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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File No. 1-6571
Merck & Co., Inc.
(Exact name of registrant as specified in its charter)
New Jersey 22-1918501
(State or other jurisdiction of incorporation)
(I.R.S. Employer Identification No.)
126 East Lincoln Avenue
Rahway New Jersey 07065
(Address of principal executive offices) (zip code)
(Registrant’s telephone number, including area code) (908) 740-4000
Not Applicable
(Former name, former address and former fiscal year, if changed since last report.)
Securities Registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock ($0.50 par value) MRK New York Stock Exchange
0.500% Notes due 2024 MRK 24 New York Stock Exchange
1.875% Notes due 2026 MRK/26 New York Stock Exchange
2.500% Notes due 2034 MRK/34 New York Stock Exchange
1.375% Notes due 2036 MRK 36A New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes     No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes     No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No 
The number of shares of common stock outstanding as of the close of business on July 31, 2022: 2,533,279,845





Table of Contents





Part I - Financial Information
Item 1. Financial Statements
MERCK & CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited, $ in millions except per share amounts)
 
  Three Months Ended
June 30,
Six Months Ended
June 30,
  2022 2021 2022 2021
Sales $ 14,593  $ 11,402  $ 30,494  $ 22,029 
Costs, Expenses and Other
Cost of sales 4,216  3,104  9,596  6,303 
Selling, general and administrative 2,512  2,281  4,834  4,468 
Research and development 2,798  4,321  5,374  6,732 
Restructuring costs 142  82  194  380 
Other (income) expense, net 438  (103) 1,148  (558)
  10,106  9,685  21,146  17,325 
Income from Continuing Operations Before Taxes 4,487  1,717  9,348  4,704 
Taxes on Income from Continuing Operations 538  503  1,092  741 
Net Income from Continuing Operations 3,949  1,214  8,256  3,963 
Less: Net Income Attributable to Noncontrolling Interests
Net Income from Continuing Operations Attributable to Merck & Co., Inc. 3,944  1,213  8,254  3,958 
Income from Discontinued Operations, Net of Taxes and Amounts Attributable to Noncontrolling Interests —  332  —  766 
Net Income Attributable to Merck & Co., Inc. $ 3,944  $ 1,545  $ 8,254  $ 4,724 
Basic Earnings per Common Share Attributable to Merck & Co., Inc. Common Shareholders:
Income from Continuing Operations $ 1.56  $ 0.48  $ 3.26  $ 1.56 
Income from Discontinued Operations —  0.13  —  0.30 
Net Income $ 1.56  $ 0.61  $ 3.26  $ 1.87 
Earnings per Common Share Assuming Dilution Attributable to Merck & Co., Inc. Common Shareholders:
Income from Continuing Operations $ 1.55  $ 0.48  $ 3.25  $ 1.56 
Income from Discontinued Operations —  0.13  —  0.30 
Net Income $ 1.55  $ 0.61  $ 3.25  $ 1.86 
 
MERCK & CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited, $ in millions)
 
  Three Months Ended
June 30,
Six Months Ended
June 30,
  2022 2021 2022 2021
Net Income Attributable to Merck & Co., Inc. $ 3,944  $ 1,545  $ 8,254  $ 4,724 
Other Comprehensive Income Net of Taxes:
Net unrealized gain on derivatives, net of reclassifications 183  10  246  240 
Benefit plan net gain and prior service credit, net of amortization
246  1,403  278  1,484 
Cumulative translation adjustment
(387) 132  (422) (167)
  42  1,545  102  1,557 
Comprehensive Income Attributable to Merck & Co., Inc. $ 3,986  $ 3,090  $ 8,356  $ 6,281 
 The accompanying notes are an integral part of these condensed consolidated financial statements.
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MERCK & CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited, $ in millions except per share amounts)
 
June 30, 2022 December 31, 2021
Assets
Current Assets
Cash and cash equivalents
$ 9,675  $ 8,096 
Short-term investments 453  — 
Accounts receivable (net of allowance for doubtful accounts of $82 in 2022
 and $62 in 2021)
9,643  9,230 
Inventories (excludes inventories of $2,764 in 2022 and $2,194 in 2021
classified in Other assets - see Note 7)
5,535  5,953 
Other current assets
6,810  6,987 
Total current assets 32,116  30,266 
Investments 238  370 
Property, Plant and Equipment, at cost, net of accumulated depreciation of $17,798
in 2022 and $18,192 in 2021
20,059  19,279 
Goodwill 21,213  21,264 
Other Intangibles, Net 22,497  22,933 
Other Assets 10,972  11,582 
  $ 107,095  $ 105,694 
Liabilities and Equity
Current Liabilities
Loans payable and current portion of long-term debt
$ 2,979  $ 2,412 
Trade accounts payable
3,482  4,609 
Accrued and other current liabilities
13,501  13,859 
Income taxes payable
1,438  1,224 
Dividends payable
1,768  1,768 
Total current liabilities 23,168  23,872 
Long-Term Debt 28,684  30,690 
Deferred Income Taxes 2,974  3,441 
Other Noncurrent Liabilities 8,951  9,434 
Merck & Co., Inc. Stockholders’ Equity
Common stock, $0.50 par value
Authorized - 6,500,000,000 shares
Issued - 3,577,103,522 shares in 2022 and 2021
1,788  1,788 
Other paid-in capital
44,115  44,238 
Retained earnings
58,437  53,696 
Accumulated other comprehensive loss
(4,327) (4,429)
100,013  95,293 
Less treasury stock, at cost:
1,043,894,068 shares in 2022 and 1,049,499,023 shares in 2021
56,770  57,109 
Total Merck & Co., Inc. stockholders’ equity 43,243  38,184 
Noncontrolling Interests 75  73 
Total equity 43,318  38,257 
  $ 107,095  $ 105,694 
The accompanying notes are an integral part of this condensed consolidated financial statement.
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MERCK & CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, $ in millions)
 
  Six Months Ended
June 30,
  2022 2021
Cash Flows from Operating Activities of Continuing Operations
Net income from continuing operations $ 8,256  $ 3,963 
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities of continuing operations:
Amortization 1,163  871 
Depreciation 895  749 
Intangible asset impairment charges 23  — 
Loss (income) from investments in equity securities, net 991  (854)
Charge for the acquisition of Pandion Therapeutics, Inc. —  1,556 
Deferred income taxes
(600) 29 
Share-based compensation
257  243 
Other
776  328 
Net changes in assets and liabilities
(2,698) (3,655)
Net Cash Provided by Operating Activities of Continuing Operations 9,063  3,230 
Cash Flows from Investing Activities of Continuing Operations
Capital expenditures (2,113) (2,068)
Purchases of securities and other investments (705) (1)
Proceeds from sales of securities and other investments 374  386 
Acquisition of Pandion Therapeutics, Inc., net of cash acquired —  (1,554)
Other acquisitions, net of cash acquired —  (90)
Other 194  16 
Net Cash Used in Investing Activities of Continuing Operations (2,250) (3,311)
Cash Flows from Financing Activities of Continuing Operations
Net change in short-term borrowings —  (3,983)
Payments on debt (1,250) (1,153)
Distribution from Organon & Co. —  9,000 
Purchases of treasury stock —  (239)
Dividends paid to stockholders (3,515) (3,318)
Proceeds from exercise of stock options 109  51 
Other (207) (194)
Net Cash (Used in) Provided by Financing Activities of Continuing Operations (4,863) 164 
Cash Flows from Discontinued Operations
Net cash provided by operating activities —  1,051 
Net cash used in investing activities —  (134)
Net cash used in financing activities —  (504)
Net Cash Flows Provided by Discontinued Operations —  413 
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash (364) (19)
Net Increase in Cash, Cash Equivalents and Restricted Cash 1,586  477 
Cash, Cash Equivalents and Restricted Cash at Beginning of Year (includes restricted cash of
$71 and $103 at January 1, 2022 and 2021, respectively, included in Other current assets)
8,167  8,153 
Cash, Cash Equivalents and Restricted Cash at End of Period (includes restricted cash of $78
and $55 at June 30, 2022 and 2021, respectively, included in Other current assets)
$ 9,753  $ 8,630 
The accompanying notes are an integral part of this condensed consolidated financial statement.
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Notes to Condensed Consolidated Financial Statements (unaudited)

1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Merck & Co., Inc. (Merck or the Company) have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and disclosures required by accounting principles generally accepted in the United States (U.S.) (GAAP) for complete consolidated financial statements are not included herein. These interim statements should be read in conjunction with the audited financial statements and notes thereto included in Merck’s Form 10-K filed on February 25, 2022.
The results of operations of any interim period are not necessarily indicative of the results of operations for the full year. In the Company’s opinion, all adjustments necessary for a fair statement of these interim statements have been included and are of a normal and recurring nature.
Reclassifications — Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
Spin-Off of Organon & Co.
On June 2, 2021, Merck completed the spin-off of products from its women’s health, biosimilars and established brands businesses into a new, independent, publicly traded company named Organon & Co. (Organon) through a distribution of Organon’s publicly traded stock to Company shareholders. The distribution is expected to qualify and has been treated as tax-free to the Company and its shareholders for U.S. federal income tax purposes. The established brands included in the transaction consisted of dermatology, non-opioid pain management, respiratory, select cardiovascular products, as well as the rest of Merck’s diversified brands franchise. Merck’s existing research pipeline programs continue to be owned and developed within Merck as planned. The historical results of the businesses that were contributed to Organon in the spin-off have been reflected as discontinued operations in the Company’s consolidated financial statements through the date of the spin-off (see Note 2).
Recently Adopted Accounting Standards
In August 2020, the Financial Accounting Standards Board (FASB) issued amended guidance on the accounting for convertible instruments and contracts in an entity’s own equity. The guidance removes the separation model for convertible debt instruments and preferred stock, amends requirements for conversion options to be classified in equity as well as amends diluted earnings per share (EPS) calculations for certain convertible debt instruments. The Company adopted the new guidance on January 1, 2022 using a modified retrospective approach. There was no impact to the Company’s consolidated financial statements upon adoption.
In November 2021, the FASB issued new guidance to increase the transparency of transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy. The guidance requires annual disclosures of such transactions to include the nature of the transactions and the significant terms and conditions, the accounting treatment and the impact to a company’s financial statements. The Company adopted the new guidance on January 1, 2022 on a prospective basis. There was no material impact to the Company’s consolidated financial statements upon adoption.
Recently Issued Accounting Standards Not Yet Adopted
In March 2020, the FASB issued optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting and subsequently issued clarifying amendments. The guidance provides optional expedients and exceptions for accounting for contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued because of reference rate reform. The optional guidance is effective upon issuance and can be applied on a prospective basis at any time between January 1, 2020 through December 31, 2022. The Company is currently evaluating the impact of adoption on its consolidated financial statements. The Company has evaluated all material contracts that may be affected by LIBOR cessation, including debt-related contracts, leases, business development and licensing arrangements, royalty and other agreements. The Company has amended certain agreements and continues to review any remaining agreements for potential impacts. With regard to debt-related exposures in particular, the Company’s four remaining interest rate swaps linked to LIBOR will mature in September 2022. The Company will transition its LIBOR-based debt to an alternative reference rate upon LIBOR discontinuance. Based on its evaluation thus far, the Company does not anticipate a material impact to its consolidated financial statements as a result of reference rate reform.
In October 2021, the FASB issued amended guidance that requires acquiring entities to recognize and measure contract assets and liabilities in a business combination in accordance with existing revenue recognition guidance. The amended guidance is effective for interim and annual periods in 2023 and is to be applied prospectively. Early adoption is permitted on a retrospective basis to the beginning of the fiscal year of adoption. The adoption of this guidance will not have an impact on the
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Notes to Condensed Consolidated Financial Statements (unaudited)
Company’s consolidated financial statements for prior acquisitions; however, the impact in future periods will be dependent upon the contract assets and contract liabilities acquired in future business combinations.
In June 2022, the FASB issued guidance related to the fair value measurement of an equity security subject to contractual restrictions that prohibit the sale of the equity security. The new guidance also introduces new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value. The amended guidance is effective for interim and annual periods in 2024 and is to be applied prospectively. Early adoption is permitted for both interim and annual periods. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
2. Spin-Off of Organon & Co.
On June 2, 2021, Merck completed the spin-off of Organon through a distribution of Organon’s publicly traded stock to Company shareholders. In connection with the spin-off, each Merck shareholder received one tenth of a share of Organon’s common stock for each share of Merck common stock held by such shareholder. The distribution is expected to qualify and has been treated as tax free to Merck and its shareholders for U.S. federal income tax purposes. Indebtedness of $9.5 billion principal amount, consisting of term loans and senior notes, was issued in 2021 in connection with the spin-off and assumed by Organon. Merck is no longer the obligor of any Organon debt or financing arrangements. Cash proceeds of $9.0 billion were distributed by Organon to Merck in connection with the spin-off.
Also in connection with the spin-off, Merck and Organon entered into a separation and distribution agreement and also entered into various other agreements to effect the spin-off and provide a framework for the relationship between Merck and Organon after the spin-off, including a transition services agreement (TSA), manufacturing and supply agreements (MSAs), trademark license agreements, intellectual property license agreements, an employee matters agreement, a tax matters agreement and certain other commercial agreements. Under the TSA, Merck is providing Organon various services and, similarly, Organon is providing Merck various services. The provision of services under the TSA generally will terminate within 25 months following the spin-off; however, the provision of certain services has been extended to 31 months. Merck and Organon also entered into a series of interim operating agreements pursuant to which in various jurisdictions where Merck held licenses, permits and other rights in connection with marketing, import and/or distribution of Organon products prior to the separation, Merck is continuing to market, import and distribute such products until such time as the relevant licenses and permits are transferred to Organon. Under such interim operating agreements and in accordance with the separation and distribution agreement, Merck is continuing operations in the affected markets on behalf of Organon, with Organon receiving all of the economic benefits and burdens of such activities. Additionally, Merck and Organon entered into a number of MSAs pursuant to which Merck is (a) manufacturing and supplying certain active pharmaceutical ingredients for Organon, (b) manufacturing and supplying certain formulated pharmaceutical products for Organon, and (c) packaging and labeling certain finished pharmaceutical products for Organon. Similarly, Organon and Merck entered into a number of MSAs pursuant to which Organon is (a) manufacturing and supplying certain formulated pharmaceutical products for Merck, and (b) packaging and labeling certain finished pharmaceutical products for Merck. The terms of the MSAs range in initial duration from four years to ten years.
Amounts included in the condensed consolidated statement of income for the above MSAs include sales of $95 million and $194 million and related cost of sales of $103 million and $208 million for the three and six months ended June 30, 2022, respectively. Amounts included in the condensed consolidated statement of income for the TSAs were immaterial for the three and six months ended June 30, 2022. The amounts included in the condensed consolidated statement of income for the MSAs and TSAs in the three and six months ended June 30, 2021 were immaterial.
The amounts due from Organon under all of the above agreements were $649 million and $964 million at June 30, 2022 and December 31, 2021, respectively, and are reflected in Other current assets. The amounts due to Organon under these agreements were $357 million and $400 million at June 30, 2022 and December 31, 2021, respectively, and are included in Accrued and other current liabilities.
The results of the women’s health, biosimilars and established brands businesses (previously included in the Pharmaceutical segment) that were contributed to Organon in the spin-off, as well as interest expense related to the debt issuance in 2021, have been reflected as discontinued operations in the Company’s condensed consolidated statement of income as Income from Discontinued Operations, Net of Taxes and Amounts Attributable to Noncontrolling Interests for periods prior to the spin-off on June 2, 2021. Merck incurred separation costs of $307 million and $556 million for the three and six months ended June 30, 2021, respectively, related to the spin-off of Organon, which are also included in Income from Discontinued Operations, Net of Taxes and Amounts Attributable to Noncontrolling Interests. These costs primarily relate to professional fees for separation activities within finance, tax, legal and information technology functions, as well as investment banking fees.

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Notes to Condensed Consolidated Financial Statements (unaudited)
Details of Income from Discontinued Operations, Net of Taxes and Amounts Attributable to Noncontrolling Interests are as follows:
  Three Months Ended June 30, Six Months Ended June 30,
($ in millions)
2021 (1)
Sales $ 1,059  $ 2,512 
Costs, Expenses and Other
Cost of sales 318  789 
Selling, general and administrative 431  877 
Research and development 50  103 
Restructuring costs — 
Other (income) expense, net (23) (15)
776  1,755 
Income from discontinued operations before taxes 283  757 
Income tax benefit (49) (12)
Income from discontinued operations, net of taxes 332  769 
Less: Income of discontinued operations attributable to noncontrolling interests — 
$ 332  $ 766 
(1)    Reflects amounts through the June 2, 2021 spin-off date.
3.    Acquisitions, Research Collaborations and License Agreements
The Company continues to pursue acquisitions and the establishment of external alliances such as research collaborations and licensing agreements to complement its internal research capabilities. These arrangements often include upfront payments, as well as expense reimbursements or payments to the third party, and milestone, royalty or profit share arrangements, contingent upon the occurrence of certain future events linked to the success of the asset in development. The Company also reviews its marketed products and pipeline to examine candidates which may provide more value through out-licensing and, as part of its portfolio assessment process, may also divest certain assets. Pro forma financial information for acquired businesses is not presented if the historical financial results of the acquired entity are not significant when compared with the Company’s financial results.
In July 2022, Merck and Orion Corporation (Orion) announced a global co-development and co-commercialization agreement for Orion’s investigational candidate ODM-208 (MK-5684) and other drugs targeting cytochrome P450 11A1 (CYP11A1), an enzyme important in steroid production. ODM-208 is an oral, non-steroidal inhibitor of CYP11A1 currently being evaluated in a Phase 2 clinical trial for the treatment of patients with metastatic castration-resistant prostate cancer. Merck made an upfront payment to Orion of $290 million, which will be recorded in Research and development expenses in the third quarter of 2022. Orion will be responsible for the manufacture of clinical and commercial supply of ODM-208. In addition, the contract provides both parties with an option to convert the initial co-development and co-commercialization agreement into a global exclusive license to Merck. If the option is exercised, Merck would assume full responsibility for all past development and commercialization expenses associated with the program since inception of the agreement, as well as all future development and commercialization expenses. In addition, Orion would be eligible to receive milestone payments associated with progress in the development and commercialization of ODM-208 as well as tiered double-digit royalties on sales if the product is approved.
Also in July 2022, Merck and Sichuan Kelun-Biotech Biopharmaceutical Co., Ltd. (Kelun-Biotech) closed a license and collaboration agreement in which Merck gained exclusive worldwide rights for the development, manufacture and commercialization of an investigational antibody drug conjugate (ADC) (MK-1200) for the treatment of solid tumors. Under the terms of the agreement, Merck and Kelun-Biotech will collaborate on the early clinical development of the investigational ADC. Merck will make an upfront payment of $35 million, which will be recorded in Research and development expenses in the third quarter of 2022. Kelun-Biotech is also eligible to receive future contingent milestone payments aggregating up to $82 million in developmental milestones, $334 million in regulatory milestones, and $485 million in sales-based milestones. The agreement also provides for Merck to pay tiered royalties ranging from a mid-single-digit rate to a low-double-digit rate on future net sales.
In May 2022, in connection with an existing arrangement, Merck exercised its option to obtain an exclusive license outside of China for the development, manufacture and commercialization of Kelun-Biotech’s trophoblast antigen 2 (TROP2)-targeting ADC programs, including its lead compound, SKB-264 (MK-2870). SKB-264 is currently being evaluated in Phase 2 trials for non-small-cell lung cancer and advanced solid tumors. Under the terms of the agreement, Merck and Kelun-Biotech
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Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
will collaborate on certain early clinical development plans, including evaluating the potential of SKB-264 as a monotherapy and in combination with Keytruda (pembrolizumab) for advanced solid tumors. Upon option exercise, Merck made a payment of $30 million, which was recorded in Research and development expenses in the second quarter of 2022, and agreed to make additional payments of $30 million upon completion of specified project activities and $25 million upon technology transfer. Merck also agreed to make quarterly payments in 2022 and 2023 aggregating $101 million to fund Kelun-Biotech’s ongoing research and development activities. In addition, Kelun-Biotech is eligible to receive future contingent milestone payments (which includes all program compounds) aggregating up to $90 million in developmental milestones, $290 million in first commercial sale milestones, and $780 million in sales-based milestones. The agreement also provides for Merck to pay tiered royalties ranging from a mid-single-digit rate to a low-double-digit rate on future net sales.
In April 2021, Merck acquired Pandion Therapeutics, Inc. (Pandion), a clinical-stage biotechnology company developing novel therapeutics designed to address the unmet needs of patients living with autoimmune diseases. Pandion is advancing a pipeline of precision immune modulators targeting critical immune control nodes. Total consideration paid of $1.9 billion included $147 million of transaction costs primarily comprised of share-based compensation payments to settle equity awards. The transaction was accounted for as an acquisition of an asset. Merck recorded net assets of $156 million (primarily cash) and Research and development expenses of $1.7 billion in the second quarter and first six months of 2021 related to the transaction. There are no future contingent payments associated with the acquisition.
In January 2021, Merck entered into an exclusive license and research collaboration agreement with Artiva Biotherapeutics, Inc. (Artiva) to discover, develop and manufacture CAR-NK cells that target certain solid tumors using Artiva’s proprietary platform. Merck and Artiva agreed to engage in up to three different research programs, each covering a collaboration target. Merck has sole responsibility for all development and commercialization activities (including regulatory filing and approval). Under the terms of the agreement, Merck made an upfront payment of $30 million, which was included in Research and development expenses in the first six months of 2021, for license and other rights for the first two collaboration targets and agreed to make another upfront payment of $15 million for license and other rights for the third collaboration target when it is selected by Merck and accepted by Artiva. In addition, Artiva is eligible to receive future contingent milestone payments (which span all three collaboration targets), aggregating up to: $217.5 million in developmental milestones, $570 million in regulatory milestones, and $1.05 billion in sales-based milestones. The agreement also provides for Merck to pay tiered royalties ranging from 7% to 14% on future sales.
As part of Merck’s 2020 acquisition of OncoImmune, Merck obtained MK-7110, a therapeutic candidate that was being evaluated for the treatment of patients hospitalized with COVID-19. In 2021, Merck received feedback from the U.S. Food and Drug Administration (FDA) that additional data would be needed to support a potential Emergency Use Authorization application and therefore the Company did not expect MK-7110 would become available until the first half of 2022. Given this timeline and the technical, clinical and regulatory uncertainties, the availability of a number of medicines for patients hospitalized with COVID-19, and the need to concentrate Merck’s resources on accelerating the development and manufacture of the most viable therapeutics and vaccines, Merck decided to discontinue development of MK-7110 for the treatment of COVID-19. Due to the discontinuation, the Company recorded charges of $37 million and $207 million in the second quarter and first six months of 2021, respectively, which are reflected in Cost of sales and relate to fixed assets and materials written off, as well as the recognition of liabilities for purchase commitments.
4.    Collaborative Arrangements
Merck has entered into collaborative arrangements that provide the Company with varying rights to develop, produce and market products together with its collaborative partners. Both parties in these arrangements are active participants and exposed to significant risks and rewards dependent on the commercial success of the activities of the collaboration. Merck’s more significant collaborative arrangements are discussed below.
AstraZeneca
In 2017, Merck and AstraZeneca PLC (AstraZeneca) entered into a global strategic oncology collaboration to co-develop and co-commercialize AstraZeneca’s Lynparza (olaparib) for multiple cancer types. Independently, Merck and AstraZeneca will develop and commercialize Lynparza in combinations with their respective PD-1 and PD-L1 medicines, Keytruda and Imfinzi. The companies are also jointly developing and commercializing AstraZeneca’s Koselugo (selumetinib) for multiple indications. Under the terms of the agreement, AstraZeneca and Merck will share the development and commercialization costs for Lynparza and Koselugo monotherapy and non-PD-L1/PD-1 combination therapy opportunities.
Profits from Lynparza and Koselugo product sales generated through monotherapies or combination therapies are shared equally. AstraZeneca is the principal on Lynparza and Koselugo sales transactions. Merck records its share of Lynparza and Koselugo product sales, net of cost of sales and commercialization costs, as alliance revenue and its share of development costs associated with the collaboration as part of Research and development expenses. Reimbursements received from AstraZeneca for research and development expenses are recognized as reductions to Research and development costs.
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Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
As part of the agreement, Merck made an upfront payment to AstraZeneca and also made payments over a multi-year period for certain license options. In addition, the agreement provides for contingent payments from Merck to AstraZeneca related to the successful achievement of sales-based and regulatory milestones.
In the first quarter of 2022, Merck determined it was probable that sales of Lynparza in the future would trigger a $600 million sales-based milestone payment from Merck to AstraZeneca. Accordingly, Merck recorded a $600 million liability and a corresponding increase to the intangible asset related to Lynparza. Merck also recognized $250 million of cumulative amortization catch-up expense related to the recognition of this milestone in the first quarter of 2022. In the first six months of 2022, Merck made a sales-based milestone payment to AstraZeneca (which had been previously accrued for) of $400 million. As of June 30, 2022, sales-based milestone payments accrued but not yet paid totaled $600 million. Potential future sales-based milestone payments of $2.1 billion have not yet been accrued as they are not deemed by the Company to be probable at this time. In the first six months of 2022, Lynparza received a regulatory approval triggering a capitalized milestone payment of $175 million from Merck to AstraZeneca. Potential future regulatory milestone payments of $1.3 billion remain under the agreement.
The intangible asset balance related to Lynparza (which includes capitalized sales-based and regulatory milestone payments) was $1.5 billion at June 30, 2022 and is included in Other Intangibles, Net. The amount is being amortized over its estimated useful life through 2028 as supported by projected future cash flows, subject to impairment testing.
Summarized financial information related to this collaboration is as follows:
Three Months Ended
June 30,
Six Months Ended
June 30,
($ in millions) 2022 2021 2022 2021
Alliance revenue - Lynparza $ 275  $ 248  $ 541  $ 475 
Alliance revenue - Koselugo 24  33  14 
Total alliance revenue $ 299  $ 256  $ 574  $ 489 
Cost of sales (1)
62  42  361  84 
Selling, general and administrative 46  43  90  83 
Research and development 25  31  51  60 
($ in millions) June 30, 2022 December 31, 2021
Receivables from AstraZeneca included in Other current assets
$ 300  $ 271 
Payables to AstraZeneca included in Trade accounts payable and Accrued and other current liabilities (2)
12  415 
Payables to AstraZeneca included in Other Noncurrent Liabilities (2)
600  — 
(1) Represents amortization of capitalized milestone payments. Amount in the first six months of 2022 includes $250 million of cumulative amortization catch-up expense as noted above.
(2) Includes accrued milestone payments.
Eisai
In 2018, Merck and Eisai Co., Ltd. (Eisai) announced a strategic collaboration for the worldwide co-development and co-commercialization of Lenvima (lenvatinib), an orally available tyrosine kinase inhibitor discovered by Eisai. Under the agreement, Merck and Eisai will develop and commercialize Lenvima jointly, both as monotherapy and in combination with Keytruda. Eisai records Lenvima product sales globally (Eisai is the principal on Lenvima sales transactions) and Merck and Eisai share applicable profits equally. Merck records its share of Lenvima product sales, net of cost of sales and commercialization costs, as alliance revenue. Expenses incurred during co-development are shared by the two companies in accordance with the collaboration agreement and reflected in Research and development expenses. Certain expenses incurred solely by Merck or Eisai are not shareable under the collaboration agreement, including costs incurred in excess of agreed upon caps and costs related to certain combination studies of Keytruda and Lenvima.
Under the agreement, Merck made an upfront payment to Eisai and also made payments over a multi-year period for certain option rights (of which the final $125 million option payment was made in March 2021). In addition, the agreement provides for contingent payments from Merck to Eisai related to the successful achievement of sales-based and regulatory milestones. In the first six months of 2022, Merck made sales-based milestone payments to Eisai (which had been previously accrued for) aggregating $600 million. Potential future sales-based milestone payments of $2.6 billion have not yet been accrued as they are not deemed by the Company to be probable at this time. In the first six months of 2022, Lenvima received a regulatory approval triggering a capitalized milestone payment of $25 million from Merck to Eisai. In July 2022, Merck made
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Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
an additional $25 million capitalized regulatory approval milestone payment, which was accrued for as of June 30, 2022. There are no regulatory milestone payments remaining under the agreement.
The intangible asset balance related to Lenvima (which includes capitalized sales-based and regulatory milestone payments) was $920 million at June 30, 2022 and is included in Other Intangibles, Net. The amount is being amortized over its estimated useful life through 2026 as supported by projected future cash flows, subject to impairment testing.
Summarized financial information related to this collaboration is as follows:
Three Months Ended
June 30,
Six Months Ended
June 30,
($ in millions) 2022 2021 2022 2021
Alliance revenue - Lenvima $ 231  $ 181  $ 459  $ 310 
Cost of sales (1)
53  47  106  94 
Selling, general and administrative 42  31  73  54 
Research and development 47  57  104  121 
($ in millions) June 30, 2022 December 31, 2021
Receivables from Eisai included in Other current assets
$ 247  $ 200 
Payables to Eisai included in Accrued and other current liabilities (2)
25  625 
(1) Represents amortization of capitalized milestone payments.
(2) Includes accrued milestone payments.
Bayer AG
In 2014, the Company entered into a worldwide clinical development collaboration with Bayer AG (Bayer) to market and develop soluble guanylate cyclase (sGC) modulators including Bayer’s Adempas (riociguat). The two companies have implemented a joint development and commercialization strategy. The collaboration also includes development of Bayer’s Verquvo (vericiguat), which was approved in the U.S. in January 2021, in Japan in June 2021 and in the EU in July 2021. Under the agreement, Bayer commercializes Adempas in the Americas, while Merck commercializes in the rest of the world. For Verquvo, Merck commercializes in the U.S. and Bayer commercializes in the rest of the world. Both companies share in development costs and profits on sales. Merck records sales of Adempas and Verquvo in its marketing territories, as well as alliance revenue. Alliance revenue represents Merck’s share of profits from sales of Adempas and Verquvo in Bayer’s marketing territories, which are product sales net of cost of sales and commercialization costs. Cost of sales includes Bayer’s share of profits from sales in Merck’s marketing territories.
In addition, the agreement provided for contingent payments from Merck to Bayer related to the successful achievement of sales-based milestones. In January 2022, Merck made the final $400 million sales-based milestone payment under this collaboration to Bayer.
The intangible asset balances related to Adempas (which includes the acquired intangible asset balance, as well as capitalized sales-based milestone payments attributed to Adempas) and Verquvo (which reflects the portion of the final sales-based milestone payment that was attributed to Verquvo) were $691 million and $60 million, respectively, at June 30, 2022 and are included in Other Intangibles, Net. The assets are being amortized over their estimated useful lives (through 2027 for Adempas and through 2031 for Verquvo) as supported by projected future cash flows, subject to impairment testing.

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Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
Summarized financial information related to this collaboration is as follows:
Three Months Ended
June 30,
Six Months Ended
June 30,
($ in millions) 2022 2021 2022 2021
Alliance revenue - Adempas/Verquvo $ 98  $ 74  $ 170  $ 149 
Net sales of Adempas recorded by Merck 63  74  124  129 
Net sales of Verquvo recorded by Merck
Total sales $ 167  $ 149  $ 303  $ 279 
Cost of sales (1)
54  67  103  275 
Selling, general and administrative 42  34  65  51 
Research and development 17  13  34  20 
($ in millions) June 30, 2022 December 31, 2021
Receivables from Bayer included in Other current assets
$ 144  $ 114 
Payables to Bayer included in Accrued and other current liabilities (2)
74  472 
(1) Includes amortization of intangible assets. Amount in the first six months of 2021 includes $153 million of cumulative amortization catch-up expense. In addition, cost of sales includes Bayer’s share of profits from sales in Merck’s marketing territories.
(2) Amount as of December 31, 2021 includes accrued milestone payment.
Ridgeback Biotherapeutics LP
In 2020, Merck and Ridgeback Biotherapeutics LP (Ridgeback), a closely held biotechnology company, entered into a collaboration agreement to develop Lagevrio (molnupiravir), an orally available antiviral candidate in clinical development for the treatment of patients with COVID-19. Merck gained exclusive worldwide rights to develop and commercialize Lagevrio and related molecules.
Under the terms of the agreement, Ridgeback received an upfront payment and is eligible to receive future contingent payments dependent upon the achievement of certain developmental and regulatory approval milestones. The agreement also provides for Merck to reimburse Ridgeback for a portion of certain third-party contingent milestone payments and royalties on net sales, which is part of the profit share calculation. Merck is the principal on sales transactions, recognizing sales and related costs, with profit sharing amounts recorded within Cost of sales. Profits from the collaboration are split equally between the partners. Reimbursements from Ridgeback for its share of research and development costs (deducted from Ridgeback’s share of profits) are reflected as decreases to Research and development expenses.
Lagevrio has received multiple authorizations or approvals worldwide and Merck has entered into advance purchase and supply agreements for Lagevrio in nearly 40 markets. As of June 30, 2022, the Company has 1.1 million remaining courses to be supplied under these agreements.
Summarized financial information related to this collaboration is as follows:
Three Months Ended
June 30,
Six Months Ended
June 30,
($ in millions) 2022 2021 2022 2021
Lagevrio sales
$ 1,177  $ —  $ 4,424  $ — 
Cost of sales (1)
622  2,338  52 
Selling, general and administrative 30  65 
Research and development 15  68  21  110 
($ in millions) June 30, 2022 December 31, 2021
Payables to Ridgeback included in Accrued and other current liabilities (2)
$ 683  $ 283 
(1) Includes royalty expense and amortization of capitalized milestone payments.
(2) Includes accrued royalty and milestone payments.
Bristol Myers Squibb
Reblozyl (luspatercept-aamt) is a first-in-class erythroid maturation recombinant fusion protein obtained as part of Merck’s November 2021 acquisition of Acceleron Pharma Inc. that is being developed and commercialized through a global collaboration with Bristol Myers Squibb (BMS). Reblozyl is approved in the U.S., Europe, Canada and Australia for the treatment of anemia in certain rare blood disorders and is also being evaluated for additional indications for hematology therapies. BMS is the principal on sales transactions for Reblozyl; however, Merck co-promotes Reblozyl (and will co-promote
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Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
all future products approved under this collaboration) in North America, which is reimbursed by BMS. Merck receives a 20% sales royalty from BMS which could increase to a maximum of 24% based on sales levels. This royalty will be reduced by 50% upon the earlier of patent expiry or generic entry on an indication-by-indication basis in each market. Additionally, Merck is eligible to receive future contingent sales-based milestone payments of up to $80 million. Merck recorded alliance revenue of $33 million (consisting of royalties) within Sales in the second quarter of 2022 related to this collaboration. Merck recorded alliance revenue of $86 million in the first six months of 2022, which includes royalties of $66 million, as well as the receipt of a regulatory approval milestone payment of $20 million.
5.    Restructuring
In 2019, Merck approved a global restructuring program (Restructuring Program) as part of a worldwide initiative focused on further optimizing the Company’s manufacturing and supply network, as well as reducing its global real estate footprint. This program is a continuation of the Company’s plant rationalization and builds on prior restructuring programs. The actions currently contemplated under the Restructuring Program are expected to be substantially completed by the end of 2023, with the cumulative pretax costs to be incurred by the Company to implement the program estimated to be approximately $3.5 billion. The Company estimates that approximately 70% of the cumulative pretax costs will result in cash outlays, primarily related to employee separation expense and facility shut-down costs. Approximately 30% of the cumulative pretax costs will be non-cash, relating primarily to the accelerated depreciation of facilities to be closed or divested.
The Company recorded total pretax costs of $258 million and $128 million in the second quarter of 2022 and 2021, respectively, and $384 million and $462 million for the first six months of 2022 and 2021, respectively, related to restructuring program activities. Since inception of the Restructuring Program through June 30, 2022, Merck has recorded total pretax accumulated costs of approximately $3.0 billion. For the full year of 2022, the Company expects to record charges of approximately $550 million related to the Restructuring Program. For segment reporting, restructuring charges are unallocated expenses.
The following tables summarize the charges related to restructuring program activities by type of cost:
  Three Months Ended June 30, 2022 Six Months Ended June 30, 2022
($ in millions) Separation
Costs
Accelerated
Depreciation
Other Total Separation
Costs
Accelerated
Depreciation
Other Total
Cost of sales $ —  $ 17  $ 50  $ 67  $ —  $ 35  $ 78  $ 113 
Selling, general and administrative —  19  27  —  12  36  48 
Research and development —  22  —  22  —  29  —  29 
Restructuring costs 106  —  36  142  132  —  62  194 
$ 106  $ 47  $ 105  $ 258  $ 132  $ 76  $ 176  $ 384 
  Three Months Ended June 30, 2021 Six Months Ended June 30, 2021
($ in millions) Separation
Costs
Accelerated
Depreciation
Other Total Separation
Costs
Accelerated
Depreciation
Other Total
Cost of sales $ —  $ 11  $ 27  $ 38  $ —  $ 21  $ 44  $ 65 
Selling, general and administrative —  —  —  — 
Research and development —  —  —  13  —  13 
Restructuring costs 64  —  18  82  293  —  87  380 
$ 64  $ 19  $ 45  $ 128  $ 293  $ 38  $ 131  $ 462 
Separation costs are associated with actual headcount reductions, as well as those headcount reductions which were probable and could be reasonably estimated.
Accelerated depreciation costs primarily relate to manufacturing, research and administrative facilities and equipment to be sold or closed as part of the program. Accelerated depreciation costs represent the difference between the depreciation expense to be recognized over the revised useful life of the asset, based upon the anticipated date the site will be closed or divested or the equipment disposed of, and depreciation expense as determined utilizing the useful life prior to the restructuring actions. All the sites have and will continue to operate up through the respective closure dates and, since future undiscounted cash flows are sufficient to recover the respective book values, Merck is recording accelerated depreciation over the revised useful life of the site assets. Anticipated site closure dates, particularly related to manufacturing locations, have been and may continue to be adjusted to reflect changes resulting from regulatory or other factors.
Other activity in 2022 and 2021 includes asset abandonment, facility shut-down and other related costs, as well as pretax gains and losses resulting from the sales of facilities and related assets. Additionally, other activity includes certain employee-related costs associated with pension and other postretirement benefit plans (see Note 10) and share-based compensation.
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Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
The following table summarizes the charges and spending relating to restructuring program activities for the six months ended June 30, 2022:
($ in millions) Separation
Costs
Accelerated
Depreciation
Other Total
Restructuring reserves January 1, 2022
$ 596  $ —  $ 41  $ 637 
Expense 132  76  176  384 
(Payments) receipts, net (167) —  (280) (447)
Non-cash activity —  (76) 90  14 
Restructuring reserves June 30, 2022 (1)
$ 561  $ —  $ 27  $ 588 
(1)The remaining cash outlays are expected to be substantially completed by the end of 2023.
6.    Financial Instruments
Derivative Instruments and Hedging Activities
The Company manages the impact of foreign exchange rate movements and interest rate movements on its earnings, cash flows and fair values of assets and liabilities through operational means and through the use of various financial instruments, including derivative instruments.
A significant portion of the Company’s revenues and earnings in foreign affiliates is exposed to changes in foreign exchange rates. The objectives of and accounting related to the Company’s foreign currency risk management program, as well as its interest rate risk management activities are discussed below.
Foreign Currency Risk Management
The Company has established revenue hedging, balance sheet risk management and net investment hedging programs to protect against volatility of future foreign currency cash flows and changes in fair value caused by changes in foreign exchange rates.
The objective of the revenue hedging program is to reduce the variability caused by changes in foreign exchange rates that would affect the U.S. dollar value of future cash flows derived from foreign currency denominated sales, primarily the euro, Japanese yen and Chinese renminbi. To achieve this objective, the Company will hedge a portion of its forecasted foreign currency denominated third-party and intercompany distributor entity sales (forecasted sales) that are expected to occur over its planning cycle, typically no more than two years into the future. The Company will layer in hedges over time, increasing the portion of forecasted sales hedged as it gets closer to the expected date of the forecasted sales. The portion of forecasted sales hedged is based on assessments of cost-benefit profiles that consider natural offsetting exposures, revenue and exchange rate volatilities and correlations, and the cost of hedging instruments. The Company manages its anticipated transaction exposure principally with purchased local currency put options, forward contracts and purchased collar options.
The fair values of these derivative contracts are recorded as either assets (gain positions) or liabilities (loss positions) in the Condensed Consolidated Balance Sheet. Changes in the fair value of derivative contracts are recorded each period in either current earnings or Other comprehensive income (OCI), depending on whether the derivative is designated as part of a hedge transaction and, if so, the type of hedge transaction. For derivatives that are designated as cash flow hedges, the unrealized gains or losses on these contracts are recorded in Accumulated Other Comprehensive Loss (AOCL) and reclassified into Sales when the hedged anticipated revenue is recognized. For those derivatives which are not designated as cash flow hedges, but serve as economic hedges of forecasted sales, unrealized gains or losses are recorded in Sales each period. The cash flows from both designated and non-designated contracts are reported as operating activities in the Condensed Consolidated Statement of Cash Flows. The Company does not enter into derivatives for trading or speculative purposes.
The Company manages operating activities and net asset positions at each local subsidiary in order to mitigate the effects of exchange on monetary assets and liabilities. The Company also uses a balance sheet risk management program to mitigate the exposure of net monetary assets that are denominated in a currency other than a subsidiary’s functional currency from the effects of volatility in foreign exchange. In these instances, Merck principally utilizes forward exchange contracts to offset the effects of exchange on exposures denominated in developed country currencies, primarily the euro, Japanese yen, British pound, Canadian dollar and Swiss franc. For exposures in developing country currencies, including the Chinese renminbi, the Company will enter into forward contracts to offset the effects of exchange on exposures when it is deemed economical to do so based on a cost-benefit analysis that considers the magnitude of the exposure, the volatility of the exchange rate and the cost of the hedging instrument. The cash flows from these contracts are reported as operating activities in the Condensed Consolidated Statement of Cash Flows.
Monetary assets and liabilities denominated in a currency other than the functional currency of a given subsidiary are remeasured at spot rates in effect on the balance sheet date with the effects of changes in spot rates reported in Other
- 14 -

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
(income) expense, net. The forward contracts are not designated as hedges and are marked to market through Other (income) expense, net. Accordingly, fair value changes in the forward contracts help mitigate the changes in the value of the remeasured assets and liabilities attributable to changes in foreign currency exchange rates, except to the extent of the spot-forward differences. These differences are not significant due to the short-term nature of the contracts, which typically have average maturities at inception of less than one year.
The Company also uses forward exchange contracts to hedge a portion of its net investment in foreign operations against movements in exchange rates. The forward contracts are designated as hedges of the net investment in a foreign operation. The unrealized gains or losses on these contracts are recorded in foreign currency translation adjustment within OCI and remain in AOCL until either the sale or complete or substantially complete liquidation of the subsidiary. The Company excludes certain portions of the change in fair value of its derivative instruments from the assessment of hedge effectiveness (excluded components). Changes in fair value of the excluded components are recognized in OCI. The Company recognizes in earnings the initial value of the excluded components on a straight-line basis over the life of the derivative instrument, rather than using the mark-to-market approach. The cash flows from these contracts are reported as investing activities in the Condensed Consolidated Statement of Cash Flows.
Foreign exchange risk is also managed through the use of foreign currency debt. The Company’s senior unsecured euro-denominated notes have been designated as, and are effective as, economic hedges of the net investment in a foreign operation. Accordingly, foreign currency transaction gains or losses due to spot rate fluctuations on the euro-denominated debt instruments are included in foreign currency translation adjustment within OCI.
The effects of the Company’s net investment hedges on OCI and the Consolidated Statement of Income are shown below:
Amount of Pretax (Gain) Loss Recognized in Other Comprehensive Income (1)
Amount of Pretax (Gain) Loss Recognized in Other (income) expense, net for Amounts Excluded from Effectiveness Testing
Three Months Ended June 30, Six Months Ended June 30, Three Months Ended June 30, Six Months Ended June 30,
($ in millions) 2022 2021 2022 2021 2022 2021 2022 2021
Net Investment Hedging Relationships
Foreign exchange contracts
$ (31) $ (3) $ (46) $ (28) $ (1) $ (4) $ (2) $ (8)
Euro-denominated notes (128) 45  (181) (122) —  —  —  — 
(1) No amounts were reclassified from AOCL into income related to the sale of a subsidiary.
Interest Rate Risk Management
The Company may use interest rate swap contracts on certain investing and borrowing transactions to manage its net exposure to interest rate changes and to reduce its overall cost of borrowing. The Company does not use leveraged swaps and, in general, does not leverage any of its investment activities that would put principal capital at risk.
In February 2022, five interest rate swaps with a total notional amount of $1.25 billion matured. These swaps effectively converted the Company’s $1.25 billion, 2.35% fixed-rate notes due 2022 to variable rate debt. At June 30, 2022, the Company was a party to four pay-floating, receive-fixed interest rate swap contracts designated as fair value hedges of fixed-rate notes in which the notional amounts match the amount of the hedged fixed-rate notes as detailed in the table below.
June 30, 2022
($ in millions) Par Value of Debt Number of Interest Rate Swaps Held Total Swap Notional Amount
2.40% notes due 2022
$ 1,000  $ 1,000 
The interest rate swap contracts are designated hedges of the fair value changes in the notes attributable to changes in the benchmark LIBOR swap rate. The fair value changes in the notes attributable to changes in the LIBOR swap rate are recorded in interest expense along with the offsetting fair value changes in the swap contracts. See Note 1 for a discussion of the pending discontinuation of LIBOR as part of reference rate reform. The cash flows from these contracts are reported as operating activities in the Condensed Consolidated Statement of Cash Flows.

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Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
The table below presents the location of amounts recorded on the Condensed Consolidated Balance Sheet related to cumulative basis adjustments for fair value hedges:
Carrying Amount of Hedged Liabilities Cumulative Amount of Fair Value Hedging Adjustment Increase (Decrease) Included in the Carrying Amount
($ in millions) June 30, 2022 December 31, 2021 June 30, 2022 December 31, 2021
Balance Sheet Line Item in which Hedged Item is Included
Loans payable and current portion of long-term debt $ 999  $ 2,263  $ (1) $ 13 
Presented in the table below is the fair value of derivatives on a gross basis segregated between those derivatives that are designated as hedging instruments and those that are not designated as hedging instruments:
    June 30, 2022 December 31, 2021
    Fair Value of Derivative U.S. Dollar
Notional
Fair Value of Derivative U.S. Dollar
Notional
($ in millions) Asset Liability Asset Liability
Derivatives Designated as Hedging Instruments
Balance Sheet Caption
Interest rate swap contracts Other current assets $ $ —  $ 1,000  $ 14  $ —  $ 2,250 
Foreign exchange contracts Other current assets 467  —  6,751  271  —  6,778 
Foreign exchange contracts Other Assets 57  —  1,334  43  —  1,551 
Foreign exchange contracts Accrued and other current liabilities —  510  —  24  1,623 
Foreign exchange contracts Other Noncurrent Liabilities —  126  —  43 
    $ 525  $ $ 9,721  $ 328  $ 25  $ 12,245 
Derivatives Not Designated as Hedging Instruments
Balance Sheet Caption            
Foreign exchange contracts Other current assets $ 407  $ —  $ 10,931  $ 221  $ —  $ 10,073 
Foreign exchange contracts Accrued and other current liabilities —  131  7,074  —  96  10,640 
    $ 407  $ 131  $ 18,005  $ 221  $ 96  $ 20,713 
    $ 932  $ 134  $ 27,726  $ 549  $ 121  $ 32,958 
As noted above, the Company records its derivatives on a gross basis in the Condensed Consolidated Balance Sheet. The Company has master netting agreements with several of its financial institution counterparties (see Concentrations of Credit Risk below). The following table provides information on the Company’s derivative positions subject to these master netting arrangements as if they were presented on a net basis, allowing for the right of offset by counterparty and cash collateral exchanged per the master agreements and related credit support annexes:
  June 30, 2022 December 31, 2021
($ in millions) Asset Liability Asset Liability
Gross amounts recognized in the condensed consolidated balance sheet $ 932  $ 134  $ 549  $ 121 
Gross amounts subject to offset in master netting arrangements not offset in the condensed consolidated balance sheet
(123) (123) (110) (110)
Cash collateral received (527) —  (164) — 
Net amounts $ 282  $ 11  $ 275  $ 11 

- 16 -

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
The table below provides information regarding the location and amount of pretax gains and losses of derivatives designated in fair value or cash flow hedging relationships:
Three Months Ended June 30, Six Months Ended June 30,
($ in millions) 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021
Financial Statement Line Items in which Effects of Fair Value or Cash Flow Hedges are Recorded Sales
Other (income) expense, net (1)
Other comprehensive income (loss) Sales
Other (income) expense, net (1)
Other comprehensive income (loss)
$ 14,593  $ 11,402  $ 438  $ (103) $ 42  $ 1,545  $ 30,494  $ 22,029  $ 1,148  $ (558) $ 102  $ 1,557 
(Gain) loss on fair value hedging relationships
Interest rate swap contracts
Hedged items
—  —  (4) (9) —  —  —  —  (14) (19) —  — 
Derivatives designated as hedging instruments
—  —  (1) —  —  —  —  —  —  — 
Impact of cash flow hedging relationships
Foreign exchange contracts
Amount of gain (loss) recognized in OCI on derivatives
—  —  —  —  403  (58) —  —  —  —  551  121 
Increase (decrease) in Sales as a result of AOCL reclassifications
172  (71) —  —  (172) 71  239  (183) —  —  (239) 183 
Interest rate contracts
Amount of gain recognized in Other (income) expense, net on derivatives
—  —  —  —  —  —  —  —  (1) (1) —  — 
Amount of loss recognized in OCI on derivatives
—  —  —  —  —  —  —  —  —  —  (1) (1)
(1) Interest expense is a component of Other (income) expense, net.
The table below provides information regarding the income statement effects of derivatives not designated as hedging instruments:
Amount of Derivative Pretax (Gain) Loss Recognized in Income
Three Months Ended June 30, Six Months Ended June 30,
($ in millions) 2022 2021 2022 2021
Derivatives Not Designated as Hedging Instruments Income Statement Caption
Foreign exchange contracts (1)
Other (income) expense, net $ (64) $ 167  $ (36) $ 217 
Foreign exchange contracts (2)
Sales (36) 14  (38) 10 
(1) These derivative contracts primarily mitigate changes in the value of remeasured foreign currency denominated monetary assets and liabilities attributable to changes in foreign currency exchange rates. Amounts in 2021 include a loss on forward exchange contracts entered into in conjunction with the spin-off of Organon.
(2) These derivative contracts serve as economic hedges of forecasted transactions.
At June 30, 2022, the Company estimates $463 million of pretax net unrealized gains on derivatives maturing within the next 12 months that hedge foreign currency denominated sales over that same period will be reclassified from AOCL to Sales. The amount ultimately reclassified to Sales may differ as foreign exchange rates change. Realized gains and losses are ultimately determined by actual exchange rates at maturity.

- 17 -

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
Investments in Debt and Equity Securities
Information on investments in debt and equity securities is as follows:
  June 30, 2022 December 31, 2021
  Amortized
Cost
Gross Unrealized Fair
Value
Amortized
Cost
Gross Unrealized Fair
Value
($ in millions) Gains Losses Gains Losses
Commercial paper $ 334  $ —  $ —  $ 334  $ —  $ —  $ —  $ — 
U.S. government and agency securities 72  —  —  72  80  —  —  80 
Corporate notes and bonds —  —  —  — 
Foreign government bonds —  —  —  — 
Total debt securities $ 412  $ —  $ —  $ 412  $ 86  $ —  $ —  $ 86 
Publicly traded equity securities (1)
1,530  1,647 
Total debt and publicly traded equity securities
$ 1,942  $ 1,733 
(1) Unrealized net (gains) losses of $(25) million and $194 million were recorded in Other (income) expense, net in the second quarter and first six months of 2022, respectively, on equity securities still held at June 30, 2022. Unrealized net losses of $18 million and $199 million were recorded in Other (income) expense, net in the second quarter and first six months of 2021, respectively, on equity securities still held at June 30, 2021.
At June 30, 2022 and June 30, 2021, the Company also had $671 million and $694 million, respectively, of equity investments without readily determinable fair values included in Other Assets. The Company records unrealized gains on these equity investments based on favorable observable price changes from transactions involving similar investments of the same investee and records unrealized losses based on unfavorable observable price changes, which are included in Other (income) expense, net. During the first six months of 2022, the Company recorded unrealized gains of $20 million and unrealized net losses of $1 million related to certain of these equity investments still held at June 30, 2022. During the first six months of 2021, the Company recorded unrealized gains of $75 million and unrealized losses of $1 million related to certain of these investments still held at June 30, 2021. Cumulative unrealized gains and cumulative unrealized losses based on observable price changes for investments in equity investments without readily determinable fair values still held at June 30, 2022 were $254 million and $8 million, respectively.
At June 30, 2022 and June 30, 2021, the Company also had $805 million and $1.0 billion, respectively, recorded in Other Assets for equity securities held through ownership interests in investment funds. Losses (gains) recorded in Other (income) expense, net relating to these investment funds were $302 million and $(238) million for the second quarter of 2022 and 2021, respectively, and were $811 million and $(502) million for the first six months of 2022 and 2021, respectively.
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company uses a fair value hierarchy which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. There are three levels of inputs used to measure fair value with Level 1 having the highest priority and Level 3 having the lowest:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities;
Level 3 - Unobservable inputs that are supported by little or no market activity. Level 3 assets or liabilities are those whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques with significant unobservable inputs, as well as assets or liabilities for which the determination of fair value requires significant judgment or estimation.
If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

- 18 -

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
Financial assets and liabilities measured at fair value on a recurring basis are summarized below:
Fair Value Measurements Using Fair Value Measurements Using
  Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
($ in millions) June 30, 2022 December 31, 2021
Assets
Investments
Commercial paper $ —  $ 334  $ —  $ 334  $ —  $ —  $ —  $ — 
Foreign government bonds —  —  —  — 
Publicly traded equity securities 355  —  —  355  368  —  —  368 
  355  336  —  691  368  —  370 
Other assets (1)
U.S. government and agency securities 72  —  —  72  80  —  —  80 
Corporate notes and bonds —  —  —  — 
Publicly traded equity securities 1,175  —  —  1,175  1,279  —  —  1,279 
1,251  —  —  1,251  1,363  —  —  1,363 
Derivative assets (2)
Forward exchange contracts —  576  —  576  —  351  —  351 
Purchased currency options —  355  —  355  —  184  —  184 
Interest rate swaps —  —  —  14  —  14 
  —  932  —  932  —  549  —  549 
Total assets $ 1,606  $ 1,268  $ —  $ 2,874  $ 1,731  $ 551  $ —  $ 2,282 
Liabilities
Other liabilities
Contingent consideration $ —  $ —  $ 542  $ 542  $ —  $ —  $ 777  $ 777 
Derivative liabilities (2)
Forward exchange contracts —  133  —  133  —  120  —  120 
Written currency options —  —  —  — 
—  134  —  134  —  121  —  121 
Total liabilities $ —  $ 134  $ 542  $ 676  $ —  $ 121  $ 777  $ 898 
(1) Investments included in other assets are restricted as to use, including for the payment of benefits under employee benefit plans.
(2)    The fair value determination of derivatives includes the impact of the credit risk of counterparties to the derivatives and the Company’s own credit risk, the effects of which were not significant.
As of June 30, 2022 and December 31, 2021, Cash and cash equivalents included $8.6 billion and $6.8 billion of cash equivalents, respectively (which would be considered Level 2 in the fair value hierarchy).
Contingent Consideration
Summarized information about the changes in the fair value of liabilities for contingent consideration associated with business combinations is as follows:
($ in millions) 2022 2021
Fair value January 1 $ 777  $ 841 
Changes in estimated fair value (1)
(114) 50 
Payments (119) — 
Other (2) (12)
Fair value June 30 (2)
$ 542  $ 879 
(1) Recorded in Cost of sales, Research and development expenses, and Other (income) expense, net. Includes cumulative translation adjustments.
(2) At June 30, 2022, $402 million of the liabilities relate to the 2016 termination of the Sanofi Pasteur MSD joint venture. As part of the termination, Merck recorded a liability for contingent future royalty payments of 11.5% on net sales of all Merck products that were previously sold by the joint venture through December 31, 2024. The fair value of this liability is determined utilizing the estimated amount and timing of projected cash flows using a risk-adjusted discount rate to present value the cash flows. As part of the Company’s routine assessment, the discount rate was reduced from 8% to 6% during the second quarter of 2022, which resulted in an immaterial increase to the liability. Balance at June 30, 2022 includes $131 million recorded as a current liability for amounts expected to be paid within the next 12 months.
The payments of contingent consideration in 2022 relate to the Sanofi Pasteur MSD liabilities described above.

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Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
Other Fair Value Measurements
Some of the Company’s financial instruments, such as cash and cash equivalents, receivables and payables, are reflected in the balance sheet at carrying value, which approximates fair value due to their short-term nature.
The estimated fair value of loans payable and long-term debt (including current portion) at June 30, 2022, was $29.0 billion compared with a carrying value of $31.7 billion and at December 31, 2021, was $35.7 billion compared with a carrying value of $33.1 billion. Fair value was estimated using recent observable market prices and would be considered Level 2 in the fair value hierarchy.
Concentrations of Credit Risk
On an ongoing basis, the Company monitors concentrations of credit risk associated with corporate and government issuers of securities and financial institutions with which it conducts business. Credit exposure limits are established to limit a concentration with any single issuer or institution. Cash and investments are placed in instruments that meet high credit quality standards as specified in the Company’s investment policy guidelines.
The majority of the Company’s accounts receivable arise from product sales in the U.S., Europe and China and are primarily due from drug wholesalers and retailers, hospitals, government agencies, managed health care providers and pharmacy benefit managers. The Company monitors the financial performance and creditworthiness of its customers so that it can properly assess and respond to changes in their credit profile. The Company also continues to monitor global economic conditions, including the volatility associated with international sovereign economies, and associated impacts on the financial markets and its business.
The Company has accounts receivable factoring agreements with financial institutions in certain countries to sell accounts receivable. The Company factored $1.9 billion and $2.8 billion of accounts receivable as of June 30, 2022 and December 31, 2021, respectively, under these factoring arrangements, which reduced outstanding accounts receivable. The cash received from the financial institutions is reported within operating activities in the Condensed Consolidated Statement of Cash Flows. In certain of these factoring arrangements, for ease of administration, the Company will collect customer payments related to the factored receivables, which it then remits to the financial institutions. As of June 30, 2022 and December 31, 2021, the Company had collected $28 million and $62 million, respectively, on behalf of the financial institutions, which is reflected as restricted cash in Other current assets and the related obligation to remit the cash within Accrued and other current liabilities. The Company remitted the cash to the financial institutions in July 2022 and January 2022, respectively. The net cash flows relating to these collections are reported as financing activities in the Condensed Consolidated Statement of Cash Flows. The cost of factoring such accounts receivable was de minimis.
Derivative financial instruments are executed under International Swaps and Derivatives Association master agreements. The master agreements with several of the Company’s financial institution counterparties also include credit support annexes. These annexes contain provisions that require collateral to be exchanged depending on the value of the derivative assets and liabilities, the Company’s credit rating, and the credit rating of the counterparty. Cash collateral received by the Company from various counterparties was $527 million and $164 million at June 30, 2022 and December 31, 2021, respectively. The obligation to return such collateral is recorded in Accrued and other current liabilities.
7.    Inventories
Inventories consisted of:
($ in millions) June 30, 2022 December 31, 2021
Finished goods $ 1,680  $ 1,747 
Raw materials and work in process 6,542  6,220 
Supplies 217  196 
Total (approximates current cost) 8,439  8,163 
Decrease to LIFO cost (140) (16)
  $ 8,299  $ 8,147 
Recognized as:
Inventories $ 5,535  $ 5,953 
Other assets 2,764  2,194 
Amounts recognized as Other Assets are comprised almost entirely of raw materials and work in process inventories. At June 30, 2022 and December 31, 2021, these amounts included $2.4 billion and $1.9 billion, respectively, of inventories not
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Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
expected to be sold within one year. In addition, these amounts included $366 million and $256 million at June 30, 2022 and December 31, 2021, respectively, of inventories produced in preparation for product launches.
8.    Contingencies
The Company is involved in various claims and legal proceedings of a nature considered normal to its business, including product liability, intellectual property, and commercial litigation, as well as certain additional matters including governmental and environmental matters. In the opinion of the Company, it is unlikely that the resolution of these matters will be material to the Company’s financial condition, results of operations or cash flows.
Given the nature of the litigation discussed below and the complexities involved in these matters, the Company is unable to reasonably estimate a possible loss or range of possible loss for such matters until the Company knows, among other factors, (i) what claims, if any, will survive dispositive motion practice, (ii) the extent of the claims, including the size of any potential class, particularly when damages are not specified or are indeterminate, (iii) how the discovery process will affect the litigation, (iv) the settlement posture of the other parties to the litigation and (v) any other factors that may have a material effect on the litigation.
The Company records accruals for contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. These accruals are adjusted periodically as assessments change or additional information becomes available. For product liability claims, a portion of the overall accrual is actuarially determined and considers such factors as past experience, number of claims reported and estimates of claims incurred but not yet reported. Individually significant contingent losses are accrued when probable and reasonably estimable. Legal defense costs expected to be incurred in connection with a loss contingency are accrued when probable and reasonably estimable.
The Company’s decision to obtain insurance coverage is dependent on market conditions, including cost and availability, existing at the time such decisions are made. 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 most product liabilities.
Product Liability Litigation
Fosamax
As previously disclosed, Merck is a defendant in product liability lawsuits in the U.S. involving Fosamax (alendronate sodium) (Fosamax Litigation). As of June 30, 2022, approximately 3,450 cases are pending against Merck in either a federal multidistrict litigation (Femur Fracture MDL) or state court. Plaintiffs in the vast majority of these cases generally allege that they sustained femur fractures and/or other bone injuries (Femur Fractures) in association with the use of Fosamax.
In March 2014, the Femur Fracture MDL court dismissed with prejudice approximately 650 cases on preemption grounds. Plaintiffs in approximately 515 of those cases appealed that decision to the U.S. Court of Appeals for the Third Circuit (Third Circuit). In March 2017, the Third Circuit issued a decision reversing the Femur Fracture MDL court’s preemption ruling and remanding the appealed cases back to the Femur Fracture MDL court. In May 2019, the U.S. Supreme Court decided that the Third Circuit had incorrectly concluded that the issue of preemption should be resolved by a jury, and accordingly vacated the judgment of the Third Circuit and remanded the proceedings back to the Third Circuit to address the issue in a manner consistent with the Supreme Court’s opinion. In November 2019, the Third Circuit remanded the cases back to the District Court in order to allow that court to determine in the first instance whether the plaintiffs’ state law claims are preempted by federal law under the standards described by the Supreme Court in its opinion. On March 23, 2022, the District Court granted Merck’s motion and ruled that plaintiffs’ failure to warn claims are preempted as a matter of law to the extent they assert that Merck should have added a warning or precaution regarding atypical femur fractures prior to September 2010. Plaintiffs have indicated that they do not intend to move forward with any other claims at this point and intend to appeal the District Court’s preemption ruling to the Third Circuit.
Discovery is presently stayed in the Femur Fracture MDL. As part of the spin-off of Organon, Organon is required to indemnify Merck for all liabilities relating to, arising from, or resulting from the Fosamax Litigation.
Januvia/Janumet
As previously disclosed, Merck is a defendant in product liability lawsuits in the U.S. involving Januvia (sitagliptin) and/or Janumet (sitagliptin and metformin HCl).
Most claims were filed in multidistrict litigation before the U.S. District Court for the Southern District of California (MDL). On March 9, 2021, the MDL Court issued an omnibus order granting defendants’ summary judgment motions based on preemption and failure to establish general causation, as well as granting defendants’ motions to exclude plaintiffs’ expert
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Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
witnesses. The plaintiffs appealed that order. Since that time, more than half of these claims have been dismissed with prejudice as to Merck, and on October 5, 2021, the U.S. Court of Appeals for the Ninth Circuit dismissed the appeal as to Merck and two of its codefendants. The MDL Court’s judgment is now final and no longer appealable with respect to remaining claims.
Outside of the MDL, the majority of claims were filed in coordinated proceedings before the Superior Court of California, County of Los Angeles (California State Court). On April 6, 2021, the court in California issued an omnibus order granting defendants’ summary judgment motions and also granting defendants’ motions to exclude plaintiffs’ expert witnesses. On May 31, 2022, the court entered judgment in favor of Merck as to all of the claims pending against Merck in that jurisdiction.
As of June 30, 2022, six product users have claims pending against Merck in state courts other than California, including Illinois. In June 2017, the Illinois trial court denied Merck’s motion for summary judgment based on federal preemption. Merck appealed, and the Illinois appellate court affirmed in December 2018. Merck filed a petition for leave to appeal to the Illinois Supreme Court in February 2019. In April 2019, the Illinois Supreme Court stayed consideration of the pending petition to appeal until the U.S. Supreme Court issued its opinion in Merck Sharp & Dohme Corp. v. Albrecht (relating to the Fosamax matter discussed above). Merck filed the opinion in Albrecht with the Illinois Supreme Court in June 2019. The petition for leave to appeal was decided in September 2019, in which the Illinois Supreme Court directed the intermediate appellate court to reconsider its earlier ruling. The Illinois Appellate Court issued a favorable decision concluding, consistent with Albrecht, that preemption presents a legal question to be resolved by the court. In May 2020, the Illinois Appellate Court issued a mandate to the state trial court, which, as of June 30, 2022, had not scheduled a case management conference or otherwise taken action.
In addition to the claims noted above, the Company has agreed to toll the statute of limitations for approximately 50 additional claims. The Company intends to continue defending against any remaining lawsuits.
Governmental Proceedings
As previously disclosed, from time to time, the Company’s subsidiaries in China receive inquiries regarding their operations from various Chinese governmental agencies. Some of these inquiries may be related to matters involving other multinational pharmaceutical companies, as well as Chinese entities doing business with such companies. The Company’s policy is to cooperate with these authorities and to provide responses as appropriate.
As previously disclosed, from time to time, the Company receives inquiries and is the subject of preliminary investigation activities from competition and other governmental authorities in markets outside the U.S. These authorities may include regulators, administrative authorities, and law enforcement and other similar officials, and these preliminary investigation activities may include site visits, formal or informal requests or demands for documents or materials, inquiries or interviews and similar matters. Certain of these preliminary inquiries or activities may lead to the commencement of formal proceedings. Should those proceedings be determined adversely to the Company, monetary fines and/or remedial undertakings may be required.
Commercial and Other Litigation
Zetia Antitrust Litigation
As previously disclosed, Merck, MSD, Schering Corporation, Schering-Plough Corporation, and MSP Singapore Company LLC (collectively, the Merck Defendants) are defendants in putative class action and opt-out lawsuits filed in 2018 on behalf of direct and indirect purchasers of Zetia (ezetimibe) alleging violations of federal and state antitrust laws, as well as other state statutory and common law causes of action. The cases have been consolidated for pretrial purposes in a federal multidistrict litigation (MDL) before Judge Rebecca Beach Smith in the Eastern District of Virginia.
In November 2019, the direct purchaser plaintiffs and the indirect purchaser plaintiffs filed motions for class certification. In August 2020, the district court granted in part the direct purchasers’ motion for class certification and certified a class of 35 direct purchasers. In August 2021, the Fourth Circuit vacated the district court’s class certification order and remanded for further proceedings consistent with the court’s ruling. In September 2021, the direct purchaser plaintiffs filed a renewed motion for class certification. On January 25, 2022, the magistrate judge recommended that the district court deny the motion for class certification. On February 8, 2022, the direct purchaser plaintiffs filed objections to the recommendation. On April 13, 2022, the district court denied the direct purchaser plaintiffs’ renewed motion for class certification. In August 2021, the district court granted certification of a class of indirect purchasers.
In 2020 and 2021, United Healthcare Services, Inc., Humana Inc., Centene Corporation and others, and Kaiser Foundation Health Plan, Inc. (collectively, the insurer plaintiffs), each filed a lawsuit in a jurisdiction outside of the Eastern District of Virginia against the Merck Defendants and others, making similar allegations as those made in the Zetia MDL, as well as additional allegations about Vytorin. These cases have been transferred to the Eastern District of Virginia to proceed with the Zetia MDL.
- 22 -

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
On February 9, 2022, the insurer plaintiffs filed amended complaints. On March 2, 2022, the Merck Defendants, jointly with other defendants, moved to dismiss certain aspects of the insurer plaintiffs’ complaints, including any claims for Vytorin damages.
In April 2022, the direct purchaser plaintiffs moved for an order setting a deadline for direct purchasers of Zetia not currently parties to the case to file cases against defendants in order for those cases to be coordinated for trial with the existing direct purchaser plaintiffs and other MDL plaintiff groups. The court granted that motion, setting a deadline of June 30, 2022 for unnamed direct purchasers to file claims. On June 30, 2022, 23 new entities, many related, brought new complaints against defendants or otherwise sought to intervene. Defendants’ summary judgment motions, filed in August 2020, are still pending. The court has scheduled trial for all plaintiffs other than the insurer plaintiffs for April 2023.
Rotavirus Vaccines Antitrust Litigation
As previously disclosed, MSD is a defendant in putative class action lawsuits filed in 2018 on behalf of direct purchasers of RotaTeq (Rotavirus Vaccine, Live, Oral, Pentavalent), alleging violations of federal antitrust laws. The cases were consolidated in the Eastern District of Pennsylvania. In January 2019, the court denied MSD’s motions to compel arbitration and to dismiss the consolidated complaint. In February 2019, MSD appealed the court’s order on arbitration to the Third Circuit. In October 2019, the Third Circuit vacated the district court’s order and remanded for limited discovery on the issue of arbitrability. On July 6, 2020, MSD filed a renewed motion to compel arbitration, and plaintiffs filed a cross motion for summary judgment as to arbitrability. On November 20, 2020, the district court denied MSD’s motion and granted plaintiffs’ motion. On December 4, 2020, MSD filed a notice of appeal to the Third Circuit. On March 21, 2022, the Third Circuit reversed the order of the district court and remanded with the instruction that the court grant MSD’s motion to compel arbitration. On April 4, 2022, plaintiffs filed a petition for panel rehearing or rehearing en banc, and on May 25, 2022, the Third Circuit denied the petition. On July 1, 2022, the district court stayed the case in favor of arbitration of plaintiffs’ claims.
Bravecto Litigation
As previously disclosed, in January 2020, the Company was served with a complaint in the U.S. District Court for the District of New Jersey. Following motion practice, the plaintiffs filed a second amended complaint on July 1, 2021, seeking to certify a nationwide class action of purchasers or users of Bravecto (fluralaner) products in the U.S. or its territories between May 1, 2014 and July 1, 2021. Plaintiffs contend Bravecto causes neurological events in dogs and cats and alleges violations of the New Jersey Consumer Fraud Act, breach of warranty, product liability, and related theories. The Company moved to dismiss or, alternatively, to strike the class allegations from the second amended complaint, and that motion is pending. A similar case was filed in Quebec, Canada in May 2019. The Superior Court certified a class of dog owners in Quebec who gave Bravecto Chew to their dogs between February 16, 2017 and November 2, 2018 whose dogs experienced one of the conditions in the post-marketing adverse reactions section of the labeling approved on November 2, 2018. The Company and plaintiffs each appealed the class certification decision. The Court of Appeal of Quebec heard the appeal on February 7, 2022 and issued a decision on April 25, 2022 allowing both parties’ appeals in part. The Company sought leave to appeal to the Supreme Court of Canada.
340B Program Litigation
Merck has filed a complaint in the U.S. District Court for the District of Columbia to challenge the letter Merck received from the Health Resources and Services Administration (HRSA) in May 2022 regarding Merck’s 340B Program integrity initiative. HRSA’s letter to Merck asserts that Merck is in violation of the 340B statute. HRSA further claims that continued failure to provide the 340B price to covered entities using contract pharmacies may result in civil monetary penalties for each instance of alleged overcharging, in addition to repayment for any instance of overcharging. The letter is very similar to letters HRSA has sent to other manufacturers, which letters have been held to be unlawful by multiple federal courts. Merck disagrees with HRSA’s assertion. Merck remains committed to the 340B Program and to providing 340B discounts to eligible covered entities. Merck’s 340B Program integrity initiative is consistent with the requirements of the 340B statute and is intended to ensure the integrity and sustainability of the 340B statute by reducing prohibited duplicate discounts and diversion and putting patients back at the center of the program. Merck continues to offer all of the Company’s covered outpatient drugs to all 340B covered entities for purchase at or below the 340B ceiling price.
Patent Litigation
From time to time, generic manufacturers of pharmaceutical products file abbreviated New Drug Applications (NDAs) with the FDA seeking to market generic forms of the Company’s products prior to the expiration of relevant patents owned by the Company. To protect its patent rights, the Company may file patent infringement lawsuits against such generic companies. Similar lawsuits defending the Company’s patent rights may exist in other countries. The Company intends to vigorously defend its patents, which it believes are valid, against infringement by companies attempting to market products prior to the expiration of such patents. As with any litigation, there can be no assurance of the outcomes, which, if adverse,
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Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
could result in significantly shortened periods of exclusivity for these products and, with respect to products acquired through acquisitions accounted for as business combinations, potentially significant intangible asset impairment charges.
Bridion As previously disclosed, between January and November 2020, the Company received multiple Paragraph IV Certification Letters under the Hatch-Waxman Act notifying the Company that generic drug companies have filed applications to the FDA seeking pre-patent expiry approval to sell generic versions of Bridion (sugammadex) Injection. In March, April and December 2020, the Company filed patent infringement lawsuits in the U.S. District Courts for the District of New Jersey and the Northern District of West Virginia against those generic companies. All actions in the District of New Jersey have been consolidated. These lawsuits, which assert one or more patents covering sugammadex and methods of using sugammadex, automatically stay FDA approval of the generic applications until June 2023 or until adverse court decisions, if any, whichever may occur earlier. The West Virginia action remains stayed. The U.S. District Court for the District of New Jersey has set a bench trial in this matter beginning on October 12, 2022.
The Company has settled with four generic companies providing that these generic companies can bring their generic versions of Bridion to the market in January 2026 (which may be delayed by any applicable pediatric exclusivity) or earlier under certain circumstances. The Company has agreed to stay the lawsuit filed against two generic companies, which in exchange agreed to be bound by a judgment on the merits of the consolidated action in the District of New Jersey. One of the generic companies in the consolidated action requested dismissal of the action against it and the Company did not oppose this request, which was subsequently granted by the court. The Company does not expect this company to bring its generic version of Bridion to the market before January 2026 or later, depending on any applicable pediatric exclusivity, unless the Company receives an adverse court decision.
Januvia, Janumet, Janumet XR — As previously disclosed, the FDA has granted pediatric exclusivity with respect to Januvia, Janumet, and Janumet XR (sitagliptin and metformin HCl extended-release), which provides a further six months of exclusivity in the U.S. beyond the expiration of all patents listed in the FDA’s Orange Book. Adding this exclusivity to the term of the key patent protection extends exclusivity on these products to January 2023. The Company currently anticipates that sales of Januvia and Janumet in the U.S. will decline significantly after this date. However, Januvia, Janumet, and Janumet XR contain sitagliptin phosphate monohydrate and the Company has another patent covering certain phosphate salt and polymorphic forms of sitagliptin (2027 salt/polymorph patent), which, if determined to be valid, would preclude generic manufacturers from making sitagliptin phosphate salt and polymorphic forms until 2027 with the expiration of that patent, plus pediatric exclusivity. In 2019, Par Pharmaceutical filed suit against the Company in the U.S. District Court for the District of New Jersey, seeking a declaratory judgment of invalidity of the 2027 salt/polymorph patent. In response, the Company filed a patent infringement lawsuit in the U.S. District Court for the District of Delaware against Par Pharmaceutical and additional companies that also indicated an intent to market generic versions of Januvia, Janumet, and Janumet XR following expiration of key patent protection, but prior to the expiration of the 2027 salt/polymorph patent, and a later granted patent owned by the Company covering the Janumet formulation where its term plus the pediatric exclusivity ends in 2029. The Company also filed a patent infringement lawsuit against Mylan in the Northern District of West Virginia. The Judicial Panel on Multidistrict Litigation entered an order transferring the Company’s lawsuit against Mylan to the U.S. District Court for the District of Delaware for coordinated and consolidated pretrial proceedings with the other cases pending in that district.
Prior to the beginning of the scheduled October 2021 trial in the U.S. District Court for the District of Delaware on invalidity issues, the Company settled with all defendants scheduled to participate in that trial. In the Company’s case against Mylan, a bench trial was held in December 2021 in the U.S. District Court for the Northern District of West Virginia, and the closing arguments were held on April 13, 2022.
In total, the Company has settled with 22 generic companies providing that these generic companies can bring their generic versions of Januvia and Janumet to the market in May 2026 or earlier under certain circumstances, and their generic versions of Janumet XR to the market in July 2026 or earlier under certain circumstances.
Additionally, in 2019, Mylan filed a petition for Inter Partes Review (IPR) at the U.S. Patent and Trademark Office (USPTO) seeking invalidity of some, but not all, of the claims of the 2027 salt/polymorph patent. The USPTO instituted IPR proceedings in May 2020, finding a reasonable likelihood that the challenged claims are not valid. A trial was held in February 2021 and a final decision was rendered in May 2021, holding that all of the challenged claims were not invalid. Mylan has appealed the USPTO’s decision to the U.S. Court of Appeals for the Federal Circuit, and a hearing was held on August 2, 2022.
In March 2021, the Company filed a patent infringement lawsuit in the U.S. District Court for the District of Delaware against Zydus Worldwide DMCC, Zydus Pharmaceuticals (USA) Inc., and Cadila Healthcare Ltd. (collectively, Zydus). In that lawsuit, the Company alleged infringement of the 2027 salt/polymorph patent based on the filing of Zydus’s application seeking approval of its sitagliptin tablets. The U.S. District Court for the District of Delaware has set a three-day bench trial in this matter beginning on October 31, 2022.
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Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
Generic companies have sought revocation of the Supplementary Protection Certificate (SPC) for Janumet in the following European countries: Austria, Bulgaria, Czech Republic, Estonia, Finland, France, Hungary, Italy, Portugal, Romania, Slovakia, Slovenia, and Sweden. If the generic companies are successful, Janumet could lose market exclusivity in these countries at the same time as the expiry of Januvia pediatric market exclusivity in September 2022. In February 2022, a Finnish court referred certain questions to the European Court of Justice that could determine the validity of the Janumet SPCs in Europe. In June 2021, a German court decided that the SPC for Janumet is invalid, which decision the Company has appealed. The validity of the Janumet SPC was upheld in the Czech Republic in March 2022 in a first instance decision, which has been appealed. In June 2022, a Romanian court decided that the SPC for Janumet was invalid in a first instance decision.
Other Litigation
There are various other pending legal proceedings involving the Company, principally product liability and intellectual property lawsuits. While it is not feasible to predict the outcome of such proceedings, in the opinion of the Company, either the likelihood of loss is remote or any reasonably possible loss associated with the resolution of such proceedings is not expected to be material to the Company’s financial condition, results of operations or cash flows either individually or in the aggregate.
Legal Defense Reserves
Legal defense costs expected to be incurred in connection with a loss contingency are accrued when probable and reasonably estimable. Some of the significant factors considered in the review of these legal defense reserves are as follows: the actual costs incurred by the Company; the development of the Company’s legal defense strategy and structure in light of the scope of its litigation; the number of cases being brought against the Company; the costs and outcomes of completed trials and the most current information regarding anticipated timing, progression, and related costs of pre-trial activities and trials in the associated litigation. The amount of legal defense reserves as of June 30, 2022 and December 31, 2021 of approximately $235 million and $230 million, respectively, represents the Company’s best estimate of the minimum amount of defense costs to be incurred in connection with its outstanding litigation; however, events such as additional trials and other events that could arise in the course of its litigation could affect the ultimate amount of legal defense costs to be incurred by the Company. The Company will continue to monitor its legal defense costs and review the adequacy of the associated reserves and may determine to increase the reserves at any time in the future if, based upon the factors set forth, it believes it would be appropriate to do so.

- 25 -

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
9.    Equity
Three Months Ended June 30,
 
  
Common Stock
Other
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
 
Treasury Stock
Non-
controlling
Interests
Total
($ and shares in millions except per share amounts) Shares Par Value Shares Cost
Balance at April 1, 2021 3,577  $ 1,788  $ 39,613  $ 48,888  $ (6,622) 1,046  $ (56,722) $ 94  $ 27,039 
Net income attributable to Merck & Co., Inc. —  —  —  1,545  —  —  —  —  1,545 
Other comprehensive income, net of taxes —  —  —  —  1,545  —  —  —  1,545 
Cash dividends declared on common stock ($0.65 per share)
—  —  —  (1,656) —  —  —  —  (1,656)
Treasury stock shares purchased —  —  —  —  —  (239) —  (239)
Spin-off of Organon & Co. —  —  4,643  —  449  —  —  (1) 5,091 
Share-based compensation plans and other —  —  (217) —  —  (5) 279  —  62 
Net income attributable to noncontrolling interests
—  —  —  —  —  —  — 
Balance at June 30, 2021 3,577  $ 1,788  $ 44,039  $ 48,777  $ (4,628) 1,044  $ (56,682) $ 94  $ 33,388 
Balance at April 1, 2022