Medicaid, including the Medicare Prescription Drug Improvement and Modernization Act of 2003 and the Patient Protection and Affordable Care Act. Changes to the health care system enacted as part of health care reform in the United States, as well as increased purchasing power of entities that negotiate on behalf of Medicare, Medicaid, and private sector beneficiaries, could result in further pricing pressures. As an example, health care reform is contributing to an increase in the number of patients in the Medicaid program under which sales of pharmaceutical products are subject to substantial rebates.
In addition, in the effort to contain the U.S. federal deficit, the pharmaceutical industry could be considered a potential source of savings via legislative proposals that have been debated but not enacted. These types of revenue generating or cost saving proposals include additional direct price controls in the Medicare prescription drug program (Part D). In addition, Congress may again consider proposals to allow, under certain conditions, the importation of medicines from other countries. It remains very uncertain as to what proposals, if any, may be included as part of future federal budget deficit reduction proposals that would directly or indirectly affect the Company.

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Efforts toward health care cost containment remain intense in several European countries. Many countries have continued to announce and execute austerity measures, which include the implementation of pricing actions to reduce prices of generic and patented drugs and mandatory switches to generic drugs. While the Company is taking steps to mitigate the impact in these countries, the austerity measures continued to negatively affect the Company’s revenue performance in 2015 and the Company anticipates the austerity measures will continue to negatively affect revenue performance in 2016. In addition, a majority of countries attempt to contain drug costs by engaging in reference pricing in which authorities examine pre-determined markets for published prices of drugs by brand. The authorities then use price data from those markets to set new local prices for brand-name drugs, including the Company’s. Guidelines for examining reference pricing are usually set in local markets and can be changed pursuant to local regulations.
In addition, in Japan, the pharmaceutical industry is subject to government-mandated biennial price reductions of pharmaceutical products and certain vaccines, which will occur again in 2016. Furthermore, the government can order repricings for classes of drugs if it determines that it is appropriate under applicable rules.
Certain markets outside of the United States have also implemented other cost management strategies, such as health technology assessments, which require additional data, reviews and administrative processes, all of which increase the complexity, timing and costs of obtaining product reimbursement and exert downward pressure on available reimbursement.
The Company’s focus on emerging markets has increased. Governments in many emerging markets are also focused on constraining health care costs and have enacted price controls and related measures, such as compulsory licenses, that aim to put pressure on the price of pharmaceuticals and constrain market access. The Company anticipates that pricing pressures and market access challenges will continue in 2016 to varying degrees in the emerging markets.
Beyond pricing and market access challenges, other conditions in emerging market countries can affect the Company’s efforts to continue to grow in these markets, including potential political instability, significant currency fluctuation and controls, financial crises, limited or changing availability of funding for health care, and other developments that may adversely impact the business environment for the Company. Further, the Company may engage third-party agents to assist in operating in emerging market countries, which may affect its ability to realize continued growth and may also increase the Company’s risk exposure.
In addressing cost containment pressures, the Company engages in public policy advocacy with policymakers and continues to work to demonstrate that its medicines provide value to patients and to those who pay for health care. The Company advocates with government policymakers to encourage a long-term approach to sustainable health care financing that ensures access to innovative medicines and does not disproportionately target pharmaceuticals as a source of budget savings. In markets with historically low rates of health care spending, the Company encourages those governments to increase their investments and adopt market reforms in order to improve their citizens’ access to appropriate health care, including medicines.
Operating conditions have become more challenging under the global pressures of competition, industry regulation and cost containment efforts. Although no one can predict the effect of these and other factors on the Company’s business, the Company continually takes measures to evaluate, adapt and improve the organization and its business practices to better meet customer needs and believes that it is well positioned to respond to the evolving health care environment and market forces.
The pharmaceutical industry is also subject to regulation by regional, country, state and local agencies around the world focused on standards and processes for determining drug safety and effectiveness, as well as conditions for sale or reimbursement.
Of particular importance is the FDA in the United States, which administers requirements covering the testing, approval, safety, effectiveness, manufacturing, labeling, and marketing of prescription pharmaceuticals. In some cases, the FDA requirements and practices have increased the amount of time and resources necessary to develop new products and bring them to market in the United States. At the same time, the FDA has committed to expediting the development and review of products bearing the “breakthrough therapy” designation, which appears to have accelerated the regulatory review process for medicines with this designation.

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The EU has adopted directives and other legislation concerning the classification, labeling, advertising, wholesale distribution, integrity of the supply chain, enhanced pharmacovigilance monitoring and approval for marketing of medicinal products for human use. These provide mandatory standards throughout the EU, which may be supplemented or implemented with additional regulations by the EU member states. 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.
The Company believes that it will continue to be able to conduct its operations, including launching new drugs, in this regulatory environment.
Operating Results
Sales
Worldwide sales were $39.5 billion in 2015, a decline of 6% compared with 2014 including a 6% unfavorable effect from foreign exchange. The acquisition of Cubist in 2015, the divestiture of MCC in 2014, as well as product divestitures and the termination of the Company’s relationship with AstraZeneca LP (AZLP) also in 2014, as discussed below, had a net unfavorable impact to sales of approximately 3%. In addition, sales performance in 2015 reflects declines in PegIntron and Victrelis, medicines for the treatment of HCV, Remicade, a treatment for inflammatory diseases, Pneumovax 23, a vaccine to help prevent pneumococcal disease, Nasonex, an inhaled corticosteroid for the treatment of nasal allergy symptoms and Vytorin, a cholesterol modifying medicine. These declines were partially offset by volume growth in Keytruda, an anti-PD-1 therapy; Januvia and Janumet, for the treatment of type 2 diabetes, Gardasil/Gardasil 9, vaccines to help prevent certain diseases caused by certain types of human papillomavirus (HPV), Noxafil, for the prevention of invasive fungal infections, Simponi, a once-monthly subcutaneous treatment for inflammatory diseases, Implanon/Nexplanon, single-rod subdermal contraceptive implants, Invanz, for the treatment of certain infections, Dulera Inhalation Aerosol, a combination medicine for the treatment of asthma, and Bridion, a medication for the reversal of two types of neuromuscular blocking agents used during surgery, as well as volume growth in Animal Health products and higher third-party manufacturing sales.
In January 2015, the Company acquired Cubist, which contributed sales of $1.3 billion to Merck’s revenues in 2015. In 2014, the Company divested certain ophthalmic products in several international markets (most of which closed on July 1, 2014). In addition, on October 1, 2014, the Company divested its MCC business including the prescription rights to Claritin and Afrin. The sales decline in 2015 attributable to these divestitures was approximately $1.9 billion of which $1.5 billion related to the Consumer Care segment and $400 million related to the Pharmaceutical segment. Also, in 2014, the Company sold the U.S. marketing rights to Saphris, an antipsychotic indicated for the treatment of schizophrenia and bipolar I disorder in adults, which resulted in revenue of $232 million. Additionally, the Company’s relationship with AZLP terminated on June 30, 2014; therefore, effective July 1, 2014, the Company no longer records supply sales to AZLP. These supply sales were $463 million in 2014 through the termination date and were reflected in the Alliances segment.
Sales in the United States were $17.5 billion in 2015, an increase of 3% compared with $17.1 billion in 2014. The increase was driven primarily by the acquisition of Cubist, as well as higher sales of Keytruda, Gardasil/Gardasil 9, Januvia/Janumet, Zetia, a cholesterol modifying medicine, and higher third-party manufacturing sales. These increases were partially offset by the 2014 divestiture of MCC, the termination of the Company’s relationship with AZLP in 2014, revenue recognized in 2014 in connection with the sale of the U.S. marketing rights to Saphris, as well as lower sales in 2015 of Pneumovax 23 and Nasonex.
International sales were $22.0 billion in 2015, a decline of 13% compared with $25.2 billion in 2014. Foreign exchange unfavorably affected international sales performance by 11% in 2015. Excluding the unfavorable effect of foreign exchange, the sales decrease reflects the divestiture of MCC, as well as lower sales in the Pharmaceutical segment, largely reflecting declines in Europe and Japan, partially offset by growth in the emerging markets. Sales in Europe declined 19% in 2015, to $7.7 billion, including a 14% unfavorable effect from foreign exchange. Excluding the unfavorable effect from foreign exchange, the decline was driven primarily by lower sales of Remicade, as well as lower sales of products for the treatment of HCV and from product divestitures and ongoing generic erosion and fiscal austerity measures in this region, partially offset by growth in Simponi, Keytruda, and Januvia/Janumet. Sales in Japan declined 23% in 2015, to $2.6 billion, of which 11% was due to the unfavorable effect of foreign exchange. The sales decline was largely driven by product divestitures and the ongoing impacts of the loss of market exclusivity for several products, including Cozaar and Hyzaar, treatments for hypertension, as well as lower sales of PegIntron and Januvia.

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Sales in the emerging markets were $7.3 billion in 2015, a decline of 6% including an 11% unfavorable effect from foreign exchange. Excluding the unfavorable effect of foreign exchange, sales performance reflects volume growth of diabetes, hospital acute care, oncology and certain diversified brand products, partially offset by lower sales of HCV products, as well as from product divestitures. Total international sales represented 56% and 60% of total sales in 2015 and 2014, respectively.
Global efforts toward health care cost containment continue to exert pressure on product pricing and market access worldwide. In the United States, health care reform is contributing to an increase in the number of patients in the Medicaid program under which sales of pharmaceutical products are subject to substantial rebates. In many international markets, government-mandated pricing actions have reduced prices of generic and patented drugs. In addition, other austerity measures negatively affected the Company’s revenue performance in 2015. The Company anticipates these pricing actions, including the biennial price reductions in Japan that will occur again in 2016, and other austerity measures will continue to negatively affect revenue performance in 2016.
Worldwide sales totaled $42.2 billion in 2014, a decline of 4% compared with $44.0 billion in 2013. Foreign exchange unfavorably affected global sales performance by 1% in 2014. The decline reflects lower revenue resulting from the ongoing impacts of the loss of market exclusivity for several products, including Temodar, a treatment for certain types of brain tumors, Singulair, a once-a-day oral medicine for the chronic treatment of asthma and for the relief of symptoms of allergic rhinitis, and Cozaar and Hyzaar. In addition, the sales decline was attributable to product divestitures that occurred in 2014 and 2013 as discussed below, the termination of the Company’s relationship with AZLP, as well as the divestiture of MCC. The revenue decline was also driven by lower sales of Victrelis and PegIntron, Nasonex, and Vytorin. These declines were partially offset by growth in Remicade and Simponi, the diabetes franchise of Januvia/Janumet, Dulera Inhalation Aerosol, Implanon/Nexplanon, as well as higher sales from hospital acute care and animal health products. In addition, the Company recognized revenue of $232 million in 2014 in connection with the sale of the U.S. marketing rights to Saphris.
In October 2013, the Company sold its active pharmaceutical ingredient (API) manufacturing business and, effective December 31, 2013, certain related products within Diversified Brands. In November 2013, Merck sold the U.S. rights to certain ophthalmic products and in January 2014 sold the U.S. marketing rights to Saphris. In addition, the Company sold the U.S. rights to Zioptan in April 2014. Also in 2014, as noted above, the Company divested certain ophthalmic products in several international markets and sold its MCC business. The sales decline in 2014 attributable to these divestitures was approximately $1.1 billion, of which approximately $575 million related to the Pharmaceutical segment, $345 million related to the Consumer Care segment and $150 million related to the divested API manufacturing business (non-segment revenues). Also, the termination of the Company’s relationship with AZLP resulted in a sales decline of approximately $450 million in the Alliances segment in 2014 compared with 2013.


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Sales of the Company’s products were as follows:
($ in millions)
2015
 
2014
 
2013
Primary Care and Women’s Health
 
 
 
 
 
Cardiovascular
 
 
 
 
 
Zetia
$
2,526

 
$
2,650

 
$
2,658

Vytorin
1,251

 
1,516

 
1,643

Diabetes
 
 
 
 
 
Januvia
3,863

 
3,931

 
4,004

Janumet
2,151

 
2,071

 
1,829

General Medicine and Women’s Health
 
 
 
 
 
NuvaRing
732

 
723

 
686

Implanon/Nexplanon
588

 
502

 
403

Dulera
536

 
460

 
324

Follistim AQ
383

 
412

 
481

Hospital and Specialty
 
 
 
 
 
Hepatitis
 
 
 
 
 
PegIntron
182

 
381

 
496

HIV
 
 
 
 
 
Isentress
1,511

 
1,673

 
1,643

Hospital Acute Care
 
 
 
 
 
Cubicin (1)
1,127

 
25

 
24

Cancidas
573

 
681

 
660

Invanz
569

 
529

 
488

Noxafil
487

 
402

 
309

Bridion
353

 
340

 
288

Primaxin
313

 
329

 
335

Immunology
 
 
 
 
 
Remicade
1,794

 
2,372

 
2,271

Simponi
690

 
689

 
500

Oncology
 
 
 
 
 
Keytruda
566

 
55

 
—

Emend
535

 
553

 
507

Temodar
312

 
350

 
708

Diversified Brands
 
 
 
 
 
Respiratory
 
 
 
 
 
Singulair
931

 
1,092

 
1,196

Nasonex
858

 
1,099

 
1,335

Clarinex
187

 
232

 
235

Other
 
 
 
 
 
Cozaar/Hyzaar
667

 
806

 
1,006

Arcoxia
471

 
519

 
484

Fosamax
359

 
470

 
560

Zocor
217

 
258

 
301

Propecia
183

 
264

 
283

Vaccines (2)
 
 
 
 
 
Gardasil/Gardasil 9
1,908

 
1,738

 
1,831

ProQuad/M-M-R II/Varivax
1,505

 
1,394

 
1,306

Zostavax
749

 
765

 
758

RotaTeq
610

 
659

 
636

Pneumovax 23
542

 
746

 
653

Other pharmaceutical (3)
4,553

 
5,356

 
6,596

Total Pharmaceutical segment sales
34,782

 
36,042

 
37,437

Other segment sales (4)
3,659

 
5,758

 
6,397

Total segment sales
38,441

 
41,800

 
43,834

Other (5)
1,057

 
437

 
199

 
$
39,498

 
$
42,237

 
$
44,033

(1) 
Sales of Cubicin in 2015 represent sales subsequent to the Cubist acquisition date. Sales of Cubicin in 2014 and 2013 reflect sales in Japan pursuant to a previously existing licensing agreement.
(2) 
These amounts do not reflect sales of vaccines sold in most major European markets through the Company’s joint venture, Sanofi Pasteur MSD, the results of which are reflected in equity income from affiliates which is included in Other (income) expense, net. These amounts do, however, reflect supply sales to Sanofi Pasteur MSD.
(3) 
Other pharmaceutical primarily reflects sales of other human health pharmaceutical products, including products within the franchises not listed separately.
(4)  
Represents the non-reportable segments of Animal Health, Alliances and Healthcare Services, as well as Consumer Care until its divestiture on October 1, 2014. The Alliances segment includes revenue from the Company’s relationship with AZLP until termination on June 30, 2014.
(5) 
Other revenues are primarily comprised of miscellaneous corporate revenues, including revenue hedging activities, as well as third-party manufacturing sales. Other revenues in 2014 also include $232 million received by Merck in connection with the sale of the U.S. marketing rights to Saphris. Other revenues in 2013 reflect $50 million of revenue for the out-license of a pipeline compound.


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Pharmaceutical Segment
Primary Care and Women’s Health
Cardiovascular
Combined global sales of Zetia (marketed in most countries outside the United States as Ezetrol ) and Vytorin (marketed outside the United States as Inegy), medicines for lowering LDL cholesterol, were $3.8 billion in 2015, a decline of 9% compared with 2014 including a 7% unfavorable effect from foreign exchange. The sales decline was driven primarily by lower volumes of Ezetrol in Canada where it lost market exclusivity in September 2014, as well as by lower volumes in the United States, partially offset by higher pricing in the United States. Combined worldwide sales of Zetia and Vytorin were $4.2 billion in 2014, a decline of 3% compared with 2013. Foreign exchange unfavorably affected global sales performance by 1% in 2014. The sales decline was driven primarily by lower volumes of Vytorin in the United States and Ezetrol in Canada due to loss of market exclusivity.
In November 2014, Merck announced that the investigational IMPROVE-IT study (IMProved Reduction of Outcomes: Vytorin Efficacy International Trial) met its primary and all secondary composite efficacy endpoints. In IMPROVE-IT, patients taking Vytorin - which combines simvastatin with Zetia - experienced significantly fewer major cardiovascular events (as measured by a composite of cardiovascular death, non-fatal myocardial infarction, non-fatal stroke, re-hospitalization for unstable angina or coronary revascularization occurring at least 30 days after randomization) than patients treated with simvastatin alone. The results from this 18,144 patient study of high-risk patients presenting with acute coronary syndromes were presented at the American Heart Association 2014 Scientific Sessions. In April 2015, Merck submitted the data from IMPROVE-IT to the FDA to support a new indication for reduction of cardiovascular events for Vytorin and Zetia. Vytorin and Zetia are currently indicated for use along with a healthy diet to reduce elevated LDL cholesterol in patients with hyperlipidemia. The current U.S. Prescribing Information for both products states that the effect of ezetimibe on cardiovascular morbidity and mortality, alone or incremental to statin therapy, has not been determined. In February 2016, Merck announced that the FDA issued a Complete Response Letter (CRL) regarding Merck’s supplemental new drug applications. Merck is reviewing the letter and will determine next steps. Also, in February 2016, through a decentralized process, Merck received a positive outcome of the mutual recognition procedure for updated product information for Ezetrol and Inegy based on the results of IMPROVE-IT. Following the completion of this procedure, the EU Member States concerned will amend local labeling on a country by country basis to include the reduction of risk of cardiovascular events in patients with coronary heart disease and a history of acute coronary syndrome.
By agreement, a generic manufacturer may launch a generic version of Zetia in the United States in December 2016. The U.S. patent and exclusivity periods for Zetia and Vytorin otherwise expire in April 2017. The Company has market exclusivity for Ezetrol in major European markets until October 2017; however, the Company expects to apply for pediatric extensions to the term which would extend the date to April 2018. The Company has market exclusivity for Inegy in those markets until April 2019.
In May 2014, Merck announced that the FDA approved Zontivity for the reduction of thrombotic cardiovascular events in patients with a history of myocardial infarction or with peripheral arterial disease. The U.S. prescribing information for Zontivity includes a boxed warning regarding bleeding risk. In January 2015, Zontivity was approved by the EC for coadministration with acetylsalicylic acid and, where appropriate, clopidogrel, to reduce atherothrombotic events in adult patients with a history of myocardial infarction. Merck currently plans to begin launching Zontivity in certain European markets in 2016. The Company continues to monitor and assess Zontivity and the related intangible asset. Merck continues to focus on building product awareness in the United States for Zontivity. If the Company’s efforts to build product awareness in the United States or the launches in Europe are not successful, the Company may take a non-cash impairment charge with respect to the Zontivity intangible asset, which was $292 million at December 31, 2015.
Diabetes
Worldwide combined sales of Januvia and Janumet, medicines that help lower blood sugar levels in adults with type 2 diabetes, were $6.0 billion in 2015, essentially flat as compared with 2014 including a 7% unfavorable effect from foreign exchange. Sales performance reflects higher volumes and pricing in the United States, as well as volume growth in the emerging markets and Europe. Volume declines of co-marketed sitagliptin in Japan due to the timing of sales to the licensee partially offset growth in 2015. Combined global sales of Januvia and Janumet were $6.0 billion in 2014, an increase of 3% compared with 2013 including a 1% unfavorable effect from foreign exchange.

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The growth was driven primarily by higher sales of both Januvia and Janumet in the United States and by volume growth in Europe, partially offset by lower sales of Januvia in Japan due to lower pricing. In April 2014, all DPP-4 inhibitors, including Januvia, were subject to repricing in Japan.
In June 2015, Merck announced the primary results of the Trial Evaluating Cardiovascular Outcomes with Sitagliptin (TECOS), a placebo-controlled study of the cardiovascular (CV) safety of Merck’s DPP-4 inhibitor Januvia (sitagliptin), added to usual care in more than 14,000 patients. The study achieved its primary composite CV endpoint of non-inferiority (defined as the time to the first confirmed event of any of the following: CV-related death, nonfatal myocardial infarction, nonfatal stroke, or hospitalization for unstable angina) compared to usual care without sitagliptin. In addition, there was no increase in hospitalization for heart failure and rates of all-cause mortality were similar in both treatments groups, which were two key secondary endpoints. These data were presented at the annual scientific meeting of the American Diabetes Association in June 2015.
In September 2015, Merck announced that the Japanese Pharmaceuticals and Medical Devices Agency approved Marizev (omarigliptin) 25 mg and 12.5 mg tablets, an oral, once-weekly DPP-4 inhibitor indicated for the treatment of adults with type 2 diabetes. Japan is the first country to have approved omarigliptin. Other worldwide regulatory submissions will follow.
General Medicine and Women’s Health 
Worldwide sales of NuvaRing, a vaginal contraceptive product, were $732 million in 2015, an increase of 1% compared with 2014, and were $723 million in 2014, an increase of 5% compared with 2013. Foreign exchange unfavorably affected global sales performance by 7% and 1% in 2015 and 2014, respectively. Sales growth in both years largely reflects higher pricing in the United States.
Worldwide sales of Implanon/Nexplanon, single-rod subdermal contraceptive implants, rose to $588 million in 2015, a 17% increase compared with 2014 including a 6% unfavorable effect from foreign exchange. The increase was driven primarily by higher demand in the United States and in the emerging markets. Implanon/Nexplanon sales grew 25% to $502 million in 2014 compared with 2013 driven primarily by higher demand in the United States.
Global sales of Dulera Inhalation Aerosol, a combination medicine for the treatment of asthma, grew 16% in 2015 to $536 million and increased 42% in 2014 to $460 million driven primarily by higher demand in the United States.
Global sales of Follistim AQ (marketed in most countries outside the United States as Puregon), a fertility treatment, were $383 million in 2015, a decline of 7% compared with 2014, reflecting a 9% unfavorable effect from foreign exchange that was offset by higher pricing in the United States. Worldwide sales of Follistim AQ declined 14% to $412 million in 2014 compared with 2013 driven largely by lower pricing in the United States, as well as by lower sales in Europe driven primarily by volume declines. Foreign exchange unfavorably affected global sales performance by 1% in 2014. The patent that provided market exclusivity for Follistim AQ in the United States expired in June 2015.

Hospital and Specialty
Hepatitis
Worldwide sales of PegIntron, a treatment for chronic HCV, were $182 million in 2015, a decline of 52% compared with 2014 including a 5% unfavorable effect from foreign exchange. The decline was driven by lower volumes in nearly all regions as the availability of newer therapeutic options continues to reduce market share. Global sales of PegIntron were $381 million in 2014, a decline of 23% compared with 2013 including a 3% unfavorable effect from foreign exchange. The decrease was driven by lower volumes in most regions as the availability of newer therapeutic options resulted in loss of market share or led to patient treatment delays in markets anticipating the availability of new therapeutic options.
Global sales of Victrelis, an oral medicine for the treatment of chronic HCV, were $18 million in 2015, a decline of 89% compared with 2014, driven by lower volumes in Europe and the emerging markets as the availability of newer therapeutic options continues to reduce market share. Worldwide sales of Victrelis were $153 million in 2014, a decline of 64% compared with 2013, driven by lower volumes in nearly all regions, particularly within the United States, as the availability of newer therapeutic options resulted in loss of market share or led to patient treatment delays in markets anticipating the availability of newer therapeutic options.

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In January 2016, the FDA approved Zepatier for the treatment of adult patients with chronic HCV GT1 or GT4 infection, with or without ribavirin. Zepatier is a once-daily, fixed-dose combination tablet containing the NS5A inhibitor elbasvir (50 mg) and the NS3/4A protease inhibitor grazoprevir (100 mg). The FDA previously granted two Breakthrough Therapy designations to Zepatier, for the treatment of chronic HCV GT1 infection in patients with end stage renal disease on hemodialysis, and for the treatment of patients with chronic HCV GT4 infection. Breakthrough Therapy designation is given to investigational medicines for serious or life-threatening conditions that may offer substantial improvement over existing therapies. Across multiple clinical studies, Zepatier achieved high rates of sustained virologic response ranging from 94% to 97% in GT1-infected patients, and 97% to 100% in GT4-infected patients. Sustained virologic response is defined as HCV RNA levels measuring less than the lower limit of quantification at 12 weeks after the cessation of treatment, indicating that a patient’s HCV infection has been cured. Zepatier became available in the United States in February 2016. Zepatier is under review in the EU.
HIV
Worldwide sales of Isentress, an HIV integrase inhibitor for use in combination with other antiretroviral agents for the treatment of HIV-1 infection, were $1.5 billion in 2015, a decline of 10% compared with 2014 including an 8% unfavorable effect from foreign exchange. The decline was driven primarily by lower volumes in the United States and lower demand and pricing in Europe due to competitive pressures, partially offset by higher volumes in Latin America and higher pricing in the United States. Global sales of Isentress increased 2% in 2014 to $1.7 billion compared with 2013 primarily reflecting volume growth in Europe and the emerging markets, particularly in Latin America resulting from government tenders, partially offset by volume declines in the United States reflecting competitive pressures. Foreign exchange unfavorably affected global sales performance by 1% in 2014.
Hospital Acute Care
In January 2015, Merck acquired Cubist, a leader in the development of therapies to treat serious infections caused by a broad range of bacteria. Cubist’s products include Cubicin, an I.V. antibiotic for complicated skin and skin structure infections or bacteremia, when caused by designated susceptible organisms. Sales of Cubicin were $1.1 billion in 2015 subsequent to the acquisition. The U.S. composition patent for Cubicin expires in June 2016 and significant losses of Cubicin sales are expected to occur thereafter.
In many markets outside of the United States, Cubicin is commercialized by other companies in accordance with distribution agreements established prior to Merck’s acquisition of Cubist. In the fourth quarter of 2015, Merck entered into agreements to reacquire the marketing rights to Cubicin in certain international markets (including Europe, Latin America, Australia, New Zealand, China, South Africa and certain other Asia Pacific countries).
Cubist’s products also include Zerbaxa, a combination product approved by the FDA in December 2014 for the treatment of adults with complicated urinary tract infections caused by designated susceptible Gram-negative organisms or with complicated intra-abdominal infections caused by designated susceptible Gram-negative and Gram-positive organisms, and Sivextro, a product approved by the FDA in June 2014 for the treatment of acute bacterial skin and skin structure infections (ABSSSI) in adults caused by designated susceptible Gram-positive organisms. Sivextro was also approved by the EC in March 2015 for the treatment of ABSSSI in adults. The Company began launching Sivextro in the second quarter of 2015. In September 2015, Zerbaxa was approved by the EC for the treatment of complicated intra-abdominal infections, acute pyelonephritis, and complicated urinary tract infections in adults. Zerbaxa and Sivextro are in Phase 3 development in the United States for the treatment of hospital-acquired bacterial pneumonia and ventilator-associated bacterial pneumonia.
Global sales of Cancidas, an anti-fungal product, were $573 million in 2015, a decrease of 16% compared with 2014 reflecting a 12% unfavorable effect from foreign exchange and volume declines in certain emerging markets. Worldwide sales of Cancidas grew 3% in 2014 to $681 million compared with 2013 largely reflecting volume growth in the Asia Pacific region, particularly in China. Foreign exchange unfavorably affected global sales performance by 1% in 2014.
Worldwide sales of Noxafil, for the prevention of invasive fungal infections, grew 21% in 2015 to $487 million and increased 30% in 2014 to $402 million driven by pricing and higher demand in the United States and volume growth in Europe reflecting a positive impact from the approval of new formulations. Foreign exchange unfavorably affected global sales performance by 12% in 2015.

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Sales of Bridion, for the reversal of two types of neuromuscular blocking agents used during surgery, grew 4% in 2015 to $353 million and rose 18% in 2014 to $340 million driven by volume growth in the international markets where it is sold. Foreign exchange unfavorably affected global sales performance by 19% in 2015 and 6% in 2014. Bridion is approved and marketed in many countries outside of the United States. In December 2015, the FDA approved Bridion for the reversal of neuromuscular blockade induced by rocuronium bromide and vecuronium bromide in adults undergoing surgery.
Immunology
Sales of Remicade, a treatment for inflammatory diseases (marketed by the Company in Europe, Russia and Turkey), were $1.8 billion in 2015, a decline of 24% compared with 2014 including a 14% unfavorable effect from foreign exchange. In February 2015, the Company lost market exclusivity for Remicade in major European markets and no longer has market exclusivity in any of its marketing territories. The Company is experiencing pricing and volume declines in these markets as a result of biosimilar competition. While the Company has retained a majority of its existing patients, the Company has lost market share as new patients are prescribed biosimilars. The Company expects the Remicade sales decline to accelerate throughout 2016. Sales of Remicade were $2.4 billion in 2014, an increase of 4% compared with 2013 reflecting sales growth in Europe, partially offset by a decline in Russia.
Sales of Simponi, a once-monthly subcutaneous treatment for certain inflammatory diseases (marketed by the Company in Europe, Russia and Turkey), were $690 million in 2015, essentially flat as compared with 2014, driven by higher demand in Europe, reflecting in part an ongoing positive impact from the ulcerative colitis indication, which was offset by a 19% unfavorable effect from foreign exchange. Sales of Simponi grew 38% in 2014 to $689 million compared with 2013 driven by demand in Europe reflecting in part a positive impact from the ulcerative colitis indication.
Other products contained in Hospital and Specialty include among others, Invanz for the treatment of certain infections; and Primaxin, an anti-bacterial product.
Oncology
Sales of Keytruda, an anti-PD-1 (programmed death receptor-1) therapy, were $566 million in 2015 and $55 million in 2014. The increase primarily reflects higher sales in the United States, as well as in the emerging markets and Europe as the Company continues to launch Keytruda. In September 2014, the FDA granted accelerated approval of Keytruda at a dose of 2 mg/kg every three weeks for the treatment of patients with unresectable or metastatic melanoma and disease progression following ipilimumab and, if BRAF V600 mutation positive, a BRAF inhibitor. In December 2015, the Company announced that the FDA approved an expanded indication for Keytruda to include the first-line treatment of patients with unresectable or metastatic melanoma regardless of BRAF status. Additionally, the FDA approved an update to the product labeling for Keytruda for the treatment of patients with ipilimumab-refractory advanced melanoma.
In addition, in October 2015, the FDA granted accelerated approval of Keytruda at a dose of 2 mg/kg every three weeks for the treatment of patients with metastatic NSCLC whose tumors express PD-L1 as determined by an FDA-approved test and who have disease progression on or after platinum-containing chemotherapy across both squamous and non-squamous metastatic NSCLC. Patients with EGFR or ALK genomic tumor aberrations should have disease progression on FDA-approved therapy for these aberrations prior to receiving Keytruda. In addition to approving Keytruda for NSCLC, the FDA approved the first companion diagnostic that will enable physicians to determine the level of PD-L1 expression in a patient’s tumor.
In July 2015, Merck announced that the EC approved Keytruda for the treatment of advanced (unresectable or metastatic) melanoma in adults. In October 2015, Merck announced the National Institute for Health and Care Excellence (NICE) of the UK issued a draft recommendation, in the form of a Final Appraisal Determination, recommending Keytruda as a first-line treatment option for adults with advanced melanoma. In addition, the NICE issued final guidance recommending Keytruda for the treatment of advanced melanoma after disease progression with ipilimumab.
The Company has made additional regulatory filings in other countries and further filings are planned. The Keytruda clinical development program includes studies across a broad range of cancer types (see “Research and Development” below).

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Global sales of Emend, for the prevention of chemotherapy-induced and post-operative nausea and vomiting, were $535 million in 2015, a decline of 3% reflecting a 6% unfavorable effect from foreign exchange that was partially offset by higher pricing in the United States and volume growth in Europe. Worldwide sales of Emend were $553 million in 2014, an increase of 9% compared with 2013 including a 1% unfavorable effect from foreign exchange, largely reflecting volume growth in most regions. In February 2016, Merck announced that the FDA approved a supplemental new drug application for single-dose Emend for injection for the prevention of delayed nausea and vomiting in adults receiving initial and repeat courses of moderately emetogenic chemotherapy. With this approval, Emend for injection is the first intravenous single-dose NK1 receptor antagonist approved in the United States for both highly emetogenic chemotherapy as well as moderately emetogenic chemotherapy.
Sales of Temodar (marketed as Temodal outside the United States), a treatment for certain types of brain tumors, were $312 million in 2015, a decline of 11% compared with 2014, reflecting a 14% unfavorable effect from foreign exchange that was partially offset by growth in the emerging markets. Global sales of Temodar declined 51% to $350 million in 2014. Foreign exchange unfavorably affected global sales performance by 3% in 2014. The sales decline in 2014 was driven primarily by generic competition in the United States, as well as in Europe. By agreement, a generic manufacturer launched a generic version of Temodar in the United States in August 2013. The U.S. patent and exclusivity periods otherwise expired in February 2014.
Diversified Brands
Merck’s diversified brands include human health pharmaceutical products that are approaching the expiration of their marketing exclusivity or are no longer protected by patents in developed markets, but continue to be a core part of the Company’s offering in other markets around the world.
Respiratory
Worldwide sales of Singulair, a once-a-day oral medicine for the chronic treatment of asthma and for the relief of symptoms of allergic rhinitis, were $931 million in 2015, a decline of 15% compared with 2014 including a 10% unfavorable effect from foreign exchange. The sales decline in 2015 was driven primarily by lower volumes in Japan and lower demand in Europe as a result of generic competition. Global sales of Singulair were $1.1 billion in 2014, a decline of 9% compared with 2013 including a 5% unfavorable effect from foreign exchange, primarily reflecting lower sales in Europe as a result of generic competition. The Company has lost market exclusivity for Singulair in the United States and in most major international markets with the exception of Japan and expects generic competition in these markets to continue. The patent that provides market exclusivity for Singulair in Japan will expire in 2016. Singulair sales in Japan were $452 million in 2015.
Global sales of Nasonex, an inhaled nasal corticosteroid for the treatment of nasal allergy symptoms, were $858 million in 2015, a decline of 22% compared with 2014 including a 6% unfavorable effect from foreign exchange. The decline was driven primarily by lower volumes in the United States reflecting competition from alternative generic treatment options, as well as from supply constraints. The supply issue was resolved and Nasonex became available again in October. In addition, lower volumes and pricing in Europe from ongoing generic erosion also contributed to the Nasonex sales decline. By agreement, generic manufacturers were able to launch a generic version of Nasonex in most European markets on January 1, 2014 and generic versions of Nasonex have since launched in most of these markets. Accordingly, the Company continues to experience volume and pricing declines in Nasonex sales in Europe. Worldwide sales of Nasonex decreased 18% to $1.1 billion in 2014 compared with 2013. Foreign exchange unfavorably affected global sales performance by 2% in 2014. The sales decline was driven primarily by lower demand in the United States, as well as by lower volumes in Europe and Canada resulting from generic competition. In 2009, Apotex Inc. and Apotex Corp. (collectively, Apotex) filed an application with the FDA seeking approval to sell its generic version of Nasonex. In June 2012, the U.S. District Court for the District of New Jersey ruled against the Company in a patent infringement suit against Apotex holding that Apotex’s generic version of Nasonex does not infringe on the Company’s formulation patent. In June 2013, the Court of Appeals for the Federal Circuit issued a decision affirming the U.S. District Court decision and the Company has exhausted all of its appeal options. Apotex has not yet launched a generic version of Nasonex in the United States; however, if Apotex’s generic version becomes available, significant losses of U.S. Nasonex sales could occur. U.S. sales of Nasonex were $449 million in 2015.

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Other
Global sales of Cozaar and its companion agent Hyzaar (a combination of Cozaar and hydrochlorothiazide), treatments for hypertension, declined 17% in 2015 to $667 million and decreased 20% in 2014 to $806 million. Foreign exchange unfavorably affected global sales performance by 9% and 4% in 2015 and 2014, respectively. The patents that provided market exclusivity for Cozaar and Hyzaar in the United States and in most major international markets have expired. Accordingly, the Company is experiencing declines in Cozaar and Hyzaar sales and expects the declines to continue.
Worldwide sales of ophthalmic products Cosopt and Trusopt were $61 million in 2015, $257 million in 2014 and $416 million in 2013. The declines were driven largely by the divestiture of Cosopt and Trusopt in many international markets in 2014. In addition, the sale of the U.S. rights to Cosopt and Cosopt PF in 2013 also contributed to the sales decline in 2014 as compared with 2013. In December 2015, the Company divested its remaining ophthalmics portfolio in international markets to Mundipharma Ophthalmology Products Limited (see Note 4 to the consolidated financial statements).
Other products contained in Diversified Brands include among others, Clarinex, a non-sedating antihistamine; Arcoxia for the treatment of arthritis and pain (which the Company markets outside the United States); Fosamax (marketed as Fosamac in Japan) and Fosamax Plus D (marketed as Fosavance throughout the EU) for the treatment and, in the case of Fosamax, prevention of osteoporosis; Zocor, a statin for modifying cholesterol; and Propecia, a product for the treatment of male pattern hair loss.
Vaccines
The following discussion of vaccines does not include sales of vaccines sold in most major European markets through Sanofi Pasteur MSD (SPMSD), the Company’s joint venture with Sanofi Pasteur, the results of which are reflected in equity income from affiliates included in Other (income) expense, net (see “Selected Joint Venture and Affiliate Information” below). Supply sales to SPMSD, however, are included.
Merck’s sales of Gardasil/Gardasil 9, vaccines to help prevent certain diseases caused by certain types of HPV, were $1.9 billion in 2015, an increase of 10% compared with 2014 including a 1% unfavorable effect from foreign exchange. Sales growth was driven primarily by higher sales in the United States resulting from higher pricing and increased volumes reflecting the timing of public sector purchases, as well as increased government tenders in the Asia Pacific region, partially offset by declines in Latin America due to both price and volume. Gardasil 9, Merck’s 9-valent HPV vaccine, was approved by the FDA in December 2014 for use in girls and young women 9 to 26 years of age. Gardasil 9 includes the greatest number of HPV types in any available HPV vaccine. In December 2015, the FDA approved an expanded age indication for Gardasil 9, to include use in males 16 through 26 years of age for the prevention of anal cancers, precancerous or dysplastic lesions and genital warts caused by certain HPV types. Merck’s sales of Gardasil were $1.7 billion in 2014, a decline of 5% compared with 2013 including a 2% unfavorable effect from foreign exchange. The decline reflects lower sales in Asia Pacific, Japan and Canada, partially offset by higher government tenders in Brazil from the national immunization program, as well as higher public sector purchases in the United States. Sales in 2014 and 2013 included $56 million and $37 million, respectively, of purchases for the U.S. Centers for Disease Control and Prevention (CDC) Pediatric Vaccine Stockpile. The Company is a party to certain third-party license agreements with respect to Gardasil/Gardasil 9 (including a cross-license and settlement agreement with GlaxoSmithKline). As a result of these agreements, the Company pays royalties on worldwide Gardasil/Gardasil 9 sales of 17% to 25% which vary by country and are included in Materials and production costs.
Merck’s sales of ProQuad, a pediatric combination vaccine to help protect against measles, mumps, rubella and varicella, were $454 million in 2015, $395 million in 2014 and $314 million in 2013. Sales growth in 2015 as compared with 2014 was driven by higher sales in the United States reflecting increased volumes, which were driven in part by measles outbreaks in the United States, as well as higher pricing. The increase in 2014 as compared with 2013 was driven primarily by higher sales in the United States reflecting approximately $30 million of government purchases for the CDC Pediatric Vaccine Stockpile.
Merck’s sales of M-M-R II, a vaccine to help protect against measles, mumps and rubella, were $365 million in 2015, $326 million in 2014 and $307 million in 2013. Sales growth in 2015 as compared with 2014 was driven by higher demand resulting from measles outbreaks in the United States and higher pricing.

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Merck’s sales of Varivax, a vaccine to help prevent chickenpox (varicella), were $686 million in 2015, $672 million in 2014 and $684 million in 2013. Sales growth in 2015 as compared with 2014 reflects higher volumes in certain emerging markets and higher pricing in the United States, partially offset by lower volumes in the United States. Sales performance in 2014 as compared with 2013 reflects lower sales in the United States largely offset by growth in the emerging markets.
Merck’s sales of Zostavax, a vaccine to help prevent shingles (herpes zoster) in adults 50 years of age and older, were $749 million in 2015, a decline of 2% compared with 2014 including a 2% unfavorable effect from foreign exchange. Sales performance in 2015 as compared with 2014 reflects lower volumes in the United States, partially offset by higher demand in Canada and higher pricing in the United States. Merck’s sales of Zostavax were $765 million in 2014, an increase of 1% compared with 2013, driven primarily by higher sales in the Asia Pacific region due to ongoing launches, partially offset by lower demand in the United States, as well as in Canada. The Company is continuing to educate U.S. customers on the broad managed care coverage for Zostavax and the process for obtaining reimbursement. Merck is continuing to launch Zostavax outside of the United States.
Merck’s sales of RotaTeq, a vaccine to help protect against rotavirus gastroenteritis in infants and children, were $610 million in 2015, a decline of 7% compared with 2014 including a 3% unfavorable effect from foreign exchange. The decline was driven primarily by the effects of public sector purchasing in the United States. Merck’s sales of RotaTeq increased 4% in 2014 to $659 million compared with 2013 primarily reflecting higher sales in certain emerging markets.
Merck’s sales of Pneumovax 23, a vaccine to help prevent pneumococcal disease, declined 27% in 2015 to $542 million compared with 2014 driven primarily by lower demand in the United States due to near term market dynamics and sales in the emerging markets. Merck’s sales of Pneumovax 23 grew 14% in 2014 to $746 million compared with 2013 driven primarily by higher sales in Japan from the national immunization program, as well as higher sales in the United States attributable to both price and volume. Foreign exchange unfavorably affected sales performance by 2% and 3% in 2015 and 2014, respectively.
Other Segments
The Company’s other segments are the Animal Health, Alliances and Healthcare Services segments, which are not material for separate reporting. Prior to its disposition on October 1, 2014, the Company also had a Consumer Care segment which had sales of $1.5 billion in 2014 and $1.9 billion in 2013.
Animal Health
Animal Health includes pharmaceutical and vaccine products for the prevention, treatment and control of disease in all major farm and companion animal species. Animal Health sales are affected by competition and the frequent introduction of generic products. Global sales of Animal Health products were $3.3 billion in 2015, a decline of 4% compared with 2014 including a 13% unfavorable effect from foreign exchange. Sales performance in 2015 reflects volume growth in companion animal products, driven primarily by higher sales of Bravecto chewable tablets for dogs to treat fleas and ticks that began launching in Europe and the United States in 2014, as well as volume growth in swine and aqua products. Worldwide sales of Animal Health products totaled $3.5 billion in 2014, growth of 3% compared with 2013 including a 2% unfavorable effect from foreign exchange. The sales growth was driven primarily by higher sales of companion animal products, reflecting the launch of Bravecto in Europe and the United States, as well as higher sales of poultry and aqua products, partially offset by lower sales of Zilmax, a feed supplement for beef cattle.
Alliances
The Alliances segment includes results from the Company’s relationship with AZLP. On June 30, 2014, AstraZeneca exercised its option to buy Merck’s interest in a subsidiary and, through it, Merck’s interest in Nexium and Prilosec. As a result, as of July 1, 2014, the Company no longer records equity income from AZLP and supply sales to AZLP, primarily relating to sales of Nexium and Prilosec, have terminated (see “Selected Joint Venture and Affiliate Information” below). Revenue from AZLP was $463 million in 2014 through the June 30 termination date and $920 million in 2013.


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Costs, Expenses and Other
($ in millions)
2015
 
Change
 
2014
 
Change
 
2013
Materials and production
$
14,934

 
-11
 %
 
$
16,768

 
-1
 %
 
$
16,954

Marketing and administrative
10,313

 
-11
 %
 
11,606

 
-3
 %
 
11,911

Research and development (1) 
6,704

 
-7
 %
 
7,180

 
-4
 %
 
7,503

Restructuring costs
619

 
-39
 %
 
1,013

 
-41
 %
 
1,709

Other (income) expense, net
1,527

 
*

 
(11,613
)
 
*

 
411

 
$
34,097

 
37
 %
 
$
24,954

 
-35
 %
 
$
38,488

* 100% or greater.
(1) 
Includes $63 million, $49 million and $279 million of IPR&D impairment charges in 2015, 2014 and 2013, respectively.
Materials and Production
Materials and production costs were $14.9 billion in 2015, $16.8 billion in 2014 and $17.0 billion in 2013. Costs include expenses for the amortization of intangible assets recorded in connection with business acquisitions which totaled $4.7 billion in 2015, $4.2 billion in 2014 and $4.7 billion in 2013. In addition, expenses for 2015 include $105 million of amortization of purchase accounting adjustments to Cubist’s inventories. Costs in 2015, 2014 and 2013 also include intangible asset impairment charges of $45 million, $1.1 billion and $486 million, respectively, related to marketed products and other intangibles (see Note 7 to the consolidated financial statements). The Company may recognize additional non-cash impairment charges in the future related to intangibles that were measured at fair value and capitalized in connection with acquisitions and such charges could be material. Additionally, costs in 2013 include a $41 million intangible asset impairment charge related to a licensing agreement. Also included in materials and production are costs associated with restructuring activities which amounted to $361 million, $482 million and $446 million in 2015, 2014 and 2013, respectively, including accelerated depreciation and asset write-offs related to the planned sale or closure of manufacturing facilities. Separation costs associated with manufacturing-related headcount reductions have been incurred and are reflected in Restructuring costs as discussed below.
Gross margin was 62.2% in 2015 compared with 60.3% in 2014 and 61.5% in 2013. The amortization of intangible assets and purchase accounting adjustments to inventories, as well as the restructuring and impairment charges noted above reduced gross margin by 13.2 percentage points in 2015, 13.6 percentage points in 2014 and 12.8 percentage points in 2013. Excluding these impacts, the gross margin improvement in 2015 as compared with 2014 was driven primarily by the favorable effects of foreign exchange and lower inventory write-offs, as well as the net impact of acquisitions and divestitures. The gross margin decline in 2014 as compared with 2013 was driven primarily by the unfavorable effects of inventory write-offs largely related to Victrelis, as well as by changes in product mix, partially offset by the sale of the U.S. marketing rights to Saphris.
Marketing and Administrative
Marketing and administrative expenses declined 11% in 2015 to $10.3 billion in 2015 largely reflecting the favorable effects from foreign exchange, the prior year divestiture of MCC, additional expenses in the prior year related to the health care reform fee as discussed below, lower restructuring costs, as well as lower selling costs, partially offset by higher promotional spending largely related to product launches, as well as higher costs related to the January acquisition of Cubist and higher acquisition and divestiture-related costs. Marketing and administrative expenses decreased 3% in 2014 to $11.6 billion driven primarily by lower selling costs and promotional spending, the divestiture of MCC and the favorable effects of foreign exchange, partially offset by an additional year of expense related to the health care reform fee, as well as higher acquisition and divestiture-related costs. Expenses for 2015, 2014 and 2013 include restructuring costs of $78 million, $200 million and $145 million, respectively, related primarily to accelerated depreciation for facilities to be closed or divested. Separation costs associated with sales force reductions have been incurred and are reflected in Restructuring costs as discussed below. Expenses also include $436 million, $234 million and $94 million of acquisition and divestiture-related costs in 2015, 2014 and 2013, respectively, consisting of integration, transaction, and certain other costs related to business acquisitions, including severance costs which are not part of the Company’s formal restructuring programs, as well as transaction and certain other costs related to divestitures.

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On July 28, 2014, the IRS issued final regulations on the annual non-tax deductible health care reform fee imposed by the Patient Protection and Affordable Care Act that is based on an allocation of a company’s market share of prior year branded pharmaceutical sales to certain government programs. The final IRS regulations accelerated the recognition criteria for the fee obligation by one year to the year in which the underlying sales used to allocate the fee occurred rather than the year in which the fee was paid. As a result of this change, Merck recorded an additional year of expense of $193 million during 2014.
Research and Development
Research and development expenses were $6.7 billion in 2015, a decline of 7% compared with $7.2 billion in 2014 driven primarily by the favorable effects of foreign exchange, expenses recognized in the prior year to increase the estimated fair value of liabilities for contingent consideration, lower restructuring costs, a charge in the prior year related to a collaboration with Bayer AG (Bayer) and the prior year divestiture of MCC, partially offset by the acquisition of Cubist, higher licensing costs and higher clinical development spending. Research and development expenses declined 4% in 2014 to $7.2 billion compared with $7.5 billion in 2013 reflecting targeted reductions and lower clinical development spend as a result of portfolio prioritization, cost savings resulting from restructuring activities and lower acquired in-process research and development (IPR&D) impairment charges, partially offset by higher charges to increase the estimated fair value of liabilities for contingent consideration, higher restructuring costs and a charge related to a collaboration with Bayer.
Research and development expenses are comprised of the costs directly incurred by Merck Research Laboratories (MRL), the Company’s research and development division that focuses on human health-related activities, which were approximately $4.0 billion in 2015, $3.7 billion in 2014 and $4.2 billion in 2013. Also included in research and development expenses are costs incurred by other divisions in support of research and development activities, including depreciation, production and general and administrative, as well as licensing activity, and certain costs from operating segments, including the Pharmaceutical and Animal Health segments, which in the aggregate were $2.6 billion, $2.8 billion and $2.9 billion for 2015, 2014 and 2013, respectively. Research and development expenses also include IPR&D impairment charges of $63 million, $49 million and $279 million in 2015, 2014 and 2013, respectively (see “Research and Development” below). The Company may recognize additional non-cash impairment charges in the future for the cancellation or delay of other pipeline programs that were measured at fair value and capitalized in connection with acquisitions and such charges could be material. In addition, research and development expenses include expense or income related to changes in the estimated fair value measurement of liabilities for contingent consideration recorded in connection with acquisitions. During 2015, the Company recorded a reduction of expenses of $24 million to decrease the fair value of liabilities for contingent consideration and during 2014 recorded a charge of $316 million to increase the estimated fair value of liabilities for contingent consideration (see Note 5 to the consolidated financial statements). Research and development expenses in 2015, 2014 and 2013 also reflect $52 million, $283 million and $101 million, respectively, of accelerated depreciation and asset abandonment costs associated with restructuring activities.
Restructuring Costs
Restructuring costs, primarily representing separation and other related costs associated with restructuring activities, were $619 million, $1.0 billion and $1.7 billion in 2015, 2014 and 2013, respectively. Costs in 2015, 2014 and 2013 include $363 million, $594 million and $898 million, respectively, of expenses related to the 2013 Restructuring Program. The remaining costs in 2015, 2014 and nearly all of the remaining costs recorded in 2013 related to the Merger Restructuring Program. In 2015, 2014 and 2013, separation costs of $208 million, $674 million and $1.4 billion, respectively, were incurred associated with actual headcount reductions, as well as estimated expenses under existing severance programs for headcount reductions that were probable and could be reasonably estimated. Positions eliminated under the 2013 Restructuring Program were approximately 2,535 in 2015, 4,555 in 2014 and 1,540 in 2013. Positions eliminated under the Merger Restructuring Program were approximately 1,235 in 2015, 1,530 in 2014 and 4,475 in 2013. These position eliminations are comprised of actual headcount reductions, and the elimination of contractors and vacant positions. Also included in restructuring costs are asset abandonment, shut-down and other related costs, as well as employee-related costs such as curtailment, settlement and termination charges associated with pension and other postretirement benefit plans and share-based compensation plan costs. For segment reporting, restructuring costs are unallocated expenses. Additional costs associated with the Company’s restructuring activities are included in Materials and production, Marketing and administrative and Research and development as discussed above.

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Other (Income) Expense, Net
Other (income) expense, net was $1.5 billion of expense in 2015 compared with $11.6 billion of income in 2014. The unfavorability was driven primarily by gains recognized in 2014, including an $11.2 billion gain related to the divestiture of MCC (see Note 4 to the consolidated financial statements), a $741 million gain related to AstraZeneca’s option exercise (see Note 8 to the consolidated financial statements), a $480 million gain on the divestiture of certain ophthalmic products in several international markets (see Note 4 to the consolidated financial statements) and a $204 million gain related to the divestiture of the Company’s Sirna Therapeutics, Inc. subsidiary (see Note 4 to the consolidated financial statements). The unfavorability was also driven by a $680 million net charge recorded in 2015 related to the settlement of Vioxx shareholder class action litigation (see Note 10 to the consolidated financial statements), foreign exchange losses of $876 million in 2015 related to the devaluation of the Company’s net monetary assets in Venezuela (see Note 14 to the consolidated financial statements), and lower equity income from AZLP. Partially offsetting the unfavorability of these items was a $628 million loss on extinguishment of debt in 2014 (see Note 9 to the consolidated financial statements), a $250 million gain in 2015 on the sale of certain migraine clinical development programs (see Note 4 to the consolidated financial statements), a $147 million gain on the divestiture of the Company’s remaining ophthalmics business in international markets (see Note 4 to the consolidated financial statements), higher equity income from certain research investment funds, and a $93 million goodwill impairment charge in 2014 related to the Company’s joint venture with Supera (see Note 7 to the consolidated financial statements).
Other (income) expense, net was $11.6 billion of income in 2014 compared with $411 million of expense in 2013 driven primarily by gains recognized in 2014 as noted above, lower foreign exchange losses due to a Venezuelan currency devaluation in 2013, partially offset by charges recognized in 2014 related to the extinguishment of debt and goodwill impairment as noted above, as well as lower equity income from AZLP in 2014.
Segment Profits
 
 
 
 
 
($ in millions)
2015
 
2014
 
2013
Pharmaceutical segment profits
$
21,658

 
$
22,164

 
$
22,983

Other non-reportable segment profits
1,659

 
2,458

 
3,049

Other
(17,916
)
 
(7,339
)
 
(20,487
)
Income before income taxes
$
5,401

 
$
17,283

 
$
5,545

Segment profits are comprised of segment sales less standard costs, certain operating expenses directly incurred by the segment, components of equity income or loss from affiliates and certain depreciation and amortization expenses. For internal management reporting presented to the chief operating decision maker, Merck does not allocate materials and production costs, other than standard costs, the majority of research and development expenses or general and administrative expenses, nor 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 segment profits. Also excluded from the determination of segment profits are acquisition and divestiture-related costs, including the amortization of purchase accounting adjustments and intangible asset impairment charges, restructuring costs, taxes paid at the joint venture level and a portion of equity income. Additionally, segment profits do not reflect other expenses from corporate and manufacturing cost centers and other miscellaneous income or expense. These unallocated items, including gains on divestitures, a net charge related to the settlement of Vioxx shareholder class action litigation, the gain on AstraZeneca’s option exercise, foreign exchange losses related to the devaluation of the Company’s net monetary assets in Venezuela, the loss on extinguishment of debt and an additional year of expense related to the health care reform fee, are reflected in “Other” in the above table. Also included in “Other” are miscellaneous corporate profits (losses), as well as operating profits (losses) related to third-party manufacturing sales.
Pharmaceutical segment profits declined 2% in 2015 compared with 2014 primarily reflecting the unfavorable effect of foreign exchange. Pharmaceutical segment profits declined 4% in 2014 compared with 2013 driven primarily by the unfavorable effects of product divestitures and loss of market exclusivity for certain products, partially offset by cost savings from productivity measures. The declines in other segment profits in 2015 and 2014 reflect the termination of the Company’s relationship with AZLP, as well as the divestiture of MCC.

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Taxes on Income
The effective income tax rates of 17.4% in 2015, 30.9% in 2014 and 18.5% in 2013 reflect the impacts of acquisition and divestiture-related costs and restructuring costs, partially offset by the beneficial impact of foreign earnings. The effective income tax rate for 2015 also reflects the favorable impact of a net benefit of $410 million related to the settlement of certain federal income tax issues, the impact of the net charge related to the settlement of Vioxx shareholder class action litigation being fully deductible at combined U.S. federal and state tax rates and the favorable impact of tax legislation enacted in the fourth quarter of 2015, as well as the unfavorable effect of non-tax deductible foreign exchange losses related to Venezuela (see Note 14 to the consolidated financial statements). The effective income tax rate for 2014 reflects the impact of the gain on the divestiture of MCC being taxed at combined U.S. federal and state tax rates. In addition, the effective income tax rate for 2014 includes a net tax benefit of $517 million recorded in connection with AstraZeneca’s option exercise (see Note 8 to the consolidated financial statements) and a benefit of approximately $300 million associated with a capital loss generated in connection with the sale of Sirna (see Note 4 to the consolidated financial statements). The effective income tax rate for 2014 also includes the unfavorable impact of an additional year of expense for the non-tax deductible health care reform fee that the Company recorded in accordance with final regulations issued in the third quarter by the IRS. The effective income tax rate in 2013 reflects a net benefit of $165 million from the settlements of certain federal income tax issues, net benefits from reductions in tax reserves upon expiration of applicable statutes of limitations, the favorable impact of tax legislation enacted in the first quarter of 2013 that extended the R&D tax credit for both 2012 and 2013, as well as an out-of-period net tax benefit of approximately $160 million associated with the resolution of a previously disclosed legacy Schering-Plough federal income tax issue (see Note 15 to the consolidated financial statements).
The Company is under examination by numerous tax authorities in various jurisdictions globally. The ultimate finalization of the Company’s examinations with relevant taxing authorities can include formal administrative and legal proceedings, which could have a significant impact on the timing of the reversal of unrecognized tax benefits. The Company believes that its reserves for uncertain tax positions are adequate to cover existing risks or exposures. However, there is one item that is currently under discussion with the IRS relating to the 2006 through 2008 examination. The Company has concluded that its position should be sustained upon audit. However, if this item were to result in an unfavorable outcome or settlement, it could have a material adverse impact on the Company’s financial position, liquidity and results of operations.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests was $17 million in 2015, $14 million in 2014 and $113 million in 2013. The declines in 2015 and 2014 as compared with 2013 reflect in part the termination of the Company’s relationship with AZLP and the resulting retirement of KBI preferred stock (see Note 11 to the consolidated financial statements). In addition, the amount for 2014 includes the portion of intangible asset and goodwill impairment charges related to the Company’s joint venture with Supera (see Note 7 to the consolidated financial statements) that are attributable to noncontrolling interests.
Net Income and Earnings per Common Share
Net income attributable to Merck & Co., Inc. was $4.4 billion in 2015, $11.9 billion in 2014 and $4.4 billion in 2013. EPS was $1.56 in 2015, $4.07 in 2014 and $1.47 in 2013.
Non-GAAP Income and Non-GAAP EPS
Non-GAAP income and non-GAAP EPS are alternative views of the Company’s performance used by management that Merck is providing because management believes this information enhances investors’ understanding of the Company’s results. Non-GAAP income and non-GAAP EPS exclude certain items because of the nature of these items and the impact that they have on the analysis of underlying business performance and trends. The excluded items consist of acquisition and divestiture-related costs, restructuring costs and certain other items. These excluded items are significant components in understanding and assessing financial performance. Therefore, the information on non-GAAP income and non-GAAP EPS should be considered in addition to, but not in lieu of, net income and EPS prepared in accordance with generally accepted accounting principles in the United States (GAAP). Additionally, since non-GAAP income and non-GAAP EPS are not measures determined in accordance with GAAP, they have no standardized meaning prescribed by GAAP and, therefore, may not be comparable to the calculation of similar measures of other companies.

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Non-GAAP income and non-GAAP EPS are important internal measures for the Company. Senior management receives a monthly analysis of operating results that includes non-GAAP income and non-GAAP EPS and the performance of the Company is measured on this basis along with other performance metrics. Senior management’s annual compensation is derived in part using non-GAAP income and non-GAAP EPS.
A reconciliation between GAAP financial measures and non-GAAP financial measures is as follows:
($ in millions except per share amounts)
2015
 
2014
 
2013
Pretax income as reported under GAAP
$
5,401

 
$
17,283

 
$
5,545

Increase (decrease) for excluded items:
 
 
 
 
 
Acquisition and divestiture-related costs
5,398

 
5,946

 
5,549

Restructuring costs
1,110

 
1,978

 
2,401

Other items:
 
 
 
 
 
Foreign currency devaluation related to Venezuela
876

 
—

 
—

Net charge related to the settlement of Vioxx shareholder class action litigation
680

 
—

 
—

Gain sale of certain migraine clinical development programs
(250
)
 
—

 
—

Gain on the divestiture of certain ophthalmic products
(147
)
 
(480
)
 
—

Gain on divestiture of Merck Consumer Care
—

 
(11,209
)
 
—

Gain on AstraZeneca option exercise
—

 
(741
)
 
—

Loss on extinguishment of debt
—

 
628

 
—

Additional year of expense for health care reform fee
—

 
193

 
—

Other
(34
)
 
(9
)
 
(13
)
 
13,034

 
13,589

 
13,482

Taxes on income as reported under GAAP
942

 
5,349

 
1,028

Estimated tax benefit (provision) on excluded items (1)
1,470

 
(2,345
)
 
1,573

Net tax benefits from settlements of federal income tax issues
410

 
—

 
325

Tax benefits related to sale of Sirna Therapeutics, Inc. subsidiary
—

 
300

 
—

 
2,822

 
3,304

 
2,926

Non-GAAP net income
10,212

 
10,285

 
10,556

Less: Net income attributable to noncontrolling interests as reported under GAAP
17

 
14

 
113

Acquisition and divestiture-related costs attributable to non-controlling interests
—

 
56

 
—

 
17

 
70

 
113

Non-GAAP net income attributable to Merck & Co., Inc.
$
10,195

 
$
10,215

 
$
10,443

EPS assuming dilution as reported under GAAP
$
1.56

 
$
4.07

 
$
1.47

EPS difference (2)
2.03

 
(0.58
)
 
2.02

Non-GAAP EPS assuming dilution
$
3.59

 
$
3.49

 
$
3.49

(1) 
Amount for 2014 includes a net benefit of $517 million recorded in connection with AstraZeneca’s option exercise.
(2) 
Represents the difference between calculated GAAP EPS and calculated non-GAAP EPS, which may be different than the amount calculated by dividing the impact of the excluded items by the weighted-average shares for the applicable year.
Acquisition and Divestiture-Related Costs
Non-GAAP income and non-GAAP EPS exclude the impact of certain amounts recorded in connection with acquisitions and divestitures. These amounts include the amortization of intangible assets and amortization of purchase accounting adjustments to inventories, as well as intangible asset impairment charges and expense or income related to changes in the estimated fair value measurement of contingent consideration. Also excluded are integration, transaction, and certain other costs associated with business acquisitions, including severance costs which are not part

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of the Company’s formal restructuring programs, as well as transaction and certain other costs related to divestitures. These costs should not be considered non-recurring; however, management excludes these amounts from non-GAAP income and non-GAAP EPS because it believes it is helpful for understanding the performance of the continuing business.
Restructuring Costs
Non-GAAP income and non-GAAP EPS exclude costs related to restructuring actions (see Note 3 to the consolidated financial statements). These amounts include employee separation costs and accelerated depreciation associated with facilities to be closed or divested. Accelerated depreciation costs represent the difference between the depreciation expense to be recognized over the revised useful life of the site, based upon the anticipated date the site will be closed or divested, and depreciation expense as determined utilizing the useful life prior to the restructuring actions. Restructuring costs also include asset abandonment, shut-down and other related costs, as well as employee-related costs such as curtailment, settlement and termination charges associated with pension and other postretirement benefit plans and share-based compensation costs. The Company has undertaken restructurings of different types during the covered periods and, therefore, these charges should not be considered non-recurring; however, management excludes these amounts from non-GAAP income and non-GAAP EPS because it believes it is helpful for understanding the performance of the continuing business.
Certain Other Items
Non-GAAP income and non-GAAP EPS exclude certain other items. These items represent substantive, unusual items that are evaluated on an individual basis. Such evaluation considers both the quantitative and the qualitative aspect of their unusual nature and generally represent items that, either as a result of their nature or magnitude, management would not anticipate that they would occur as part of the Company’s normal business on a regular basis. Excluded from non-GAAP income and non-GAAP EPS in 2015 are foreign exchange losses related to the devaluation of the Company’s net monetary assets in Venezuela (see Note 14 to the consolidated financial statements), a net charge related to the settlement of Vioxx shareholder class action litigation (see Note 10 to the consolidated financial statements), a gain on the sale of certain migraine clinical development programs (see Note 4 to the consolidated financial statements), a gain on the divestiture of the Company’s remaining ophthalmics business in international markets (see Note 4 to the consolidated financial statements), as well as a net tax benefit related to the settlement of certain federal income tax issues (see Note 15 to the consolidated financial statements). Excluded from non-GAAP income and non-GAAP EPS in 2014 are certain gains, including a gain on the divestiture of MCC (see Note 4 to the consolidated financial statements), a gain recognized in conjunction with AstraZeneca’s option exercise, including a related net tax benefit on the transaction (see Note 8 to the consolidated financial statements), a gain on the divestiture of certain ophthalmic products in several international markets (see Note 4 to the consolidated financial statements), as well as a loss on extinguishment of debt (see Note 9 to the consolidated financial statements), an additional year of expense related to the health care reform fee as discussed above, and a tax benefit from the sale of Sirna and tax benefits from the settlements of certain federal income tax issues (see Note 15 to the consolidated financial statements).
Research and Development
A chart reflecting the Company’s current research pipeline as of February 19, 2016 is set forth in Item 1. “Business — Research and Development” above.

Research and Development Update
The Company currently has several candidates under regulatory review in the United States or internationally.
Keytruda is an FDA-approved anti-PD-1 (programmed death receptor-1) therapy in clinical development for expanded indications in different cancer types. Keytruda is currently approved for the treatment of melanoma, advanced melanoma and NSCLC (see “Pharmaceutical Segment” above).
In December 2015, Merck announced results from the pivotal KEYNOTE-010 study to evaluate the potential of an immunotherapy compared to chemotherapy based on prospective measurement of PD-L1 expression in patients with advanced NSCLC. In the Phase 2/3 study, Keytruda significantly improved overall survival compared to chemotherapy in patients with any level of PD-L1 expression. Based on these data, Merck has submitted a supplemental Biologics License Application to the FDA and has filed a Marketing Authorization Application with the EMA.

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In November 2015, Merck announced that the FDA granted Breakthrough Therapy designation to Keytruda for the treatment of patients with microsatellite instability high metastatic colorectal cancer. The FDA’s Breakthrough Therapy designation is intended to expedite the development and review of a candidate that is planned for use, alone or in combination, to treat a serious or life-threatening disease or condition when preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints. Keytruda was previously granted Breakthrough Therapy status for advanced melanoma and advanced NSCLC.
The Keytruda clinical development program consists of more than 200 clinical trials, including over 100 trials that combine Keytruda with other cancer treatments. These studies encompass more than 30 cancer types including: bladder, colorectal, esophageal, gastric, head and neck, melanoma, multiple myeloma, non-small-cell lung, and triple negative breast, several of which are currently in Phase 3 clinical development.
MK-6072, bezlotoxumab, is an investigational antitoxin for the prevention of C. difficile infection recurrence currently under review with the FDA and EMA. In January 2016, Merck announced that the FDA accepted for review the Biologics License Application (BLA) for bezlotoxumab and granted Priority Review with a Prescription Drug User Fee Act action date of July 23, 2016. In September 2015, Merck announced that the two pivotal Phase 3 clinical studies for bezlotoxumab met their primary efficacy endpoint: the reduction in C. difficile recurrence through week 12 compared to placebo, when used in conjunction with standard of care antibiotics for the treatment of C. difficile. The Company is also seeking approval in the EU and intends to file in Canada in 2016. Currently, there are no therapies approved for the prevention of recurrent disease caused by C. difficile.
MK-1293 is an insulin glargine candidate for the treatment of patients with type 1 and type 2 diabetes being developed in collaboration with Samsung Bioepis. In December 2015, the Company submitted an application for regulatory approval in the EU and plans to submit MK-1293 to the FDA in 2016.
MK-5172A, Zepatier, currently under review in the EU for the treatment of chronic HCV, is a once-daily, fixed-dose combination tablet containing the NS5A inhibitor elbasvir (50 mg) and the NS3/4A protease inhibitor grazoprevir (100 mg). Zepatier was approved by the FDA in January 2016 for the treatment of adult patients with chronic HCV GT1 or GT4 infection, with or without ribavirin.
V419 is an investigational pediatric hexavalent combination vaccine, DTaP5-IPV-Hib-HepB, under review with the FDA that is being developed and, if approved, will be commercialized through a partnership of Merck and Sanofi Pasteur. This vaccine is designed to help protect against six important diseases - diphtheria, tetanus, pertussis (whooping cough), polio (poliovirus types 1, 2, and 3), invasive disease caused by Haemophilus influenzae type b (Hib), and hepatitis B. On November 2, 2015, the FDA issued a CRL with respect to the BLA for V419. Both companies are reviewing the CRL and plan to have further communication with the FDA. In February 2016, the EC granted marketing authorization for V419 for prophylaxis against diphtheria, tetanus, pertussis, hepatitis B, poliomyelitis, and invasive disease caused by Hib, in infants and toddlers from the age of 6 weeks. V419 will be marketed as Vaxelis in the EU through SPMSD, the Company’s joint venture with Sanofi Pasteur.
In addition to the candidates under regulatory review, the Company has several drug candidates in Phase 3 clinical development in addition to the Keytruda programs discussed above. The Company anticipates filing applications for regulatory approval with the FDA with respect to certain of these candidates in 2016, including MK-1293 as noted above.
MK-0822, odanacatib, is an oral, once-weekly investigational treatment for patients with osteoporosis. Osteoporosis is a disease that reduces bone density and strength and results in an increased risk of bone fractures. Odanacatib is a cathepsin K inhibitor that selectively inhibits the cathepsin K enzyme. Cathepsin K is known to play a central role in the function of osteoclasts, which are cells that break down existing bone tissue, particularly the protein components of bone. Inhibition of cathepsin K is a novel approach to the treatment of osteoporosis. In September 2014, Merck announced data from the pivotal Phase 3 fracture outcomes study for odanacatib in postmenopausal women with osteoporosis. In the Long-Term Odanacatib Fracture Trial (LOFT), odanacatib met its primary endpoints and significantly reduced the risk of three types of osteoporotic fractures (radiographically-assessed vertebral, clinical hip, and clinical non-vertebral) compared to placebo and also reduced the risk of the secondary endpoint of clinical vertebral fractures. In addition, treatment with odanacatib led to progressive increases over five years in bone mineral density at the lumbar spine and total hip. The rates of adverse events overall in LOFT were generally balanced between patients

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taking odanacatib and placebo. Adjudicated events of morphea-like skin lesions and atypical femoral fractures occurred more often in the odanacatib group than in the placebo group. Adjudicated major adverse cardiovascular events were generally balanced overall between the treatment groups. There were numerically more adjudicated stroke events with odanacatib than with placebo. Adjudicated atrial fibrillation was reported more often in the odanacatib group than in the placebo group. A numeric imbalance in mortality was observed; this numeric difference does not appear to be related to a particular reported cause or causes of death. Merck continues to collect data from the blinded extension study and is planning additional analyses of data from the trial, including an independent re-adjudication of major adverse cardiovascular events (MACE), in support of regulatory submissions. Merck plans to submit a New Drug Application (NDA) to the FDA for odanacatib in 2016 following completion of the independent adjudication and analysis of MACE. Merck also plans to submit applications to the EMA and the Ministry of Health, Labour, and Welfare in Japan.
MK-3102, omarigliptin, is an investigational once-weekly DPP-4 inhibitor in development for the treatment of adults with type 2 diabetes. In September 2015, the Company announced that omarigliptin achieved its primary efficacy endpoint in a Phase 3 study. Omarigliptin was found to be non-inferior to Januvia, at reducing patients’ A1C (an estimate of a person’s blood glucose over a two-to three-month period) levels from baseline, with similar A1C reductions achieved in both groups. The head-to-head study was designed to evaluate once-weekly treatment with omarigliptin 25 mg compared to 100 mg of Januvia once daily. Results were presented during an oral session at the 51st European Association for the Study of Diabetes Annual Meeting. Also, in September 2015, Merck announced that the Japanese Pharmaceuticals and Medical Devices Agency approved Marizev (omarigliptin) 25 mg and 12.5 mg tablets. Japan is the first country to have approved omarigliptin. Merck plans to submit omarigliptin for regulatory approval in the United States in 2016. Other worldwide regulatory submissions will follow.
MK-8835, ertugliflozin, is an investigational oral SGLT2 inhibitor being evaluated for the treatment of type 2 diabetes in collaboration with Pfizer Inc. Ertugliflozin is also being studied in combination with Januvia (sitagliptin) and metformin. Merck expects to submit applications for regulatory approval in the United States for ertugliflozin and the two fixed-dose combination tablets by the end of 2016.
MK-8237 is an investigational allergy immunotherapy tablet for house dust mite allergy that is part of a North America partnership between Merck and ALK-Abello. Merck plans to submit an NDA to the FDA for MK-8237 in the first half of 2016.
MK-8931, verubecestat, is Merck’s novel investigational oral ß-amyloid precursor protein site-cleaving enzyme (BACE) inhibitor for the treatment of Alzheimer’s disease being studied in a Phase 3 trial (APECS) designed to evaluate the safety and efficacy of MK-8931 versus placebo in patients with amnestic mild cognitive impairment due to Alzheimer’s disease, also known as prodromal Alzheimer’s disease. MK-8931 is also being studied in another Phase 2/3 randomized, placebo-controlled, study in patients with mild-to-moderate Alzheimer’s disease (EPOCH). The EPOCH study completed enrollment in the fourth quarter of 2015 and is estimated to reach primary trial completion in mid-2017.
MK-0859, anacetrapib, is an investigational inhibitor of the cholesteryl ester transfer protein (CETP) in development for raising HDL-C and reducing LDL-C. Anacetrapib is being evaluated in a 30,000 patient, event-driven cardiovascular clinical outcomes trial sponsored by Oxford University, REVEAL (Randomized EValuation of the Effects of Anacetrapib Through Lipid-modification), involving patients with preexisting vascular disease, which is projected to conclude in early 2017. In November 2015, Merck announced that the Data Monitoring Committee (DMC) of the REVEAL outcomes study completed its planned review of unblinded study data and recommended the study continue with no changes. The DMC reviewed safety and efficacy data from the study, which included an assessment of futility. Merck remains blinded to the actual results of this analysis and to other REVEAL safety and efficacy data. The REVEAL Steering Committee and Merck will continue to monitor the progress of the study. No additional interim efficacy analyses are planned.
MK-7655A is a combination of relebactam, an investigational beta-lactamase inhibitor, and imipenem/cilastatin (an approved carbapenem antibiotic). The FDA has designated this combination a Qualified Infectious Disease Product with designated Fast Track status for the treatment of hospital-acquired bacterial pneumonia, ventilator-associated bacterial pneumonia, complicated intra-abdominal infections and complicated urinary tract infections.

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MK-8228, letermovir, is an investigational oral, once-daily antiviral candidate for the prevention and treatment of Human Cytomegalovirus infection. Letermovir has received Orphan Drug Status in the EU and in the United States, where it has also been granted Fast Track designation.
MK-8342B, referred to as the Next Generation Ring, is an investigational combination (etonogestrel and 17β-estradiol) vaginal ring for contraception and the treatment of dysmenorrhea in women seeking contraception.
MK-0431J is an investigational fixed-dose combination of sitagliptin and ipragliflozin under development for commercialization in Japan in collaboration with Astellas Pharma Inc. (Astellas). Ipragliflozin, an SGLT2 inhibitor, co-developed by Astellas and Kotobuki Pharmaceutical Co., Ltd. (Kotobuki), is approved for use in Japan and is being co-promoted with Merck and Kotobuki.
V920 is an investigational rVSV-ZEBOV (Ebola) vaccine candidate being studied in large scale Phase 2/3 clinical trials currently underway in West Africa. In November 2014, Merck and NewLink Genetics announced an exclusive licensing and collaboration agreement for the investigational Ebola vaccine. In December 2015, Merck announced that the application for Emergency Use Assessment and Listing (EUAL) for V920 has been accepted for review by the World Health Organization (WHO). According to the WHO, the EUAL process is designed to expedite the availability of vaccines needed for public health emergencies such as another outbreak of Ebola. The procedure is intended to assist United Nations’ procurement agencies and Member States on the acceptability of using a vaccine candidate in an emergency-use setting. EUAL designation is not prequalification by the WHO, but rather is a special procedure implemented when there is an outbreak of a disease with high rates of morbidity and/or mortality and a lack of treatment and/or prevention options. In such instances, the WHO may recommend making a vaccine available for a limited time, while further clinical trial data are being gathered for formal regulatory agency review by a national regulatory authority. The decision to grant V920 EUAL status will be based on data regarding quality, safety, and efficacy/effectiveness; as well as a risk/benefit analysis for emergency use. While EUAL designation allows for emergency use, the vaccine remains investigational and has not yet been licensed for commercial distribution.
V212 is an inactivated varicella zoster virus vaccine in development for the prevention of herpes zoster. The Company is conducting two Phase 3 trials, one in autologous hematopoietic cell transplant patients and the other in patients with solid tumor malignancies undergoing chemotherapy and hematological malignancies.
MK-1439, doravirine, is an investigational, once-daily oral next-generation non-nucleoside reverse transcriptase inhibitor being developed by Merck for the treatment of HIV-1 infection.
In 2015, the Company also divested or discontinued certain drug candidates.
In July 2015, Merck and Allergan plc (Allergan) entered into an agreement pursuant to which Allergan acquired the exclusive worldwide rights to MK-1602 and MK-8031, Merck’s investigational small molecule oral CGRP receptor antagonists, which are being developed for the treatment and prevention of migraine (see Note 4 to the consolidated financial statements).
MK-4261, surotomycin, is an investigational oral antibiotic in development for the treatment of C. difficile associated diarrhea. Merck acquired surotomycin as part of its purchase of Cubist. During the second quarter of 2015, the Company received unfavorable efficacy data from a randomized, double-blinded, active-controlled study in patients with C. difficile associated diarrhea. The evaluation of this data, combined with an assessment of the commercial opportunity for surotomycin, resulted in the discontinuation of the program and an IPR&D impairment charge in 2015 (see Note 7 to the consolidated financial statements).
MK-2402, bevenopran, is an oral investigational therapy in development as a potential treatment for opioid-induced constipation in patients with chronic, non-cancer pain. Merck acquired bevenopran as a part of its purchase of Cubist. The Company has made the decision not to continue development of this program and is seeking to out-license the asset.
MK-8962, corifollitropin alfa injection, is an investigational fertility treatment for controlled ovarian stimulation in women participating in assisted reproductive technology. In July 2014, Merck received a CRL from the FDA for its NDA for corifollitropin alfa injection. Merck has made a decision to discontinue development of corifollitropin alfa injection in the United States for business reasons. Corifollitropin alfa injection is marketed as Elonva in certain markets outside of the United States.

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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. The Company’s research and development model is designed to increase productivity and improve the probability of success by prioritizing the Company’s research and development resources on candidates the Company believes are capable of providing unambiguous, promotable advantages to patients and payers and delivering the maximum value of its approved medicines and vaccines through new indications and new formulations. Merck is pursuing emerging product opportunities independent of therapeutic area or modality (small molecule, biologics and vaccines) and is building its biologics capabilities. The Company is committed to making externally sourced programs a greater component of its pipeline strategy, with a renewed focus on supplementing its internal research with a licensing and external alliance strategy focused on the entire spectrum of collaborations from early research to late-stage compounds, as well as access to new technologies.
The Company also reviews its pipeline to examine candidates which may provide more value through out-licensing. The Company continues to evaluate certain late-stage clinical development and platform technology assets to determine their out-licensing or sale potential.
The Company’s clinical pipeline includes candidates in multiple disease areas, including atherosclerosis, cancer, cardiovascular diseases, diabetes, infectious diseases, inflammatory/autoimmune diseases, neurodegenerative diseases, osteoporosis, respiratory diseases and women’s health.

Acquired In-Process Research and Development
In connection with acquisitions, the Company has recorded the fair value of in-process research projects which, at the time of acquisition, had not yet reached technological feasibility. At December 31, 2015, the balance of IPR&D was $4.2 billion. Of this amount, $3.2 billion relates to the clinical development program for MK-3682, which the Company acquired in 2014 with the acquisition of Idenix Pharmaceuticals, Inc. (Idenix).
During 2015, 2014 and 2013, approximately $280 million, $654 million and $346 million, respectively, of IPR&D projects received marketing approval in a major market and the Company began amortizing these assets based on their estimated useful lives.
All of the IPR&D projects that remain in development are subject to the inherent risks and uncertainties in drug development and it is possible that the Company will not be able to successfully develop and complete the IPR&D programs and profitably commercialize the underlying product candidates. The time periods to receive approvals from the FDA and other regulatory agencies are subject to uncertainty. Significant delays in the approval process, or the Company’s failure to obtain approval at all, would delay or prevent the Company from realizing revenues from these products. Additionally, if certain of the IPR&D programs fail or are abandoned during development, then the Company will not realize the future cash flows it has estimated and recorded as IPR&D as of the acquisition date, and the Company may also not recover the research and development expenditures made since the acquisition to further develop such program. If such circumstances were to occur, the Company’s future operating results could be adversely affected and the Company may recognize impairment charges and such charges could be material.
During 2015, the Company recorded $63 million of IPR&D impairment charges within Research and development expenses. Of this amount, $50 million relates to the surotomycin clinical development program obtained in connection with the acquisition of Cubist. During 2015, the Company received unfavorable efficacy data from a clinical trial for surotomycin. The evaluation of this data, combined with an assessment of the commercial opportunity for surotomycin, resulted in the discontinuation of the program and the IPR&D impairment charge noted above. During 2014, the Company recorded $49 million of IPR&D impairment charges primarily as a result of changes in cash flow assumptions for certain compounds obtained in connection with the Supera joint venture, as well as for the discontinuation of certain Animal Health programs. During 2013, the Company recorded $279 million of IPR&D impairment charges. Of this amount, $181 million related to the write-off of the intangible asset associated with preladenant as a result of the discontinuation of the clinical development program for this compound. In addition, the Company recorded impairment charges resulting from changes in cash flow assumptions for certain compounds, as well as for pipeline programs that had previously been deprioritized and were subsequently deemed to have no alternative use in the period.
Additional research and development will be required before any of the remaining programs reach technological feasibility. The costs to complete the research projects will depend on whether the projects are brought

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to their final stages of development and are ultimately submitted to the FDA or other regulatory agencies for approval. As of December 31, 2015, the estimated costs to complete projects acquired in connection with acquisitions in Phase 3 development for human health and the analogous stage of development for animal health were approximately $480 million.

Acquisitions, Research Collaborations and License Agreements
Merck continues to remain focused on pursuing opportunities that have the potential to drive both near- and long-term growth. Certain of the more recent significant transactions are described below. Merck is actively monitoring the landscape for growth opportunities that meet the Company’s strategic criteria.
In January 2016, Merck acquired IOmet, a privately held UK-based drug discovery company focused on the development of innovative medicines for the treatment of cancer, with a particular emphasis on the fields of cancer immunotherapy and cancer metabolism. Total purchase consideration in the transaction included an upfront cash payment of $150 million and future additional milestone payments of up to $250 million that are contingent upon certain clinical and regulatory milestones being achieved. The acquisition provides Merck with IOmet’s pre-clinical pipeline of IDO (indoleamine-2,3-dioxygenase 1), TDO (tryptophan-2,3-dioxygenase), and dual-acting IDO/TDO inhibitors. The Company is in the process of determining the preliminary fair value of assets acquired, liabilities assumed and total consideration transferred for this business acquisition. This transaction closed on January 11, 2016; accordingly, the results of operations of the acquired business will be included in the Company’s results of operations beginning after that date.
In July 2015, Merck acquired cCAM, a privately held biopharmaceutical company focused on the discovery and development of novel cancer immunotherapies. The acquisition provides Merck with cCAM’s lead pipeline candidate, CM-24, a novel monoclonal antibody targeting the immune checkpoint protein CEACAM1 that is being evaluated in a Phase 1 study for the treatment of advanced or recurrent malignancies, including melanoma, non-small-cell lung, bladder, gastric, colorectal, and ovarian cancers. Total purchase consideration in the transaction of $201 million included an upfront payment of $96 million in cash and future additional payments of up to $510 million associated with the attainment of certain clinical development, regulatory and commercial milestones, which the Company determined had a fair value of $105 million at the acquisition date. The transaction was accounted for as an acquisition of a business; accordingly, the assets acquired and liabilities assumed were recorded at their respective fair values as of the acquisition date. Merck recognized an intangible asset for IPR&D of $180 million and other net assets of $7 million. The excess of the consideration transferred over the fair value of net assets acquired of $14 million was recorded as goodwill that was allocated to the Pharmaceutical segment and is not deductible for tax purposes. The fair value of the identifiable intangible asset related to IPR&D was determined using an income approach through which fair value is estimated based on the asset’s probability-adjusted future net cash flows, which reflects the stage of development of the project and the associated probability of successful completion. The asset’s probability-adjusted future net cash flows were then discounted to present value using a discount rate of 10.5%. The fair value of the contingent consideration was determined utilizing a probability-weighted estimated cash flow stream adjusted for the expected timing of each payment also utilizing a discount rate of 10.5%. Actual cash flows are likely to be different than those assumed. This transaction closed on July 31, 2015; accordingly, the results of operations of the acquired business have been included in the Company’s results of operations beginning after that date.
In February 2015, Merck and NGM, a privately held biotechnology company, entered into a multi-year collaboration to research, discover, develop and commercialize novel biologic therapies across a wide range of therapeutic areas. The collaboration includes multiple drug candidates currently in preclinical development at NGM, including NP201, which is being evaluated for the treatment of diabetes, obesity and nonalcoholic steatohepatitis. NGM will lead the research and development of the existing preclinical candidates and have the autonomy to identify and pursue other discovery stage programs at its discretion. Merck will have the option to license all resulting NGM programs following human proof of concept trials. If Merck exercises this option, Merck will lead global product development and commercialization for the resulting products, if approved. Under the terms of the agreement, Merck made an upfront payment to NGM of $94 million, which is included in Research and development expenses, and purchased a 15% equity stake in NGM for $106 million. Merck committed up to $250 million to fund all of NGM’s efforts under the initial five-year term of the collaboration, with the potential for additional funding if certain conditions are met. Prior to Merck initiating a Phase 3 study for a licensed program, NGM may elect to either receive milestone and royalty payments or, in certain cases, to co-fund development and participate in a global cost and revenue share arrangement

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of up to 50%. The agreement also provides NGM with the option to participate in the co-promotion of any co-funded program in the United States. Merck will have the option to extend the research agreement for two additional two-year terms. Each party has certain termination rights under the agreement in the event of an uncured material breach by the other party. Additionally, Merck has certain termination rights in the event of the occurrence of certain defined conditions. Upon a termination event, depending on the circumstances, the parties have varying rights and obligations with respect to the continued development and commercialization of compounds discovered under the agreement and certain related payment obligations.
In January 2015, Merck acquired Cubist, a leader in the development of therapies to treat serious infections caused by a broad range of bacteria, for total consideration of $8.3 billion (see Note 4 to the consolidated financial statements). This transaction closed on January 21, 2015; accordingly, the results of operations of the acquired business have been included in the Company’s results of operations beginning after that date. The estimated fair values of identifiable intangible assets related to currently marketed products were determined using an income approach. The Company’s estimates of projected net cash flows considered historical and projected pricing, margins and expense levels; the performance of competing products where applicable; relevant industry and therapeutic area growth drivers and factors; current and expected trends in technology and product life cycles; the extent and timing of potential new product introductions by the Company’s competitors; and the life of each asset’s underlying patent. The net cash flows were then probability-adjusted where appropriate to consider the uncertainties associated with the underlying assumptions, as well as the risk profile of the net cash flows utilized in the valuation. The probability-adjusted future net cash flows of each product were then discounted to present value utilizing a discount rate of 8%. Actual cash flows are likely to be different than those assumed. The most significant intangible assets relate to Zerbaxa, Cubicin and Sivextro.
The Company recorded the fair value of incomplete research project surotomycin (MK-4261) which, at the time of acquisition, had not reached technological feasibility and had no alternative future use. The amount was capitalized and accounted for as an indefinite-lived intangible asset, subject to impairment testing until completion or abandonment of the project. The fair value of surotomycin was determined by using an income approach. The probability-adjusted future net cash flows were then discounted to present value using a discount rate of 9%. During the second quarter of 2015, the Company received unfavorable efficacy data from a clinical trial for surotomycin. The evaluation of this data, combined with an assessment of the commercial opportunity for surotomycin, resulted in the discontinuation of the program and an IPR&D impairment charge.
In connection with the Cubist acquisition, liabilities were recorded for potential future consideration that is contingent upon the achievement of future sales-based milestones. The fair value of contingent consideration liabilities was determined at the acquisition date using unobservable inputs. These inputs include the estimated amount and timing of projected cash flows, the probability of success (achievement of the contingent event) and a risk-adjusted discount rate of 8% used to present value the probability-weighted cash flows. Changes in the inputs could result in a different fair value measurement.
Selected Joint Venture and Affiliate Information
AstraZeneca LP
In 1982, Merck entered into an agreement with Astra AB (Astra) to develop and market Astra products under a royalty-bearing license. In 1993, Merck’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 1994, developed and marketed most of Astra’s new prescription medicines in the United States.
In 1998, Merck and Astra completed the restructuring of the ownership and operations of the joint venture whereby Merck 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, became the exclusive distributor of the products for which KBI retained rights.
Merck earned revenue based on sales of KBI products and such revenue was $463 million in 2014 and $920 million in 2013 primarily relating to sales of Nexium, as well as Prilosec. In addition, Merck earned certain Partnership

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returns from AZLP of $192 million in 2014 and $352 million in 2013, which were recorded in equity income from affiliates.
On June 30, 2014, AstraZeneca exercised its option to purchase Merck’s interest in KBI for $419 million in cash. Of this amount, $327 million reflects an estimate of the fair value of Merck’s interest in Nexium and Prilosec. This portion of the exercise price, which is subject to a true-up in 2018 based on actual sales from closing in 2014 to June 2018, was deferred and is being recognized over time in Other (income) expense, net as the contingency is eliminated as sales occur. During 2015 and 2014, $182 million and $140 million, respectively, of the deferred income was recognized bringing cumulative deferred income recognized through December 31, 2015 to $322 million. The remaining exercise price of $91 million primarily represents a multiple of ten times Merck’s average 1% annual profit allocation in the partnership for the three years prior to exercise. Merck recognized the $91 million as a gain in 2014 within Other (income) expense, net. As a result of AstraZeneca’s option exercise, the Company’s remaining interest in AZLP was redeemed. Accordingly, the Company also recognized a non-cash gain of approximately $650 million in 2014 within Other (income) expense, net resulting from the retirement of $2.4 billion of KBI preferred stock (see Note 11 to the consolidated financial statements), the elimination of the Company’s $1.4 billion investment in AZLP and a $340 million reduction of goodwill. This transaction resulted in a net tax benefit of $517 million in 2014 primarily reflecting the reversal of deferred taxes on the AZLP investment balance.
As a result of AstraZeneca exercising its option, as of July 1, 2014, the Company no longer records equity income from AZLP and supply sales to AZLP have terminated.

Sanofi Pasteur MSD
In 1994, Merck and Pasteur Mérieux Connaught (now Sanofi Pasteur S.A.) established an equally-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)
2015
 
2014
 
2013
Gardasil
$
184

 
$
248

 
$
291

Influenza vaccines
128

 
159

 
162

Zostavax
87

 
103

 
68

Other viral vaccines
77

 
87

 
104

RotaTeq
56

 
65

 
55

Hepatitis vaccines
62

 
38

 
31

Other vaccines
329

 
430

 
453

 
$
923

 
$
1,130

 
$
1,164


Simcere MSD (Shanghai) Pharmaceutical Co., Ltd.
In March 2015, Merck and Simcere Pharmaceutical Co., Ltd. (Simcere) executed a restructuring agreement in which Merck agreed to transfer its 51% ownership interest in the Simcere MSD (Shanghai) Pharmaceutical Co., Ltd. joint venture to Simcere. As a result, Merck deconsolidated the joint venture and recorded a net loss of $7 million in Other (income) expense, net in 2015.
Capital Expenditures
Capital expenditures were $1.3 billion in 2015, $1.3 billion in 2014 and $1.5 billion in 2013. Expenditures in the United States were $879 million in 2015, $873 million in 2014 and $902 million in 2013.
Depreciation expense was $1.6 billion in 2015, $2.5 billion in 2014 and $2.2 billion in 2013 of which $1.1 billion, $2.0 billion and $1.5 billion, respectively, applied to locations in the United States. Total depreciation expense in 2015, 2014 and 2013 included accelerated depreciation of $174 million, $900 million and $577 million, respectively, associated with restructuring activities (see Note 3 to the consolidated financial statements).


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Analysis of Liquidity and Capital Resources
Merck’s strong financial profile enables it to fully fund research and development, focus on external alliances, support in-line products and maximize upcoming launches while providing significant cash returns to shareholders.
Selected Data
 
 
 
 
 
($ in millions)
2015
 
2014
 
2013
Working capital
$
10,561

 
$
14,208

 
$
17,469

Total debt to total liabilities and equity
26.1
%
 
21.8
%
 
23.8
%
Cash provided by operations to total debt
0.5:1

 
0.4:1

 
0.5:1

Cash provided by operating activities was $12.4 billion in 2015, $7.9 billion in 2014 and $11.7 billion in 2013. The decline in cash provided by operating activities in 2014 as compared with 2013 reflects approximately $5.0 billion of taxes paid on the divestiture of MCC. Cash provided by operating activities in 2013 includes a payment made by the Company of $480 million in connection with the settlement of the ENHANCE Litigation. Cash provided by operating activities continues to be the Company’s primary source of funds to finance operating needs, capital expenditures, a portion of treasury stock purchases and dividends paid to shareholders.
Cash used in investing activities was $4.8 billion in 2015 compared with $374 million in 2014 primarily reflecting cash received in 2014 from the divestiture of MCC, higher cash received in 2014 from other dispositions of businesses and in connection with AstraZeneca’s option exercise, as well as cash used for the acquisition of Cubist in 2015, partially offset by lower purchases of securities and other investments and higher proceeds from the sales of securities and other investments, cash used in 2014 for the acquisition of Idenix and a cash payment made in 2014 upon the formation of the collaboration with Bayer. Cash used in investing activities was $374 million in 2014 compared with $3.1 billion in 2013 reflecting cash received in 2014 from the divestiture of MCC and from other dispositions of businesses, as well as cash received in connection with AstraZeneca’s option exercise, partially offset by higher purchases of and lower proceeds from the sale of securities and other investments, cash used for the acquisition of Idenix and a cash payment made upon formation of the collaboration with Bayer.
Cash used in financing activities was $5.3 billion in 2015 compared with $15.1 billion in 2014 driven primarily by higher proceeds from the issuance of debt, lower payments on debt and lower purchases of treasury stock, partially offset by lower proceeds from the exercise of stock options and a decrease in short-term borrowings. Cash used in financing activities was $15.1 billion in 2014 compared with $6.0 billion in 2013 driven primarily by higher payments on debt, lower proceeds from the issuance of debt, higher purchases of treasury stock and a decrease in short-term borrowings, partially offset by higher proceeds from the exercise of stock options.
During 2015, the Company recorded charges of $876 million related to the devaluation of its net monetary assets in Venezuela, the large majority of which was cash (see Note 14 to the consolidated financial statements).
At December 31, 2015, the total of worldwide cash and investments was $26.5 billion, including $13.4 billion of cash, cash equivalents and short-term investments, and $13.0 billion of long-term investments. Generally 80%-90% of cash and investments are held by foreign subsidiaries and would be subject to significant tax payments if such cash and investments were repatriated in the form of dividends. The Company records U.S. deferred tax liabilities for certain unremitted earnings, but when amounts earned overseas are expected to be indefinitely reinvested outside of the United States, no accrual for U.S. taxes is provided. The amount of cash and investments held by U.S. and foreign subsidiaries fluctuates due to a variety of factors including the timing and receipt of payments in the normal course of business. Cash provided by operating activities in the United States continues to be the Company’s primary source of funds to finance domestic operating needs, capital expenditures, a portion of treasury stock purchases and dividends paid to shareholders.

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The Company’s contractual obligations as of December 31, 2015 are as follows:
Payments Due by Period
 
 
 
 
 
 
 
 
 
($ in millions)
Total
 
2016
 
2017—2018
 
2019—2020
 
Thereafter
Purchase obligations (1)
$
2,333

 
$
605

 
$
786

 
$
<