Merck Announces Fourth-Quarter and Full-Year 2014 Financial Results

February 4, 2015 7:02 am ET

Fourth-Quarter 2014 Non-GAAP EPS of $0.87, Excluding Certain Items; GAAP EPS of $2.54; Full-Year 2014 Non-GAAP EPS of $3.49, Excluding Certain Items; GAAP EPS of $4.07
2015 Full-Year Non-GAAP EPS Target of $3.32 to $3.47, Including a $0.27 Negative Impact From Foreign Exchange and Excluding Certain Items; GAAP EPS Range of $1.62 to $1.91
Fourth-Quarter 2014 Worldwide Sales of $10.5 Billion, a Decrease of 7 Percent, Reflecting Unfavorable Impact of Patent Expiries and Divestitures and a 3 Percent Negative Impact From Foreign Exchange
Full-Year 2014 Worldwide Sales of $42.2 Billion, a Decrease of 4 Percent, Reflecting Unfavorable Impact of Patent Expiries and Divestitures and a 1 Percent Negative Impact From Foreign Exchange
Full-Year Results Reflect Sales Growth in Immunology, Diabetes, Hospital Acute Care, Vaccines and Animal Health and Sales Declines in Hepatitis C
Six New Products Were Approved in the United States in 2014; Company Accelerated KEYTRUDA and Hepatitis C Clinical Development Programs

Merck (NYSE:MRK), known as MSD outside the United States and Canada,
today announced financial results for the fourth quarter and full year
of 2014.


	Fourth Quarter		Year Ended
			Dec. 31,	Dec. 31,
$ in millions, except EPS amounts	2014	2013	2014	2013
Sales	$10,482	$11,319	$42,237	$44,033
GAAP EPS	2.54	0.26	4.07	1.47
Non-GAAP EPS that excludes items listed below¹	0.87	0.88	3.49	3.49
GAAP Net Income²	7,316	781	11,920	4,404
Non-GAAP Net Income that excludes items listed below^1,2	2,504	2,599	10,215	10,443

Non-GAAP (generally accepted accounting principles) earnings per share
(EPS) of $0.87 for the fourth quarter and $3.49 for the full year of
2014 exclude acquisition- and divestiture-related costs, restructuring
costs and certain other items, as well as an $11.2 billion gain on the
divestiture of the Consumer Care business.

A reconciliation of GAAP to non-GAAP net income and EPS is provided in
the tables that follow.


	Fourth Quarter		Year Ended
			Dec. 31,	Dec. 31,
$ in millions, except EPS amounts	2014	2013	2014	2013
EPS
GAAP EPS	$2.54	$0.26	$4.07	$1.47
Difference³	(1.67)	0.62	(0.58)	2.02
Non-GAAP EPS that excludes items listed below¹	$0.87	$0.88	$3.49	$3.49

Net Income
GAAP net income²	$7,316	$781	$11,920	$4,404
Difference	(4,812)	1,818	(1,705)	6,039
Non-GAAP net income that excludes items listed below^1,2	$2,504	$2,599	$10,215	$10,443

Decrease (Increase) in Net Income Due to Excluded Items:
Acquisition- and divestiture-related costs⁴	$1,394	$1,348	$5,946	$5,549
Restructuring costs	619	962	1,978	2,401
Gain on sale of Merck Consumer Care	(11,209)	–	(11,209)	–
Gain on AstraZeneca option exercise	–	–	(741)	–
Gain on divestiture of certain ophthalmic products	(84)	–	(480)	–
Loss on extinguishment of debt	628	–	628	–
Additional year of health care reform fee	–	–	193	–
Other	(14)	–	(9)	(13)
Net decrease (increase) in income before taxes	(8,666)	2,310	(3,694)	7,937
Income tax (benefit) expense⁵	3,854	(492)	2,045	(1,898)
Acquisition- and divestiture-related costs attributable to non-controlling interests	–	–	(56)	–
Decrease (increase) in net income	$(4,812)	$1,818	$(1,705)	$6,039

Select Business Highlights

In 2014, Merck took proactive, strategic action to sharpen its
commercial and research and development (R&D) focus, redesign its
operating model and reduce its cost base. Through consistent execution
of these actions, the company continued to transform into a more
competitive, more innovative company and is building a platform for
sustained future growth.

“Our stronger focus has led to better, consistent execution, and our
results in 2014 demonstrate the significant progress we’ve made in
evolving the company to better serve health care markets around the
world,” said Kenneth C. Frazier, chairman and chief executive officer,
Merck. “As we look forward to 2015 and beyond, we will continue to focus
our resources on those internal and external opportunities that can
generate the most value for patients, customers and shareholders.”

“While we are transforming the way Merck operates and executes, our
fundamental strategy has remained consistent. Our success and our future
will continue to be predicated on innovating at the intersection of
scientific opportunity and global unmet medical need. This is the best
pathway to sustainable, long-term growth,” continued Frazier.

Worldwide sales were $10.5 billion for the fourth quarter of 2014, a
decrease of 7 percent compared with the fourth quarter of 2013,
including a 3 percent negative impact from foreign exchange and a 7
percent negative impact from patent expiries and divestitures, including
the Consumer Care business. Full-year 2014 worldwide sales were $42.2
billion, a decrease of 4 percent compared with the full year of 2013,
including a 1 percent negative impact from foreign exchange and a 4
percent negative impact from patent expiries and divestitures, including
the Consumer Care business.

The following table reflects sales of the company’s top pharmaceutical
products, as well as total sales of Animal Health and Consumer Care
products.


					Year	Year
	Fourth	Fourth		Change	Ended	Ended		Change
	Quarter	Quarter		Ex-	Dec. 31,	Dec. 31,		Ex-
$ in millions	2014	2013	Change	Exchange	2014	2013	Change	Exchange
Total Sales	$10,482	$11,319	-7%	-4%	$42,237	$44,033	-4%	-3%
Pharmaceutical	9,370	9,760	-4%	0%	36,042	37,437	-4%	-2%
JANUVIA/
JANUMET	1,652	1,624	2%	6%	6,002	5,833	3%	4%
ZETIA/
VYTORIN	1,032	1,152	-10%	-7%	4,166	4,300	-3%	-2%
REMICADE	557	620	-10%	-3%	2,372	2,271	4%	4%
GARDASIL	356	394	-10%	-6%	1,738	1,831	-5%	-3%
ISENTRESS	418	442	-5%	-1%	1,673	1,643	2%	3%
PROQUAD,
M-M-R II and
VARIVAX	366	273	34%	36%	1,394	1,306	7%	8%
NASONEX	268	327	-18%	-15%	1,099	1,335	-18%	-16%
SINGULAIR	319	298	7%	16%	1,092	1,196	-9%	-4%
Animal Health	885	871	2%	8%	3,454	3,362	3%	5%
Consumer Care	16	390	-96%	-96%	1,547	1,894	-18%	-17%
Other Revenues	211	298	-29%	-63%	1,194	1,340	-11%	-24%

Commercial and Pipeline Highlights

The company continued to make steady progress in advancing its
late-stage pipeline, and received U.S. approval for six new products
in 2014 that are launching in 2015, including novel medicines KEYTRUDA
(pembrolizumab) for the treatment of advanced melanoma in patients
whose disease has progressed after other therapies and BELSOMRA
(suvorexant) for the treatment of insomnia.
Additionally, as part of its acquisition of Cubist Pharmaceuticals,
Inc. (Cubist), the company acquired ZERBAXA (ceftolozane/tazobactam),
an antibiotic approved by the U.S. Food and Drug Administration (FDA)
in December 2014 to treat Gram-negative bacteria, a key cause of
in-hospital infections. The company is preparing to launch ZERBAXA
immediately in the United States.
Merck continued to accelerate its KEYTRUDA program.
- In September 2014, the FDA granted approval of KEYTRUDA, the first
  FDA-approved anti-PD-1 therapy. An estimated 2,000 patients were
  receiving treatment with KEYTRUDA in December 2014.
- KEYTRUDA received Breakthrough Therapy Designation from the FDA
  for advanced non-small cell lung cancer (NSCLC) in 2014. Last
  month, the company announced that it expects to submit a
  supplemental Biologics License Application in mid-year 2015 to the
  FDA for KEYTRUDA for the treatment of patients with Epidermal
  Growth Factor Receptor (EGFR) mutation-negative and Anaplastic
  Lymphoma Kinase (ALK) rearrangement-negative NSCLC whose disease
  has progressed on or following platinum-containing chemotherapy.
- KEYTRUDA continues to be studied in more than 30 cancers and in 20
  combination settings, and Merck has presented data in a number of
  different tumor types.
The company accelerated its hepatitis C virus (HCV) clinical
development program in 2014.
- Merck recently announced that it expects to file a New Drug
  Application (NDA) with the FDA in the first half of 2015 for
  grazoprevir/elbasvir (MK-5172/MK-8742), the company’s
  investigational oral, once-daily combination regimen for the
  treatment of chronic HCV infection.
  - On Jan. 30, 2015, the company received notification from the
    FDA of its intent to rescind Breakthrough Therapy Designation
    status for this combination treatment regimen, citing the
    availability of other recently approved treatments for
    Genotype 1 patients. The company expects to discuss this
    matter with the FDA and does not expect that it will impact
    its ability to file an NDA for this combination regimen or the
    timing of that filing.
- The company has started the Phase 2 C-CREST studies to
  study combination regimens of grazoprevir and MK-3682 (formerly
  IDX21437) with either elbasvir or MK-8408 for the
  treatment of HCV infection. The company expects to begin Phase 3
  studies in 2015.
The company continued to build upon its legacy and leadership in
vaccines with the approval of GARDASIL 9 (Human Papillomavirus
9-valent Vaccine, Recombinant), which was approved by the FDA in
December 2014 to prevent cancers and other diseases caused by nine HPV
types.
The company anticipates an FDA advisory committee meeting will be held
in the first quarter of 2015 to review BRIDION (sugammadex), an
investigational agent for the reversal of neuromuscular blockade
induced by rocuronium or vecuronium. If approved, the company expects
to launch BRIDION later in 2015.
The company strengthened its antibiotics portfolio by acquiring
Cubist; its hepatitis pipeline by acquiring Idenix Pharmaceuticals,
Inc.; and its oncology pipeline by acquiring OncoEthix.

Pharmaceutical Revenue Performance

Fourth-quarter pharmaceutical sales declined 4 percent to $9.4 billion,
including a 4 percent negative impact from foreign exchange and a 3
percent negative impact reflecting approximately $200 million of lower
sales from patent expiries and product divestitures. Also contributing
to the decline were lower sales of ZETIA (ezetimibe)/VYTORIN (ezetimibe/
simvastatin), medicines for lowering LDL cholesterol; the HCV portfolio
of VICTRELIS (boceprevir) and PEGINTRON (peginterferon alfa-2b); and
REMICADE (infliximab), a treatment for inflammatory diseases. These
declines were partially offset by growth in the four core therapeutic
areas of vaccines, diabetes, hospital acute care and oncology. The
growth in oncology reflects the launch of KEYTRUDA whose sales were $50
million in the fourth quarter of 2014. Full-year 2014 pharmaceutical
sales declined 4 percent to $36.0 billion, including a 2 percent
negative impact from foreign exchange and a 3 percent negative impact
from patent expiries and product divestitures.

Animal Health Revenue Performance

Animal Health sales totaled $885 million for the fourth quarter of 2014,
an increase of 2 percent compared with the fourth quarter of 2013,
including a 6 percent negative impact from foreign exchange. Growth was
driven by increases across most species. In companion animals, growth
was supported by the global launch of BRAVECTO (fluralaner), a chewable
tablet that kills fleas and ticks in dogs for up to 12 weeks. Worldwide
sales for the full year of 2014 were $3.5 billion, an increase of 3
percent, including a 2 percent negative impact from foreign exchange.
Full-year 2014 results reflect the company’s decision in the third
quarter of 2013 to voluntarily suspend the sale of ZILMAX (zilpaterol
hydrochloride), a feed supplement for beef cattle, in the United States
and Canada. Excluding ZILMAX, full-year 2014 sales grew 7 percent,
including a 2 percent negative impact from foreign exchange.

Other Revenue Performance

Other revenues – primarily comprising alliance revenue, miscellaneous
corporate revenues and third-party manufacturing sales – decreased 29
percent to $211 million compared to the fourth quarter of 2013. The
decrease was driven primarily by the loss of revenue from AstraZeneca
(AZ) recorded by Merck, which was $193 million in the fourth quarter of
2013. On June 30, 2014, AZ exercised its option to buy the company’s
interest in a subsidiary and, through it, the company’s interest in
Nexium and Prilosec. Other revenues decreased 11 percent to $1.2 billion
for the full year of 2014.

Fourth-Quarter and Full-Year 2014 Expense and Other Information

The costs detailed below totaled $9.3 billion on a GAAP basis during the
fourth quarter of 2014 and include $2.0 billion of acquisition- and
divestiture-related costs and restructuring costs and certain other
items.


$ in millions	Included in expenses for the period
		Acquisition- and
		Divestiture-
Fourth Quarter		Related	Restructuring
2014	GAAP	Costs(4)	Costs	Non-GAAP(1)
Materials and production	$3,749	$984	$105	$2,660
Marketing and administrative	2,924	81	57	2,786
Research and development	2,283	329	108	1,846
Restructuring costs	349	–	349	–

Fourth Quarter
2013
Materials and production	$4,607	$1,301	$253	$3,053
Marketing and administrative	2,982	32	81	2,869
Research and development	1,836	15	63	1,758
Restructuring costs	565	–	565	–

The costs detailed below totaled $36.6 billion on a GAAP basis for the
full year of 2014 and include $8.0 billion of acquisition-related costs
and restructuring costs and certain other items.


$ in millions		Included in expenses for the period
		Acquisition- and
		Divestiture-
Year Ended		Related	Restructuring	Certain
Dec. 31, 2014	GAAP	Costs(4)	Costs	Other Items	Non-GAAP(1)
Materials and production	$16,768	$5,254	$482	$–	$ 11,032
Marketing and administrative	11,606	234	200	193	10,979
Research and development	7,180	365	283	–	6,532
Restructuring costs	1,013	–	1,013	–	–

Year Ended
Dec. 31, 2013
Materials and production	$16,954	$5,176	$446	$–	$11,332
Marketing and administrative	11,911	94	145	–	11,672
Research and development	7,503	279	101	–	7,123
Restructuring costs	1,709	–	1,709	–	–

The gross margin was 64.2 percent for the fourth quarter of 2014
compared to 59.3 percent for the fourth quarter of 2013, reflecting 10.4
and 13.7 unfavorable percentage point impacts, respectively, from the
acquisition- and divestiture-related costs and restructuring costs noted
above. The gross margin was 60.3 percent for the full year of 2014
compared to 61.5 percent for the full year of 2013, reflecting 13.6 and
12.8 unfavorable percentage point impacts, respectively, from the
acquisition- and divestiture-related costs and restructuring costs noted
above.

Marketing and administrative expenses, on a non-GAAP basis, were $2.8
billion in the fourth quarter of 2014, a decrease from $2.9 billion in
the same period of 2013, which was primarily driven by the sale of the
Consumer Care business. Full-year marketing and administrative expenses
in 2014, on a non-GAAP basis, were $11.0 billion, a decrease from $11.7
billion in 2013. The declines were primarily due to productivity
measures and divestitures.

R&D expenses, on a non-GAAP basis, were $1.8 billion in the fourth
quarter of 2014, a 5 percent increase compared to the fourth quarter of
2013. Full-year R&D expenses in 2014, on a non-GAAP basis, were $6.5
billion, a decrease from $7.1 billion in 2013. The full-year decline
reflects targeted cost reductions and lower clinical development
spending resulting from portfolio prioritization.

Other (income) expense, net, was $10.6 billion of income in the fourth
quarter of 2014 compared to $157 million of expense in the fourth
quarter of 2013. Other (income) expense, net, was $11.4 billion of
income for the full year of 2014 compared to $815 million of expense for
the full year of 2013. Other (income) expense, net in the fourth quarter
and full year of 2014 includes an $11.2 billion gain on the divestiture
of the Consumer Care business and a $628 million loss on the
extinguishment of debt.

The GAAP effective tax rates of 38.0 percent for the fourth quarter of
2014 and 30.9 percent for the full year of 2014 reflect the impacts of
acquisition- and divestiture-related costs, restructuring costs and
certain other items, including the impact of the gain on the divestiture
of the Consumer Care business being taxed primarily at combined U.S.
federal and state tax rates. The non-GAAP effective tax rates, which
exclude these items, were 20.0 percent for the fourth quarter and 24.3
percent for the full year of 2014. Both the GAAP and non-GAAP effective
tax rates for the fourth quarter and full year of 2014 include the
favorable impact of tax legislation enacted in the fourth quarter of
2014.

Financial Outlook

Merck expects its full-year 2015 non-GAAP EPS range to be between $3.32
and $3.47, including a $0.27 negative impact from foreign exchange. The
range excludes acquisition- and divestiture-related costs and costs
related to restructuring programs. Merck expects its full-year 2015 GAAP
EPS range to be between $1.62 and $1.91.

At mid-January 2015 exchange rates, Merck anticipates full-year 2015
revenues to be between $38.3 billion and $39.8 billion, including a $2.6
billion negative impact from foreign exchange and approximately $1
billion of net lost sales from acquisitions and divestitures.

In addition, the company expects full-year 2015 non-GAAP marketing and
administrative expenses to be below 2014 levels and R&D expenses to be
modestly above 2014 levels.

The company anticipates its full-year 2015 non-GAAP tax rate will be in
the range of 22 to 23 percent, not including a 2015 R&D tax credit.

A reconciliation of anticipated 2015 EPS, as reported in accordance with
GAAP to non-GAAP EPS that excludes certain items, is provided in the
table below.


		Full Year
$ in millions, except EPS amounts		2015
GAAP EPS		$1.62 to $1.91
Difference³		1.70 to 1.56
Non-GAAP EPS that excludes items listed below		$3.32 to $3.47


Acquisition- and divestiture-related costs		$5,000 to $4,700
Restructuring costs		950 to 750
Net decrease (increase) in income before taxes		5,950 to 5,450
Estimated income tax (benefit) expense		(1,100) to (1,000)
Decrease (increase) in net income		$4,850 to $4,450

Total Employees

As of Dec. 31, 2014, Merck had approximately 70,000 employees worldwide,
including the company’s joint ventures in China and Brazil.

Earnings Conference Call

Investors, journalists and the general public may access a live audio
webcast of the call today at 8:00 a.m. EST on Merck’s website at http://www.merck.com/investors/events-and-presentations/home.html.
Institutional investors and analysts can participate in the call by
dialing (706) 758-9927 or (877) 381-5782 and using ID code number
54622693. Members of the media are invited to monitor the call by
dialing (706) 758-9928 or (800) 399-7917 and using ID code number
54622693. Journalists who wish to ask questions are requested to contact
a member of Merck’s Media Relations team at the conclusion of the call.

About Merck

Today’s Merck is a global health care leader working to help the world
be well. Merck is known as MSD outside the United States and Canada.
Through our prescription medicines, vaccines, biologic therapies and
animal health products, we work with customers and operate in more than
140 countries to deliver innovative health solutions. We also
demonstrate our commitment to increasing access to health care through
far-reaching policies, programs and partnerships. For more information,
visit www.merck.com
and connect with us on Twitter,
Facebook
and YouTube.
You can also follow our Twitter conversation at $MRK.

Forward-Looking Statement

This news release includes “forward-looking statements” within the
meaning of the safe harbor provisions of the U.S. Private Securities
Litigation Reform Act of 1995. These statements are based upon the
current beliefs and expectations of Merck’s management and are subject
to significant risks and uncertainties. There can be no guarantees with
respect to pipeline products that the products will receive the
necessary regulatory approvals or that they will prove to be
commercially successful. If underlying assumptions prove inaccurate or
risks or uncertainties materialize, actual results may differ materially
from those set forth in the forward-looking statements.

Risks and uncertainties include but are not limited to, general industry
conditions and competition; general economic factors, including interest
rate and currency exchange rate fluctuations; the impact of
pharmaceutical industry regulation and health care legislation in the
United States and internationally; global trends toward health care cost
containment; technological advances, new products and patents attained
by competitors; challenges inherent in new product development,
including obtaining regulatory approval; Merck’s ability to accurately
predict future market conditions; manufacturing difficulties or delays;
financial instability of international economies and sovereign risk;
dependence on the effectiveness of Merck’s patents and other protections
for innovative products; and the exposure to litigation, including
patent litigation, and/or regulatory actions.

Merck undertakes no obligation to publicly update any forward-looking
statement, whether as a result of new information, future events or
otherwise. Additional factors that could cause results to differ
materially from those described in the forward-looking statements can be
found in Merck’s 2013 Annual Report on Form 10-K and the company’s other
filings with the Securities and Exchange Commission (SEC) available at
the SEC’s Internet site (www.sec.gov).

¹Merck is providing certain 2014 and 2013 non-GAAP
information that excludes certain items because of the nature of these
items and the impact they have on the analysis of underlying business
performance and trends. Management believes that providing this
information enhances investors’ understanding of the company’s
performance. This information should be considered in addition to, but
not in lieu of, information prepared in accordance with GAAP. For
description of the items, see Tables 2a and 2b, including the related
footnotes, attached to this release.

² Net income attributable to Merck & Co., Inc.

³ 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 period.

⁴ Includes expenses for the amortization of intangible assets
recognized as a result of mergers and acquisitions, intangible asset
impairment charges and expense or income related to changes in the fair
value measurement of contingent consideration. Also includes merger
integration costs, as well as transaction and certain other costs
related to business acquisitions and divestitures.

⁵ Includes the estimated tax impact on the reconciling items.
In addition, amount for full-year 2014 includes a net benefit of $517
million recorded in connection with AstraZeneca’s option exercise, as
well as a benefit of approximately $300 million associated with a
capital loss generated in the first quarter. Amount for full-year 2013
also includes net benefits of approximately $325 million related to the
settlements of certain federal income tax issues.

MERCK & CO., INC. CONSOLIDATED STATEMENT OF INCOME – GAAP (AMOUNTS IN MILLIONS, EXCEPT PER SHARE FIGURES) (UNAUDITED) Table 1
	GAAP								GAAP

	4Q14			4Q13			% Change		Dec YTD 2014			Dec YTD 2013			% Change

Sales	$	10,482		$	11,319		-7	%	$	42,237		$	44,033		-4	%

Costs, Expenses and Other
Materials and production ⁽¹⁾		3,749			4,607		-19	%		16,768			16,954		-1	%
Marketing and administrative ⁽¹⁾		2,924			2,982		-2	%		11,606			11,911		-3	%
Research and development ⁽¹⁾		2,283			1,836		24	%		7,180			7,503		-4	%
Restructuring costs ⁽²⁾		349			565		-38	%		1,013			1,709		-41	%
Equity income from affiliates ⁽³⁾		(16	)		(53	)	-70	%		(257	)		(404	)	-36	%
Other (income) expense, net ^{(1) (4)}		(10,618	)		157		*			(11,356	)		815		*
Income Before Taxes		11,811			1,225		*			17,283			5,545		*
Income Tax Provision		4,484			410					5,349			1,028
Net Income		7,327			815		*			11,934			4,517		*
Less: Net Income Attributable to Noncontrolling Interests		11			34					14			113
Net Income Attributable to Merck & Co., Inc.	$	7,316		$	781		*		$	11,920		$	4,404		*
Earnings per Common Share Assuming Dilution	$	2.54		$	0.26		*		$	4.07		$	1.47		*

Average Shares Outstanding Assuming Dilution		2,880			2,959					2,928			2,996
Tax Rate ⁽⁵⁾		38.0	%		33.5	%				30.9	%		18.5	%


* 100% or greater

(1) Amounts include the impact of acquisition and
divestiture-related costs, restructuring costs and certain other
items. See accompanying tables for details.

(2) Represents separation and other related costs associated with
restructuring activities under the company’s formal restructuring
programs.

(3) Reflects the performance of the company’s joint ventures and
other equity method affiliates, including the Sanofi Pasteur MSD
partnership, as well as the AstraZeneca LP partnership until its
termination on June 30, 2014.

(4) Other (income) expense, net in the fourth quarter and full year
of 2014 includes an $11.2 billion gain on the divestiture of Merck’s
Consumer Care business and a $628 million loss on the extinguishment
of debt. In addition, other (income) expense, net for the full year
of 2014 includes a gain of $741 million related to AstraZeneca’s
option exercise, gains of $480 million on the divestiture of certain
ophthalmic products in several international markets, and gains of
$204 million related to the divestiture of the company’s Sirna
Therapeutics, Inc. subsidiary, as well as a $93 million goodwill
impairment charge related to the company’s joint venture with Supera
Farma Laboratorios S.A. Other (income) expense, net in 2013 reflects
approximately $140 million of exchange losses as a result of a
Venezuelan currency devaluation.

(5) The effective income tax rates for the fourth quarter and full
year of 2014 include the impact of the gain on the divestiture of
Merck’s Consumer Care business being taxed primarily at combined
U.S. federal and state tax rates. The effective income tax rates for
the fourth quarter and full year of 2014 also reflect the favorable
impact of tax legislation enacted in the fourth quarter of 2014. In
addition, the effective income tax rate for the full year of 2014
reflects a net benefit of $517 million recorded in connection with
AstraZeneca’s option exercise, as well as a benefit of approximately
$300 million associated with a capital loss generated in the first
quarter of 2014.

The effective income tax rate for the full year of 2013 reflects net
benefits from the settlements of certain federal income tax issues,
reductions in tax reserves upon expiration of applicable statute of
limitations and the favorable impact of tax legislation enacted in
the first quarter of 2013.

MERCK & CO., INC. CONSOLIDATED STATEMENT OF INCOME GAAP TO NON-GAAP RECONCILIATION FOURTH QUARTER 2014 (AMOUNTS IN MILLIONS, EXCEPT PER SHARE FIGURES) (UNAUDITED) Table 2a

	GAAP			Acquisition and Divestiture- Related Costs ⁽¹⁾		Restructuring Costs ⁽²⁾		Certain Other Items ⁽³⁾		Adjustment Subtotal					Non-GAAP


Sales	$	10,482													$	10,482

Costs, Expenses and Other
Materials and production		3,749		984		105					1,089					2,660
Marketing and administrative		2,924		81		57					138					2,786
Research and development		2,283		329		108					437					1,846
Restructuring costs		349				349					349					–
Equity income from affiliates		(16	)													(16	)
Other (income) expense, net		(10,618	)					(10,679	)		(10,679	)				61
Income Before Taxes		11,811		(1,394	)	(619	)	10,679			8,666					3,145
Taxes on Income		4,484									3,854		((4	))		630
Net Income		7,327									4,812					2,515
Less: Net Income Attributable to Noncontrolling Interests		11														11
Net Income Attributable to Merck & Co., Inc.	$	7,316								$	4,812				$	2,504
Earnings per Common Share Assuming Dilution	$	2.54													$	0.87

Average Shares Outstanding Assuming Dilution		2,880														2,880
Tax Rate		38.0	%													20.0	%

Merck is providing non-GAAP information that excludes certain items
because of the nature of these items and the impact they have on the
analysis of underlying business performance and trends. Management
believes that providing this information enhances investors’
understanding of the company’s performance. This information should
be considered in addition to, but not in lieu of, information
prepared in accordance with GAAP.

(1) Amounts included in materials and production costs reflect
expenses for the amortization of intangible assets recognized as a
result of mergers and acquisitions. Amounts included in marketing
and administrative expenses reflect merger integration costs, as
well as transaction and certain other costs related to business
acquisitions and divestitures. Amounts included in research and
development expenses reflect a $316 million charge resulting from an
increase in the fair value of a liability for contingent
consideration, as well as in-process research and development
(“IPR&D”) impairment charges of $13 million.

(2) Amounts primarily include employee separation costs and
accelerated depreciation associated with facilities to be closed or
divested related to actions under the company’s formal restructuring
programs.

(3) Included in other (income) expense, net is an $11.2 billion gain
on the divestiture of Merck’s Consumer Care business, an additional
gain of $84 million on the divestiture of certain ophthalmic
products in several international markets and a $628 million loss on
the extinguishment of debt.

(4) Represents the estimated tax impact on the reconciling items.

MERCK & CO., INC. CONSOLIDATED STATEMENT OF INCOME GAAP TO NON-GAAP RECONCILIATION FULL YEAR 2014 (AMOUNTS IN MILLIONS, EXCEPT PER SHARE FIGURES) (UNAUDITED) Table 2b

	GAAP			Acquisition and Divestiture- Related Costs ⁽¹⁾		Restructuring Costs ⁽²⁾		Certain Other Items ⁽³⁾		Adjustment Subtotal					Non-GAAP


Sales	$	42,237													$	42,237

Costs, Expenses and Other
Materials and production		16,768		5,254		482					5,736					11,032
Marketing and administrative		11,606		234		200		193			627					10,979
Research and development		7,180		365		283					648					6,532
Restructuring costs		1,013				1,013					1,013					–
Equity income from affiliates		(257	)													(257	)
Other (income) expense, net		(11,356	)	93				(11,811	)		(11,718	)				362
Income Before Taxes		17,283		(5,946	)	(1,978	)	11,618			3,694					13,589
Taxes on Income		5,349									2,045		((4	))		3,304
Net Income		11,934									1,649					10,285
Less: Net Income Attributable to Noncontrolling Interests		14		(56	)						(56	)				70
Net Income Attributable to Merck & Co., Inc.	$	11,920								$	1,705				$	10,215
Earnings per Common Share Assuming Dilution	$	4.07													$	3.49

Average Shares Outstanding Assuming Dilution		2,928														2,928
Tax Rate		30.9	%													24.3	%

(1) Amounts included in materials and production costs reflect
expenses of $4.2 billion for the amortization of intangible assets
recognized as a result of mergers and acquisitions, as well as $1.1
billion of impairment charges on product intangibles. Amounts
included in marketing and administrative expenses reflect merger
integration costs, as well as transaction and certain other costs
related to business acquisitions and divestitures. Amounts included
in research and development expenses reflect a charge of $316
million resulting from an increase in the fair value of a liability
for contingent consideration, as well as in-process research and
development (“IPR&D”) impairment charges of $49 million primarily
related to the company’s joint venture with Supera. Amount included
in other (income) expense, net represents a goodwill impairment
charge related to the joint venture with Supera. Amount included in
net income attributable to non-controlling interests represents the
portion of intangible asset and goodwill impairment charges related
to the joint venture with Supera that are attributable to
non-controlling interests.

(3) Amount included in marketing and administrative expenses
represents an additional year of expense related to the healthcare
reform fee in accordance with final regulations issued in the third
quarter by the Internal Revenue Service. Included in other (income)
expense, net is an $11.2 billion gain on the divestiture of Merck’s
Consumer Care business, a $741 million gain related to AstraZeneca’s
option exercise, gains of $480 million on the divestiture of certain
ophthalmic products in several international markets and a $628
million loss on the extinguishment of debt.

(4) Represents the estimated tax impact on the reconciling items,
including a net benefit of approximately $517 million recorded in
connection with AstraZeneca’s option exercise, as well as a benefit
of approximately $300 million associated with a capital loss
generated in the first quarter.

MERCK & CO., INC. FRANCHISE / KEY PRODUCT SALES (AMOUNTS IN MILLIONS) Table 3

	2014										2013										% Change	% Change
	1Q		2Q		3Q		4Q		Full Year		1Q		2Q		3Q		4Q		Full Year
																					4Q	Full Year

TOTAL SALES ⁽¹⁾	$	10,264	$	10,934	$	10,557	$	10,482	$	42,237	$	10,671	$	11,010	$	11,032	$	11,319	$	44,033	-7	-4
PHARMACEUTICAL		8,451		9,087		9,134		9,370		36,042		8,891		9,310		9,475		9,760		37,437	-4	-4

Primary Care and Women’s Health
Cardiovascular
Zetia		611		717		660		662		2,650		629		650		662		716		2,658	-8	0
Vytorin		361		417		369		370		1,516		394		417		396		436		1,643	-15	-8

Diabetes
Januvia		858		1,058		933		1,082		3,931		884		1,072		927		1,121		4,004	-3	-2
Janumet		476		519		505		570		2,071		409		474		442		503		1,829	13	13

General Medicine & Women’s Health
NuvaRing		168		178		186		191		723		151		171		170		193		686	-1	5
Implanon / Nexplanon		102		119		158		123		502		84		102		96		120		403	2	25
Dulera		102		103		124		132		460		68		79		82		95		324	39	42
Follistim AQ		110		102		97		102		412		122		134		124		101		481	1	-14

Hospital and Specialty

Hepatitis
PegIntron		112		103		84		81		381		126		142		104		124		496	-34	-23
Victrelis		59		46		27		21		153		110		116		121		81		428	-74	-64

HIV
Isentress		390		453		412		418		1,673		362		412		427		442		1,643	-5	2

Acute Care
Cancidas		166		156		183		175		681		162		163		151		183		660	-4	3
Invanz		114		134		141		139		529		110		120		130		128		488	9	8
Noxafil		74		98		107		122		402		65		71		75		98		309	25	30
Bridion		73		82		90		95		340		63		69		75		82		288	15	18
Primaxin		71		81		91		86		329		84		85		88		79		335	9	-2

Immunology
Remicade		604		607		604		557		2,372		549		527		574		620		2,271	-10	4
Simponi		157		174		170		188		689		108		120		126		146		500	29	38

Other
Cosopt / Trusopt		99		100		34		25		257		105		103		104		103		416	-76	-38

Oncology

Emend		122		144		136		151		553		116		135		123		134		507	13	9
Temodar		83		93		88		86		350		216		219		162		111		708	-23	-51
Keytruda		0		0		4		50		55		0		0		0		0		0	*	*

Diversified Brands

Respiratory
Nasonex		312		258		261		268		1,099		385		325		297		327		1,335	-18	-18
Singulair		271		284		218		319		1,092		337		281		280		298		1,196	7	-9
Clarinex		62		69		49		52		232		61		64		54		55		235	-6	-1

Other
Cozaar / Hyzaar		205		214		195		192		806		267		255		238		246		1,006	-22	-20
Arcoxia		128		141		132		118		519		121		121		112		131		484	-9	7
Fosamax		123		121		114		112		470		137		144		140		139		560	-20	-16
Propecia		74		58		66		67		264		68		67		71		77		283	-13	-7
Zocor		64		69		61		64		258		82		74		65		79		301	-19	-14
Remeron		50		40		47		56		193		52		53		44		56		206	-1	-6

Vaccines

Gardasil		383		409		590		356		1,738		390		383		665		394		1,831	-10	-5
ProQuad, M-M-R II and Varivax		280		326		421		366		1,394		272		339		421		273		1,306	34	7
Zostavax		142		156		181		285		765		168		141		185		264		758	8	1
Pneumovax 23		101		102		197		346		746		111		108		193		241		653	44	14
RotaTeq		169		147		174		169		659		162		144		201		129		636	31	4

Other Pharmaceutical ⁽²⁾		1,175		1,209		1,225		1,174		4,778		1,361		1,430		1,350		1,435		5,570	-18	-14

ANIMAL HEALTH		813		872		885		885		3,454		840		851		800		871		3,362	2	3

CONSUMER CARE ⁽³⁾		546		583		401		16		1,547		571		490		443		390		1,894	-96	-18
Claritin OTC		170		153		110		1		434		177		78		123		92		471	-99	-8

Other Revenues ⁽⁴⁾		454		392		137		211		1,194		369		359		314		298		1,340	-29	-11
Astra		147		316		1		0		465		262		245		220		193		920	*	-50



* 100% or greater

Sum of quarterly amounts may not equal year-to-date amounts due to rounding.

⁽¹⁾ Only select products are shown.

⁽²⁾ Includes Pharmaceutical products not individually shown above. Other Vaccines sales included in Other Pharmaceutical were $98 million, $76 million, $116 million and $88 million for the first, second, third and fourth quarters of 2014, respectively. Other Vaccines sales included in Other Pharmaceutical were $53 million, $86 million, $127 million, and $101 million for the first, second, third, and fourth quarters of 2013, respectively.

(3) On October 1, 2014, the company divested the Consumer Care business to Bayer. Fourth quarter 2014 reflect sales in Mexico and Korea. These markets had not yet received regulatory approval of the divestiture.

(4) Other revenues are comprised primarily of alliance revenue, third-party manufacturing sales and miscellaneous corporate revenues, including revenue hedging activities. On October 1, 2013, the company divested a substantial portion of its third-party manufacturing sales. 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, the company no longer records supply sales for these products. In addition, Other revenues in the fourth quarter and full year of 2013 reflect $50 million of revenue for the out-license of a pipeline compound.