UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 1-6571

Merck & Co., Inc.

One Merck Drive

Whitehouse Station, N.J. 08889-0100

(908) 423-1000

Incorporated in New Jersey		I.R.S. Employer
		Identification No. 22-1918501

The number of shares of common stock outstanding as of the close of business on July 29, 2011: 3,080,796,992

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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

 

 

Part I — Financial Information

Item 1. Financial Statements

MERCK & CO., INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENT OF INCOME
(Unaudited, $ in millions except per share amounts)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Sales		$	12,151			$	11,346			$	23,732			$	22,768
Costs, Expenses and Other
Materials and production			4,284				4,549				8,343				9,764
Marketing and administrative			3,525				3,175				6,689				6,397
Research and development			1,936				2,179				4,094				4,230
Restructuring costs			668				526				654				814
Equity income from affiliates			(55	)			(43	)			(193	)			(180	)
Other (income) expense, net			121				(281	)			744				(113	)
			10,479				10,105				20,331				20,912
Income Before Taxes			1,672				1,241				3,401				1,856
Taxes on Income			(382	)			461				276				746
Net Income		$	2,054			$	780			$	3,125			$	1,110
Less: Net Income Attributable to Noncontrolling Interests			30				28				58				59
Net Income Attributable to Merck & Co., Inc.		$	2,024			$	752			$	3,067			$	1,051
Basic Earnings per Common Share Attributable to Merck & Co., Inc. Common Shareholders		$	0.65			$	0.24			$	0.99			$	0.34
Earnings per Common Share Assuming Dilution Attributable to Merck & Co., Inc. Common Shareholders		$	0.65			$	0.24			$	0.98			$	0.33
Dividends Declared per Common Share		$	0.38			$	0.38			$	0.76			$	0.76

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

MERCK & CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited, $ in millions except per share amounts)

		June 30,				December 31,
		2011				2010
Assets
Current Assets
Cash and cash equivalents		$	12,342			$	10,900
Short-term investments			1,639				1,301
Accounts receivable (net of allowance for doubtful accounts of $128 in 2011 and $104 in 2010)			8,475				7,344
Inventories (excludes inventories of $1,408 in 2011 and $1,194 in 2010 classified in Other assets — see Note 6)			6,225				5,868
Deferred income taxes and other current assets			3,687				3,651
Total current assets			32,368				29,064
Investments			2,175				2,175
Property, Plant and Equipment, at cost, net of accumulated depreciation of $15,195 in 2011 and $13,481 in 2010			16,671				17,082
Goodwill			12,382				12,378
Other Intangibles, Net			37,065				39,456
Other Assets			5,534				5,626
		$	106,195			$	105,781
Liabilities and Equity
Current Liabilities
Loans payable and current portion of long-term debt		$	2,523			$	2,400
Trade accounts payable			2,143				2,308
Accrued and other current liabilities			8,747				8,514
Income taxes payable			1,174				1,243
Dividends payable			1,176				1,176
Total current liabilities			15,763				15,641
Long-Term Debt			15,783				15,482
Deferred Income Taxes and Noncurrent Liabilities			16,727				17,853
Merck & Co., Inc. Stockholders’ Equity
Common stock, $0.50 par value Authorized - 6,500,000,000 shares Issued - 3,576,948,356 shares in 2011 and 2010			1,788				1,788
Other paid-in capital			40,657				40,701
Retained earnings			38,243				37,536
Accumulated other comprehensive loss			(2,776	)			(3,216	)
			77,912				76,809
Less treasury stock, at cost 493,935,906 shares in 2011 and 494,841,533 shares in 2010			22,416				22,433
Total Merck & Co., Inc. stockholders’ equity			55,496				54,376
Noncontrolling Interests			2,426				2,429
Total equity			57,922				56,805
		$	106,195			$	105,781

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

MERCK & CO., INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, $ in millions)

		Six Months Ended
		June 30,
		2011				2010
Cash Flows from Operating Activities
Net income		$	3,125			$	1,110
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			3,663				3,635
Intangible asset impairment charges			439				27
Equity income from affiliates			(193	)			(180	)
Dividends and distributions from equity affiliates			121				182
Gain on AstraZeneca asset option exercise			—				(443	)
Deferred income taxes			(841	)			(319	)
Share-based compensation			200				274
Other			(456	)			410
Net changes in assets and liabilities			(1,485	)			(5	)
Net Cash Provided by Operating Activities			4,573				4,691
Cash Flows from Investing Activities
Capital expenditures			(689	)			(680	)
Purchases of securities and other investments			(3,066	)			(4,235	)
Proceeds from sales of securities and other investments			2,890				1,700
Dispositions of businesses, net of cash divested			323				—
Acquisitions of businesses, net of cash acquired			(373	)			(141	)
Proceeds from AstraZeneca option exercise			—				647
Other			(28	)			25
Net Cash Used in Investing Activities			(943	)			(2,684	)
Cash Flows from Financing Activities
Net change in short-term borrowings			1,396				1,658
Payments on debt			(1,265	)			(626	)
Purchases of treasury stock			(314	)			(1,297	)
Dividends paid to stockholders			(2,351	)			(2,378	)
Proceeds from exercise of stock options			162				237
Other			(57	)			(115	)
Net Cash Used in Financing Activities			(2,429	)			(2,521	)
Effect of Exchange Rate Changes on Cash and Cash Equivalents			241				(131	)
Net Increase (Decrease) in Cash and Cash Equivalents			1,442				(645	)
Cash and Cash Equivalents at Beginning of Year			10,900				9,311
Cash and Cash Equivalents at End of Period		$	12,342			$	8,666

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

Notes to Consolidated Financial Statements (unaudited)

1. Basis of Presentation

     The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and disclosures required by accounting principles generally accepted in the United States for complete consolidated financial statements are not included herein. These interim statements should be read in conjunction with the audited financial statements and notes thereto included in Merck & Co., Inc.’s Form 10-K filed on February 28, 2011.

     On November 3, 2009, Merck & Co., Inc. (“Old Merck”) and Schering-Plough Corporation (“Schering-Plough”) completed their previously-announced merger (the “Merger”). In the Merger, Schering-Plough acquired all of the shares of Old Merck, which became a wholly owned subsidiary of Schering-Plough and was renamed Merck Sharp & Dohme Corp. Schering-Plough continued as the surviving public company and was renamed Merck & Co., Inc. (“New Merck” or the “Company”). However, for accounting purposes only, the Merger was treated as an acquisition with Old Merck considered the accounting acquirer. References in these financial statements to “Merck” for periods prior to the Merger refer to Old Merck and for periods after the completion of the Merger to New Merck.

     The results of operations of any interim period are not necessarily indicative of the results of operations for the full year. In the Company’s opinion, all adjustments necessary for a fair presentation of these interim statements have been included and are of a normal and recurring nature.

     Certain reclassifications have been made to prior year amounts to conform to the current year presentation.

Recently Adopted Accounting Standards

     In October 2009, the Financial Accounting Standards Board (“FASB”) issued new guidance for revenue recognition with multiple deliverables. The Company adopted this guidance prospectively for revenue arrangements entered into or materially modified on or after January 1, 2011. This guidance eliminates the residual method under the current guidance and replaces it with the “relative selling price” method when allocating revenue in a multiple deliverable arrangement. The selling price for each deliverable shall be determined using vendor specific objective evidence of selling price, if it exists, otherwise third-party evidence of selling price shall be used. If neither exists for a deliverable, the vendor shall use its best estimate of the selling price for that deliverable. The effect of adoption on the Company’s financial position and results of operations was not material.

Recently Issued Accounting Standards

     In June 2011, the FASB issued amended guidance on the presentation of comprehensive income in financial statements. This amendment provides companies the option to present the components of net income and other comprehensive income either as one continuous statement of comprehensive income or as two separate but consecutive statements. It eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The provisions of this new guidance are effective for interim and annual periods beginning in 2012. The adoption of this new guidance will not impact the Company’s financial position, results of operations or cash flows.

Notes to Consolidated Financial Statements (unaudited) (continued)

2. Restructuring

Merger Restructuring Program

     In February 2010, the Company commenced actions under a global restructuring program (the “Merger Restructuring Program”) in conjunction with the integration of the legacy Merck and legacy Schering-Plough businesses. This Merger Restructuring Program is intended to optimize the cost structure of the combined company. Additional actions under the program continued during 2010. On July 29, 2011, the Company announced the next phase of the Merger Restructuring Program during which the Company expects to reduce its workforce measured at the time of the Merger by an additional 12% to 13% across the Company worldwide. A majority of the workforce reductions in this phase of the Merger Restructuring Program relate to manufacturing, including Animal Health, administrative and headquarters organizations. Previously announced workforce reductions of approximately 17% in earlier phases of the program primarily reflect the elimination of positions in sales, administrative and headquarters organizations, as well as from the sale or closure of certain manufacturing and research and development sites and the consolidation of office facilities. The Company will continue to hire employees in strategic growth areas of the business as necessary. The Company will continue to pursue productivity efficiencies and evaluate its manufacturing supply chain capabilities on an ongoing basis which may result in future restructuring actions.

     The Company recorded total pretax restructuring costs of $808 million and $830 million in the second quarter of 2011 and 2010, respectively, and $921 million and $1.1 billion for the first six months of 2011 and 2010, respectively, related to this program. Since inception of the Merger Restructuring Program through June 30, 2011, Merck has recorded total pretax accumulated costs of approximately $4.2 billion and eliminated approximately 12,900 positions comprised of employee separations, as well as the elimination of contractors and over 2,500 positions that were vacant at the time of the Merger. The restructuring actions under the Merger Restructuring Program are expected to be substantially completed by the end of 2013, with the exception of certain actions, principally manufacturing-related, which are expected to be completed by 2015, with the total cumulative pretax costs estimated to be approximately $5.8 billion to $6.6 billion. The Company estimates that approximately two-thirds of the cumulative pretax costs relate to cash outlays, primarily related to employee separation expense. Approximately one-third of the cumulative pretax costs are non-cash, relating primarily to the accelerated depreciation of facilities to be closed or divested.

2008 Global Restructuring Program

     In October 2008, Old Merck announced a global restructuring program (the “2008 Restructuring Program”) to reduce its cost structure, increase efficiency, and enhance competitiveness. As part of the 2008 Restructuring Program, the Company expects to eliminate approximately 7,200 positions — 6,800 active employees and 400 vacancies — across the Company worldwide by the end of 2011. Pretax restructuring costs of $1 million and $66 million were recorded in the second quarter of 2011 and 2010, respectively, and $5 million and $131 million in the first six months of 2011 and 2010, respectively, related to the 2008 Restructuring Program. Since inception of the 2008 Restructuring Program through June 30, 2011, Merck has recorded total pretax accumulated costs of $1.6 billion and eliminated approximately 5,980 positions comprised of employee separations and the elimination of contractors and vacant positions. The 2008 Restructuring Program is expected to be completed by the end of 2011, except for certain manufacturing-related actions, with the total cumulative pretax costs estimated to be up to $2.0 billion. The Company estimates that two-thirds of the cumulative pretax costs relate to cash outlays, primarily from employee separation expense. Approximately one-third of the cumulative pretax costs are non-cash, relating primarily to the accelerated depreciation of facilities to be closed or divested.

Notes to Consolidated Financial Statements (unaudited) (continued)

     For segment reporting, restructuring charges are unallocated expenses.

     The following tables summarize the charges related to Merger Restructuring Program and 2008 Restructuring Program activities by type of cost:

		Three Months Ended June 30, 2011																Six Months Ended June 30, 2011
		Separation				Accelerated												Separation				Accelerated
($ in millions)		Costs				Depreciation				Other				Total				Costs				Depreciation				Other				Total
Merger Restructuring Program
Materials and production		$	—			$	91			$	5			$	96			$	—			$	152			$	5			$	157
Marketing and administrative			—				22				1				23				—				45				1				46
Research and development			—				38				(22	)			16				—				80				(19	)			61
Restructuring costs			646				—				27				673				607				—				50				657
			646				151				11				808				607				277				37				921
2008 Restructuring Program
Materials and production			—				4				2				6				—				6				2				8
Restructuring costs			(7	)			—				2				(5	)			(8	)			—				5				(3	)
			(7	)			4				4				1				(8	)			6				7				5
		$	639			$	155			$	15			$	809			$	599			$	283			$	44			$	926

		Three Months Ended June 30, 2010																Six Months Ended June 30, 2010
		Separation				Accelerated												Separation				Accelerated
($ in millions)		Costs				Depreciation				Other				Total				Costs				Depreciation				Other				Total
Merger Restructuring Program
Materials and production		$	—			$	149			$	22			$	171			$	—			$	174			$	22			$	196
Research and development			—				113				31				144				—				113				37				150
Restructuring costs			374				41				100				515				583				41				143				767
			374				303				153				830				583				328				202				1,113
2008 Restructuring Program
Materials and production			—				11				36				47				—				40				36				76
Restructuring costs			12				—				7				19				31				—				24				55
			12				11				43				66				31				40				60				131
		$	386			$	314			$	196			$	896			$	614			$	368			$	262			$	1,244

     Separation costs are associated with actual headcount reductions, as well as those headcount reductions which were probable and could be reasonably estimated. In the first six months of 2011, separation costs for the Merger Restructuring Program include a reduction of separation reserves of approximately $50 million resulting from the Company’s decision in the first quarter to retain approximately 380 employees at its Oss, Netherlands research facility that had previously been expected to be separated. In the second quarter of 2011 and 2010, approximately 585 positions and 2,435 positions, respectively, were eliminated under the Merger Restructuring Program and approximately 60 positions and 240 positions, respectively, were eliminated under the 2008 Restructuring Program. In the first six months of 2011 and 2010, approximately 1,335 positions and 7,585 positions, respectively, were eliminated under the Merger Restructuring Program and approximately 180 positions and 775 positions, respectively, were eliminated under the 2008 Restructuring Program. These position eliminations were comprised of actual headcount reductions and the elimination of contractors and vacant positions.

     Accelerated depreciation costs primarily relate to manufacturing, research and administrative facilities and equipment to be sold or closed as part of the programs. Accelerated depreciation costs represent the difference between the depreciation expense to be recognized over the revised useful life of the site, based upon the anticipated date the site will be closed or divested, and depreciation expense as determined utilizing the useful life prior to the restructuring actions. All of the sites have and will continue to operate up through the respective closure dates, and since future cash flows were sufficient to recover the respective book values, Merck was required to accelerate depreciation of the site assets rather than write them off immediately.

     Other activity in the second quarter of 2011 and 2010 includes asset abandonment, shut-down and other related costs. Additionally, other activity includes employee-related costs such as curtailment, settlement and termination charges associated with pension and other postretirement benefit plans (see Note 12) and share-based compensation costs.

Notes to Consolidated Financial Statements (unaudited) (continued)

     The following table summarizes the charges and spending relating to Merger Restructuring Program and 2008 Restructuring Program activities for the six months ended June 30, 2011:

		Separation				Accelerated
($ in millions)		Costs				Depreciation				Other				Total
Merger Restructuring Program
Restructuring reserves January 1, 2011		$	859			$	—			$	64			$	923
Expense			607				277				37				921
(Payments) receipts, net			(257	)			—				(71	)			(328	)
Non-cash activity			—				(277	)			16				(261	)
Restructuring reserves June 30, 2011 (1)		$	1,209			$	—			$	46			$	1,255
2008 Restructuring Program
Restructuring reserves January 1, 2011		$	196			$	—			$	—			$	196
Expense			(8	)			6				7				5
(Payments) receipts, net			(13	)			—				(2	)			(15	)
Non-cash activity			—				(6	)			(5	)			(11	)
Restructuring reserves June 30, 2011 (1)		$	175			$	—			$	—			$	175

(1)		The cash outlays associated with the Merger Restructuring Program and the 2008 Restructuring Program are expected to be substantially completed by the end of 2013 and 2011, respectively, with the exception of certain actions, principally manufacturing-related, which are expected to be completed by 2015.

Legacy Schering-Plough Program

     Prior to the Merger, Schering-Plough commenced a Productivity Transformation Program which was designed to reduce and avoid costs and increase productivity. The Company recorded accelerated depreciation costs included in Materials and production of $7 million and $6 million for the second quarter of 2011 and 2010, respectively, and $16 million and $9 million for the first six months of 2011 and 2010, respectively. In addition, the second quarter and first six months of 2010 includes a net gain of $8 million reflected in Restructuring costs primarily related to the sale of a manufacturing facility. The remaining reserve associated with this program was $38 million at June 30, 2011.

3. Acquisitions, Divestitures, Research Collaborations and License Agreements

     In May 2011, Merck completed the acquisition of Inspire Pharmaceuticals, Inc. (“Inspire”), a specialty pharmaceutical company focused on developing and commercializing ophthalmic products. Under the terms of the merger agreement, Merck acquired all outstanding shares of common stock of Inspire at a price of $5.00 per share in cash for a total of approximately $420 million. The transaction was accounted for as an acquisition of a business; accordingly, the assets acquired and liabilities assumed were recorded at their respective fair values as of the acquisition date. The determination of fair value requires management to make significant estimates and assumptions. In connection with the acquisition, substantially all of the purchase price was allocated to Inspire’s product and product right intangible assets and related deferred tax liabilities, a deferred tax asset relating to Inspire’s net operating loss carryforwards, and goodwill. Certain estimated values are not yet finalized and may be subject to change. The Company expects to finalize these amounts as soon as possible, but no later than one year from the acquisition date. This transaction closed on May 16, 2011, and accordingly, the results of operations of the acquired business have been included in the Company’s results of operations beginning after the acquisition date. Pro forma financial information has not been included because Inspire’s historical financial results are not significant when compared with the Company’s financial results.

     In March 2011, the Company sold the Merck BioManufacturing Network, a leading provider of contract manufacturing and development services for the biopharmaceutical industry and wholly owned by Merck, to Fujifilm Corporation (“Fujifilm”). Under the terms of the agreement, Fujifilm purchased all of the equity interests in two Merck subsidiaries which together own all assets of the Merck BioManufacturing Network comprising facilities located in Research Triangle Park, North Carolina and Billingham, U.K.; and including manufacturing contracts; business support operations and a highly skilled workforce. As part of the agreement with Fujifilm, Merck has committed to certain continued development and manufacturing activities with these two companies. The transaction resulted in a gain of $127 million in the first six months of 2011 reflected in Other (income) expense, net.

Notes to Consolidated Financial Statements (unaudited) (continued)

4. Collaborative Arrangements

     The Company continues its strategy of establishing external alliances to complement its substantial internal research capabilities, including research collaborations, licensing preclinical and clinical compounds and technology platforms to drive both near- and long-term growth. The Company supplements its internal research with a licensing and external alliance strategy focused on the entire spectrum of collaborations from early research to late-stage compounds, as well as new technologies across a broad range of therapeutic areas. These arrangements often include upfront payments and royalty or profit share payments, contingent upon the occurrence of certain future events linked to the success of the asset in development, as well as expense reimbursements or payments to the third party.

Cozaar/Hyzaar

     In 1989, Old Merck and E.I. duPont de Nemours and Company (“DuPont”) agreed to form a long-term research and marketing collaboration to develop a class of therapeutic agents for high blood pressure and heart disease, discovered by DuPont, called angiotensin II receptor antagonists, which include Cozaar and Hyzaar. In return, Old Merck provided DuPont marketing rights in the United States and Canada to its prescription medicines, Sinemet and Sinemet CR (the Company has since regained global marketing rights to Sinemet and Sinemet CR). Pursuant to a 1994 agreement with DuPont, the Company has an exclusive licensing agreement to market Cozaar and Hyzaar, which are both registered trademarks of DuPont, in return for royalties and profit share payments to DuPont. The patents that provided market exclusivity in the United States for Cozaar and Hyzaar expired in April 2010. In addition, Cozaar and Hyzaar lost patent protection in a number of major European markets in March 2010.

Remicade/Simponi

     In 1998, a subsidiary of Schering-Plough entered into a licensing agreement with Centocor Ortho Biotech Inc. (“Centocor”), a Johnson & Johnson company, to market Remicade, which is prescribed for the treatment of inflammatory diseases. In 2005, Schering-Plough’s subsidiary exercised an option under its contract with Centocor for license rights to develop and commercialize Simponi (golimumab), a fully human monoclonal antibody. The Company had exclusive marketing rights to both products outside the United States, Japan and certain other Asian markets. In December 2007, Schering-Plough and Centocor revised their distribution agreement regarding the development, commercialization and distribution of both Remicade and Simponi, extending the Company’s rights to exclusively market Remicade to match the duration of the Company’s exclusive marketing rights for Simponi. In addition, Schering-Plough and Centocor agreed to share certain development costs relating to Simponi’s auto-injector delivery system. On October 6, 2009, the European Commission approved Simponi as a treatment for rheumatoid arthritis and other immune system disorders in two presentations — a novel auto-injector and a prefilled syringe. As a result, the Company’s marketing rights for both products extend for 15 years from the first commercial sale of Simponi in the European Union (“EU”) following the receipt of pricing and reimbursement approval within the EU. In April 2011, Merck and Johnson & Johnson reached agreement to amend the distribution rights to Remicade and Simponi. Under the terms of the amended distribution agreement, Merck relinquished exclusive marketing rights for Remicade and Simponi to Johnson & Johnson in territories including Canada, Central and South America, the Middle East, Africa and Asia Pacific effective July 1, 2011. Merck retained exclusive marketing rights throughout Europe, Russia and Turkey (“Retained Territories”). In addition, beginning July 1, 2011, all profit derived from Merck’s exclusive distribution of the two products in the Retained Territories is being equally divided between Merck and Johnson & Johnson. Under the prior terms of the distribution agreement, the contribution income (profit) split, which was at 58% to Merck and 42% percent to Johnson & Johnson, would have declined for Merck and increased for Johnson & Johnson each year until 2014, when it would have been equally divided. Johnson & Johnson also received a one-time payment of $500 million in April 2011, which the Company recorded as a charge to Other (income) expense, net in the first quarter of 2011.

Notes to Consolidated Financial Statements (unaudited) (continued)

5. 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 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

     A significant portion of the Company’s revenues are denominated in foreign currencies. The Company has established revenue hedging and balance sheet risk management programs to protect against volatility of future foreign currency cash flows and changes in fair value caused by volatility in foreign exchange rates.

     The objective of the revenue hedging program is to reduce the potential for longer-term unfavorable changes in foreign exchange to decrease the U.S. dollar value of future cash flows derived from foreign currency denominated sales, primarily the euro and Japanese yen. To achieve this objective, the Company will partially hedge forecasted foreign currency denominated third-party and intercompany distributor entity sales that are expected to occur over its planning cycle, typically no more than three years into the future. The Company will layer in hedges over time, increasing the portion of third-party and intercompany distributor entity sales hedged as it gets closer to the expected date of the forecasted foreign currency denominated sales, such that it is probable the hedged transaction will occur. The portion of sales hedged is based on assessments of cost-benefit profiles that consider natural offsetting exposures, revenue and exchange rate volatilities and correlations, and the cost of hedging instruments. The hedged anticipated sales are a specified component of a portfolio of similarly denominated foreign currency-based sales transactions, each of which responds to the hedged risk in the same manner. The Company manages its anticipated transaction exposure principally with purchased local currency put options, which provide the Company with a right, but not an obligation, to sell foreign currencies in the future at a predetermined price. If the U.S. dollar strengthens relative to the currency of the hedged anticipated sales, total changes in the options’ cash flows offset the decline in the expected future U.S. dollar cash flows of the hedged foreign currency sales. Conversely, if the U.S. dollar weakens, the options’ value reduces to zero, but the Company benefits from the increase in the value of the anticipated foreign currency cash flows.

     In connection with the Company’s revenue hedging program, a purchased collar option strategy may be utilized. With a purchased collar option strategy, the Company writes a local currency call option and purchases a local currency put option. As compared to a purchased put option strategy alone, a purchased collar strategy reduces the upfront costs associated with purchasing puts through the collection of premium by writing call options. If the U.S. dollar weakens relative to the currency of the hedged anticipated sales, the purchased put option value of the collar strategy reduces to zero, but the Company benefit from the increase in the value of its anticipated foreign currency cash flows would be capped at the strike level of the written call. If the U.S. dollar strengthens relative to the currency of the hedged anticipated sales, the written call option value of the collar strategy reduces to zero and the changes in the purchased put cash flows of the collar strategy would offset the decline in the expected future U.S. dollar cash flows of the hedged foreign currency sales.

     The Company may also utilize forward contracts in its revenue hedging program. If the U.S. dollar strengthens relative to the currency of the hedged anticipated sales, the increase in the fair value of the forward contracts offsets the decrease in the expected future U.S. dollar cash flows of the hedged foreign currency sales. Conversely, if the U.S. dollar weakens, the decrease in the fair value of the forward contracts offsets the increase in the value of the anticipated foreign currency cash flows.

Notes to Consolidated Financial Statements (unaudited) (continued)

     The fair values of these derivative contracts are recorded as either assets (gain positions) or liabilities (loss positions) in the 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 effective portion of the unrealized gains or losses on these contracts is recorded in Accumulated other comprehensive income (“AOCI”) and reclassified into Sales when the hedged anticipated revenue is recognized. The hedge relationship is highly effective and hedge ineffectiveness has been de minimis. For those derivatives which are not designated as cash flow hedges, unrealized gains or losses are recorded to Sales each period. The cash flows from these contracts are reported as operating activities in the Consolidated Statement of Cash Flows. The Company does not enter into derivatives for trading or speculative purposes.

     The primary objective of the balance sheet risk management program is to mitigate the exposure of foreign currency denominated net monetary assets of foreign subsidiaries where the U.S. dollar is the functional currency from the effects of volatility in foreign exchange that might occur prior to their conversion to U.S. dollars. In these instances, Merck principally utilizes forward exchange contracts, which enable the Company to buy and sell foreign currencies in the future at fixed exchange rates and economically offset the consequences of changes in foreign exchange from the monetary assets. Merck routinely enters into contracts to offset the effects of exchange on exposures denominated in developed country currencies, primarily the euro and Japanese yen. For exposures in developing country currencies, the Company will enter into forward contracts to partially 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 Company will also minimize the effect of exchange on monetary assets and liabilities by managing operating activities and net asset positions at the local level.

     Foreign currency denominated monetary assets and liabilities of foreign subsidiaries where the U.S. dollar is the functional currency are remeasured at spot rates in effect on the balance sheet date with the effects of changes in spot rates reported in Other (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.

     When applicable, the Company uses forward contracts to hedge the changes in fair value of certain foreign currency denominated available-for-sale securities attributable to fluctuations in foreign currency exchange rates. These derivative contracts are designated as fair value hedges. Accordingly, changes in the fair value of the hedged securities due to fluctuations in spot rates are recorded in Other (income) expense, net, and are offset by the fair value changes in the forward contracts attributable to spot rate fluctuations. Changes in the contracts’ fair value due to spot-forward differences are excluded from the designated hedge relationship and recognized in Other (income) expense, net. These amounts, as well as hedge ineffectiveness, were not significant. The cash flows from these contracts are reported as operating activities in the 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 on the euro-denominated debt instruments are included in foreign currency translation adjustment within OCI.

     The Company also uses forward exchange contracts to hedge its net investment in foreign operations against adverse movements in exchange rates. The forward contracts are designated as hedges of the net investment in a foreign operation. The Company hedges a portion of the net investment in certain of its foreign operations and measures ineffectiveness based upon changes in spot foreign exchange rates. The effective portion of the unrealized gains or losses on these contracts is recorded in foreign currency translation adjustment within OCI, and remains in AOCI until either the sale or complete or substantially complete liquidation of the subsidiary. The cash flows from these contracts are reported as investing activities in the Consolidated Statement of Cash Flows.

Notes to Consolidated Financial Statements (unaudited) (continued)

Interest Rate Risk Management

     In June 2011, the Company terminated nine interest rate swap contracts with a total notional amount of $3.5 billion. These swaps effectively converted $3.5 billion of its fixed-rate notes, with maturity dates varying from March 2015 to June 2019, to floating rate instruments. As a result of the swap terminations, the Company received $175 million in cash, which included $36 million in accrued interest. The corresponding $139 million basis adjustment of the debt associated with the terminated swap contracts was deferred and is being amortized as a reduction of interest expense over the respective term of the notes. The cash flows from these contracts are reported as operating activities in the Consolidated Statement of Cash Flows.

     At June 30, 2011, the Company was a party to 13 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. There are two swaps maturing in 2011 with notional amounts of $125 million each that effectively convert the Company’s $250 million, 5.125% fixed-rate notes due 2011 to floating rate instruments. There are five swaps maturing in 2015 with notional amounts of $150 million each that effectively convert $750 million of the Company’s 4.0% fixed-rate notes due 2015 to floating rate instruments. There are six swaps maturing in 2016, two of which have notional amounts of $175 million each, and four of which have notional amounts of $125 million each, that effectively convert the Company’s $850 million, 2.25% fixed-rate notes due 2016 to floating rate instruments. The interest rate swap contracts are designated hedges of the fair value changes in the notes attributable to changes in the benchmark London Interbank Offered Rate (“LIBOR”) swap rate. The fair value changes in the notes attributable to changes in the benchmark interest rate are recorded in interest expense and offset by the fair value changes in the swap contracts. The cash flows from these contracts are reported as operating activities in the Consolidated Statement of Cash Flows.

     Presented in the table below is the fair value of derivatives segregated between those derivatives that are designated as hedging instruments and those that are not designated as hedging instruments:

				June 30, 2011												December 31, 2010
				Fair Value of Derivative								U.S. Dollar				Fair Value of Derivative								U.S. Dollar
($ in millions)		Balance Sheet Caption		Asset				Liability				Notional				Asset				Liability				Notional
Derivatives Designated as Hedging Instruments
Foreign exchange contracts (current)		Deferred income taxes and other current assets		$	91			$	—			$	3,696			$	167			$	—			$	2,344
Foreign exchange contracts (non-current)		Other assets			288				—				4,469				310				—				3,720
Foreign exchange contracts (current)		Accrued and other current liabilities			—				40				1,825				—				18				1,505
Foreign exchange contracts (non-current)		Deferred income taxes and noncurrent liabilities			—				3				113				—				6				503
Interest rate swaps (current)		Deferred income taxes and other current assets			6				—				250				—				—				—
Interest rate swaps (non-current)		Other assets			66				—				1,600				56				—				1,000
Interest rate swaps (non-current)		Deferred income taxes and noncurrent liabilities			—				—				—				—				7				850
				$	451			$	43			$	11,953			$	533			$	31			$	9,922
Derivatives Not Designated as Hedging Instruments
Foreign exchange contracts (current)		Deferred income taxes and other current assets		$	106			$	—			$	7,894			$	95			$	—			$	6,295
Foreign exchange contracts (current)		Accrued and other current liabilities			—				25				3,736				—				30				4,229
				$	106			$	25			$	11,630			$	95			$	30			$	10,524
				$	557			$	68			$	23,583			$	628			$	61			$	20,446

Notes to Consolidated Financial Statements (unaudited) (continued)

     The table below provides information on the location and pretax gain or loss amounts for derivatives that are: (i) designated in a fair value hedging relationship, (ii) designated in a cash flow hedging relationship, (iii) designated in a foreign currency hedging relationship (net investment hedge) and (iv) not designated in a hedging relationship:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
($ in millions)		2011				2010				2011				2010
Derivatives designated in fair value hedging relationships
Interest rate swap contracts
Amount of gain recognized in Other (income) expense, net on derivatives		$	(126	)		$	(13	)		$	(163	)		$	(35	)
Amount of loss recognized in Other (income) expense, net on hedged item			126				13				163				35
Derivatives designated in foreign currency cash flow hedging relationships
Foreign exchange contracts
Amount of loss (gain) reclassified from AOCI to Sales			20				(5	)			27				14
Amount of loss (gain) recognized in OCI on derivatives			69				(190	)			252				(284	)
Derivatives designated in foreign currency net investment hedging relationships
Foreign exchange contracts
Amount of gain recognized in Other (income) expense, net on derivatives (1)			(2	)			—				(8	)			—
Amount of loss recognized in OCI on derivatives			33				—				34				—
Derivatives not designated in a hedging relationship
Foreign exchange contracts
Amount of loss (gain) recognized in Other (income) expense, net on derivatives (2)			33				(117	)			349				(185	)
Amount of gain recognized in Sales on hedged item			—				(46	)			—				(113	)

(1)		There was no ineffectiveness on the hedge. Represents the amount excluded from hedge effectiveness testing.
(2)		These derivative contracts mitigate changes in the value of remeasured foreign currency denominated monetary assets and liabilities attributable to changes in foreign currency exchange rates.

     At June 30, 2011, the Company estimates $107 million of pretax net unrealized losses on derivatives maturing within the next 12 months that hedge foreign currency denominated sales over that same period will be reclassified from AOCI 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.

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. Entities are required to use 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 that may be used to measure fair value:

     Level 1 - Quoted prices in active markets for identical assets or liabilities. The Company’s Level 1 assets include equity securities that are traded in an active exchange market.

     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. The Company’s Level 2 assets and liabilities primarily include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, corporate notes and bonds, U.S. and foreign government and agency securities, certain mortgage-backed and asset-backed securities, municipal securities, commercial paper and derivative contracts whose values are determined using pricing models with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.

     Level 3 - Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation. The Company’s Level 3 assets included certain mortgage-backed securities with limited market activity.

     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.

Notes to 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
		Quoted Prices				Significant												Quoted Prices				Significant
		In Active				Other				Significant								In Active				Other				Significant
		Markets for				Observable				Unobservable								Markets for				Observable				Unobservable
		Identical Assets				Inputs				Inputs								Identical Assets				Inputs				Inputs
		(Level 1)				(Level 2)				(Level 3)				Total				(Level 1)				(Level 2)				(Level 3)				Total
($ in millions)		June 30, 2011																December 31, 2010
Assets
Investments
Commercial paper		$	—			$	1,411			$	—			$	1,411			$	—			$	1,046			$	—			$	1,046
Corporate notes and bonds			—				1,377				—				1,377				—				1,133				—				1,133
U.S. government and agency securities			—				523				—				523				—				500				—				500
Municipal securities			—				—				—				—				—				361				—				361
Asset-backed securities (1)			—				183				—				183				—				171				—				171
Mortgage-backed securities (1)			—				134				—				134				—				99				13				112
Foreign government bonds			—				56				—				56				—				10				—				10
Equity securities			96				31				—				127				117				23				—				140
Other debt securities			—				3				—				3				—				3				—				3
			96				3,718				—				3,814				117				3,346				13				3,476
Other assets
Securities held for employee compensation			197				—				—				197				181				—				—				181
Derivative assets (2)
Purchased currency options			—				379				—				379				—				477				—				477
Forward exchange contracts			—				106				—				106				—				95				—				95
Interest rate swaps			—				72				—				72				—				56				—				56
			—				557				—				557				—				628				—				628
Total assets		$	293			$	4,275			$	—			$	4,568			$	298			$	3,974			$	13			$	4,285
Liabilities
Derivative liabilities (2)
Written currency options		$	—			$	6			$	—			$	6			$	—			$	—			$	—			$	—
Forward exchange contracts			—				62				—				62				—				54				—				54
Interest rate swaps			—				—				—				—				—				7				—				7
Total liabilities		$	—			$	68			$	—			$	68			$	—			$	61			$	—			$	61

(1)		Substantially all of the asset-backed securities are highly-rated (Standard & Poor’s rating of AAA and Moody’s Investors Service rating of Aaa), secured primarily by credit card, auto loan, and home equity receivables, with weighted-average lives of primarily 5 years or less. Mortgage-backed securities represent AAA-rated securities issued or unconditionally guaranteed as to payment of principal and interest by U.S. government agencies.
(2)		The fair value determination of derivatives includes an assessment of the credit risk of counterparties to the derivatives and the Company’s own credit risk, the effects of which were not significant.

     There were no significant transfers between Level 1 and Level 2 during the second quarter or first six months of 2011. As of June 30, 2011, Cash and cash equivalents of $12.3 billion included $11.8 billion of cash equivalents.

Level 3 Valuation Techniques:

     Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial assets also include certain investment securities for which there is limited market activity such that the determination of fair value requires significant judgment or estimation. The Company’s Level 3 investment securities included certain mortgage-backed securities that were valued primarily using pricing models for which management understands the methodologies. These models incorporate transaction details such as contractual terms, maturity, timing and amount of future cash inflows, as well as assumptions about liquidity and credit valuation adjustments of marketplace participants.

Notes to Consolidated Financial Statements (unaudited) (continued)

     The table below provides a summary of the changes in fair value of all financial assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
($ in millions)		2011				2010				2011				2010
Beginning balance		$	—			$	20			$	13			$	72
Sales			—				(8	)			(13	)			(61	)
Settlements			—				—				—				(2	)
Total realized and unrealized gains (losses)
Included in:
Earnings (1)			—				6				—				18
Comprehensive income			—				(1	)			—				(10	)
Ending balance		$	—			$	17			$	—			$	17
Losses recorded in earnings for Level 3 assets still held at June 30		$	—			$	—			$	—			$	—

(1)		Amounts are recorded in Other (income) expense, net.

Financial Instruments not Measured at Fair Value

     Some of the Company’s financial instruments are not measured at fair value on a recurring basis but are recorded at amounts that approximate fair value due to their liquid or short-term nature, such as cash and cash equivalents, receivables and payables.

     The estimated fair value of loans payable and long-term debt (including current portion) at June 30, 2011 was $18.8 billion compared with a carrying value of $18.3 billion and at December 31, 2010 was $18.7 billion compared with a carrying value of $17.9 billion. Fair value was estimated using quoted dealer prices.

     A summary of gross unrealized gains and losses on available-for-sale investments recorded in AOCI is as follows:

		June 30, 2011																December 31, 2010
		Fair				Amortized				Gross Unrealized								Fair				Amortized				Gross Unrealized
($ in millions)		Value				Cost				Gains				Losses				Value				Cost				Gains				Losses
Commercial paper		$	1,411			$	1,411			$	—			$	—			$	1,046			$	1,046			$	—			$	—
Corporate notes and bonds			1,377				1,363				15				(1	)			1,133				1,124				12				(3	)
U.S. government and agency securities			523				523				2				(2	)			500				501				1				(2	)
Municipal securities			—				—				—				—				361				359				4				(2	)
Asset-backed securities			183				182				1				—				171				170				1				—
Mortgage-backed securities			134				134				1				(1	)			112				108				5				(1	)
Foreign government bonds			56				56				—				—				10				10				—				—
Other debt securities			3				1				2				—				3				1				2				—
Equity securities			324				307				17				—				321				295				34				(8	)
		$	4,011			$	3,977			$	38			$	(4	)		$	3,657			$	3,614			$	59			$	(16	)

     Available-for-sale debt securities included in Short-term investments totaled $1.6 billion at June 30, 2011. Of the remaining debt securities, $1.8 billion mature within five years. At June 30, 2011, there were no debt securities pledged as collateral.

Concentrations of Credit Risk

     On an ongoing basis, the Company monitors concentrations of credit risk associated with corporate 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. Approximately half of the Company’s cash and cash equivalents are invested in three highly-rated money market funds.

     The majority of the Company’s accounts receivable arise from product sales in the United States and Europe and are primarily due from drug wholesalers and retailers, hospitals, government agencies, managed health

Notes to Consolidated Financial Statements (unaudited) (continued)

care providers and pharmacy benefit managers. The Company monitors the financial performance and credit worthiness of its customers so that it can properly assess and respond to changes in their credit profile. The Company also continues to monitor economic conditions, including the volatility associated with international sovereign economies, and associated impacts on the financial markets and its business, taking into consideration the global economic downturn and the sovereign debt issues in certain European countries. The Company continues to monitor the credit and economic conditions within Greece, Spain, Italy and Portugal, among other members of the EU. These deteriorating economic conditions, as well as inherent variability of timing of cash receipts, have resulted in, and may continue to result in, an increase in the average length of time that it takes to collect accounts receivable outstanding. The Company does not expect to have write-offs or adjustments to accounts receivable which would have a material adverse impact on our financial position or results of operations. In the second quarter of 2011, the Company’s accounts receivable in Greece, Italy, Spain and Portugal totaled approximately $1.8 billion of which hospital and public sector receivables were approximately 75%. As of June 30, 2011, the Company’s total accounts receivable outstanding for more than one year were approximately $370 million, of which approximately 90% related to accounts receivable in Greece, Italy, Spain and Portugal, mostly comprised of hospital and public sector receivables.

     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. As of June 30, 2011 and December 31, 2010, the Company had received cash collateral of $114 million and $157 million, respectively, from various counterparties which is recorded in Accrued and other current liabilities. The Company had not advanced any cash collateral to counterparties as of June 30, 2011 or December 31, 2010.

6. Inventories

     Inventories consisted of:

		June 30,				December 31,
($ in millions)		2011				2010
Finished goods		$	1,440			$	1,484
Raw materials and work in process			6,036				5,449
Supplies			298				315
Total (approximates current cost)			7,774				7,248
Reduction to LIFO costs			(141	)			(186	)
		$	7,633			$	7,062
Recognized as:
Inventories		$	6,225			$	5,868
Other assets			1,408				1,194

     As of June 30, 2011 and December 31, 2010, $155 million and $225 million, respectively, of purchase accounting adjustments to inventories remained which are recognized as a component of Materials and production costs as the related inventories are sold. Amounts recognized as Other assets are comprised almost entirely of raw materials and work in process inventories. At June 30, 2011 and at December 31, 2010, these amounts included $1.3 billion and $1.0 billion, respectively, of inventories not expected to be sold within one year, principally vaccines. In addition, these amounts included $111 million and $197 million at June 30, 2011 and December 31, 2010, respectively, of inventories produced in preparation for product launches.

7. Other Intangibles

     At the time of the Merger, the Company measured the fair value of Schering-Plough’s marketed products and legacy pipeline programs and capitalized these amounts. During the second quarter of 2011, the Company recorded an intangible asset impairment charge of $118 million within Materials and production costs related to a marketed product. Also, during the second quarter and first six months of 2011, the Company recorded $19 million and $321 million, respectively, of in-process research and development (“IPR&D”) impairment charges within Research and development expenses primarily for pipeline programs that had previously been deprioritized and were deemed to have no alternative use in the period. During the first six months of 2010, the Company recorded $27 million of IPR&D impairment charges attributable to compounds identified during the Company’s pipeline prioritization review that were abandoned and determined to have either no alternative use or were returned to the respective licensor. The Company may recognize additional non-cash impairment charges in the future related to marketed

Notes to Consolidated Financial Statements (unaudited) (continued)

     products or for the cancellation of other legacy Schering-Plough pipeline programs and such charges could be material.

8. Joint Ventures and Other Equity Method Affiliates

     Equity income from affiliates reflects the performance of the Company’s joint ventures and other equity method affiliates and was comprised of the following:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
($ in millions)		2011				2010				2011				2010
AstraZeneca LP		$	44			$	40			$	177			$	165
Other (1)			11				3				16				15
		$	55			$	43			$	193			$	180

(1)		Primarily reflects results from Sanofi Pasteur MSD and Johnson & Johnson°Merck Consumer Pharmaceuticals Company.

AstraZeneca LP

     In 1998, Old Merck and Astra completed the restructuring of the ownership and operations of their existing joint venture whereby Old Merck acquired Astra’s interest in KBI Inc. (“KBI”) and contributed KBI’s operating assets to a new U.S. limited partnership, Astra Pharmaceuticals L.P. (the “Partnership”), in exchange for a 1% limited partner interest. Astra contributed the net assets of its wholly owned subsidiary, Astra USA, Inc., to the Partnership in exchange for a 99% general partner interest. The Partnership, renamed AstraZeneca LP (“AZLP”) upon Astra’s 1999 merger with Zeneca Group Plc (the “AstraZeneca merger”), became the exclusive distributor of the products for which KBI retained rights.

     In connection with the 1998 restructuring, Astra purchased an option (the “Asset Option”) for a payment of $443 million, which was recorded as deferred income, to buy Old Merck’s interest in the KBI products, excluding the gastrointestinal medicines Nexium and Prilosec (the “Non-PPI Products”). In April 2010, AstraZeneca exercised the Asset Option. Merck received $647 million from AstraZeneca, representing the net present value as of March 31, 2008 of projected future pretax revenue to be received by Old Merck from the Non-PPI Products, which was recorded as a reduction to the Company’s investment in AZLP. The Company recognized the $443 million of deferred income in the second quarter of 2010 as a component of Other (income) expense, net. In addition, in 1998, Old Merck granted Astra an option (the “Shares Option”) to buy Old Merck’s common stock interest in KBI and, therefore, Old Merck’s interest in Nexium and Prilosec, exercisable in 2012. The exercise price for the Shares Option will be based on the net present value of estimated future net sales of Nexium and Prilosec as determined at the time of exercise, subject to certain true-up mechanisms. The Company believes that it is likely that AstraZeneca will exercise the Shares Option.

     Summarized financial information for AZLP is as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
($ in millions)		2011				2010				2011				2010
Sales		$	1,181			$	1,297			$	2,336			$	2,590
Materials and production costs			516				626				1,061				1,259
Other expense, net			345				313				646				455
Income before taxes (1)		$	320			$	358			$	629			$	876

(1)		Merck’s partnership returns from AZLP are generally contractually determined and are not based on a percentage of income from AZLP, other than with respect to the 1% limited partnership interest discussed above.

Notes to Consolidated Financial Statements (unaudited) (continued)

9. 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 additional matters such as antitrust actions.

Vioxx Litigation

Product Liability Lawsuits

     As previously disclosed, individual and putative class actions have been filed against Old Merck in state and federal courts alleging personal injury and/or economic loss with respect to the purchase or use of Vioxx. All such actions filed in federal court are coordinated in a multidistrict litigation in the U.S. District Court for the Eastern District of Louisiana (the “Vioxx MDL”) before District Judge Eldon E. Fallon. A number of such actions filed in state court are coordinated in separate coordinated proceedings in state courts in California and Texas. (All of the actions discussed in this paragraph and in “Other Lawsuits” below are collectively referred to as the “Vioxx Product Liability Lawsuits.”)

     Of the plaintiff groups in the Vioxx Product Liability Lawsuits described above, the vast majority were dismissed as a result of the Vioxx Settlement Program, which has been described previously. As of June 30, 2011, approximately 30 plaintiff groups who were otherwise eligible for the Settlement Program did not participate and their claims remain pending against Old Merck. In addition, the claims of approximately 100 plaintiff groups who were not eligible for the Settlement Program remain pending against Old Merck, a number of which are subject to various motions to dismiss for failure to comply with court-ordered deadlines.

     There are no U.S. Vioxx Product Liability Lawsuits currently scheduled for trial in 2011. Old Merck has previously disclosed the outcomes of several Vioxx Product Liability Lawsuits that were tried prior to 2010. Of the cases that went to trial, there are two unresolved post-trial appeals: Ernst v. Merck and Garza v. Merck. Merck has previously disclosed the details associated with these cases and the grounds for Merck’s appeals.

Other Lawsuits

     There are still pending in various U.S. courts putative class actions purportedly brought on behalf of individual purchasers or users of Vioxx seeking reimbursement for alleged economic loss. In the Vioxx MDL proceeding, approximately 30 such class actions remain. In June 2010, Old Merck moved to strike the class claims or for judgment on the pleadings regarding the master complaint, which includes the above-referenced cases, and briefing on that motion was completed in September 2010. The Vioxx MDL court heard oral argument on Old Merck’s motion in October 2010, and took it under advisement.

     In June 2008, a Missouri state court certified a class of Missouri plaintiffs seeking reimbursement for out-of-pocket costs relating to Vioxx. Trial is scheduled to begin on May 21, 2012. In addition, in Indiana, plaintiffs have filed a motion to certify a class of Indiana Vioxx purchasers in a case pending before the Circuit Court of Marion County, Indiana. In April 2010, a Kentucky state court denied Old Merck’s motion for summary judgment and certified a class of Kentucky plaintiffs seeking reimbursement for out-of-pocket costs relating to Vioxx. The Kentucky Court of Appeals denied Old Merck’s petition for a writ of mandamus, and the Kentucky Supreme Court has affirmed that ruling. The trial court entered an amended class certification order on January 27, 2011, and Merck has appealed that ruling to the Kentucky Court of Appeals.

     Old Merck has also been named as a defendant in several lawsuits brought by, or on behalf of, government entities. Twelve of these suits are being brought by state Attorneys General and one has been brought on behalf of a county. All of these actions, except for a suit brought by the Attorney General of Michigan, are in the Vioxx MDL proceeding. The Michigan Attorney General case was remanded to state court. The trial court denied Old Merck’s motion to dismiss, but the Court of Appeals reversed that ruling on March 17, 2011, ordering the trial court to dismiss the case. The Michigan Attorney General has sought review before the Michigan Supreme Court, and its petition is currently pending. These actions allege that Old Merck misrepresented the safety of Vioxx. All but one of these suits seeks recovery for expenditures on Vioxx by government-funded health care programs such as Medicaid, along with other relief such as penalties and attorneys’ fees. An action brought by the Attorney General of Kentucky seeks only penalties for alleged Consumer Fraud Act violations. The lawsuit brought by the county is a class action filed by Santa Clara County, California on behalf of all similarly situated California counties. Old Merck moved to dismiss the case brought by the Attorney General of Oklahoma in December 2010.

     In March 2010, Judge Fallon partially granted and partially denied Old Merck’s motion for summary judgment in the Louisiana Attorney General case. A trial on the remaining claims before Judge Fallon was

Notes to Consolidated Financial Statements (unaudited) (continued)

completed in April 2010 and Judge Fallon found in favor of Old Merck in June 2010 dismissing the Attorney General’s remaining claims with prejudice. The Louisiana Attorney General filed a notice of appeal.

Shareholder Lawsuits

     As previously disclosed, in addition to the Vioxx Product Liability Lawsuits, various putative class actions and individual lawsuits under federal and state securities laws have been filed against Old Merck and various current and former officers and directors (the “Vioxx Securities Lawsuits”). As previously disclosed, the Vioxx Securities Lawsuits have been transferred by the Judicial Panel on Multidistrict Litigation (the “JPML”) to the U.S. District Court for the District of New Jersey before District Judge Stanley R. Chesler for inclusion in a nationwide MDL (the “Shareholder MDL”), and have been consolidated for all purposes. In June 2010, Old Merck moved to dismiss the Fifth Amended Class Action Complaint in the consolidated securities action. Oral argument on the motion to dismiss was held on July 12, 2011.

     As previously disclosed, several individual securities lawsuits filed by foreign institutional investors also are consolidated with the Vioxx Securities Lawsuits. By stipulation, defendants are not required to respond to these complaints until the resolution of any motions to dismiss in the consolidated securities class action.

     In addition, as previously disclosed, various putative class actions have been filed in federal court under the Employee Retirement Income Security Act (“ERISA”) against Old Merck and certain current and former officers and directors (the “Vioxx ERISA Lawsuits”). Those cases were consolidated in the Shareholder MDL before Judge Chesler. Fact discovery in the Vioxx ERISA Lawsuits closed in September 2010 and expert discovery closed on May 20, 2011. On June 20, 2011, Old Merck filed a motion for summary judgment, and plaintiffs filed a motion for partial summary judgment; those motions will be fully briefed on August 12, 2011. As previously disclosed, in February 2009, the court denied the motion for class certification as to one count, and granted the motion as to the remaining counts in Consolidated Amended Complaint in the Vioxx ERISA Lawsuits. On June 21, 2011, plaintiffs filed a renewed motion for class certification on the count that the court had previously ruled could not be decided on a class-wide basis; Old Merck filed an opposition to that renewed motion on July 1, 2011, and plaintiffs filed a reply on July 14, 2011. The motion is awaiting a decision by the court. Under the scheduling order, a final pre-trial order is due on November 1, 2011, and a final pre-trial conference is scheduled for November 15, 2011. No trial date has been set.

International Lawsuits

     As previously disclosed, in addition to the lawsuits discussed above, Old Merck has been named as a defendant in litigation relating to Vioxx in Australia, Brazil, Canada, Europe and Israel (collectively, the “Vioxx Foreign Lawsuits”).

Insurance

     The Company has Directors and Officers insurance coverage applicable to the Vioxx Securities Lawsuits with remaining stated upper limits of approximately $175 million. The Company has Fiduciary and other insurance for the Vioxx ERISA Lawsuits with stated upper limits of approximately $275 million. As a result of the previously disclosed insurance arbitration, additional insurance coverage for these claims should also be available, if needed, under upper-level excess policies that provide coverage for a variety of risks. There are disputes with the insurers about the availability of some or all of the Company’s insurance coverage for these claims and there are likely to be additional disputes. The amounts actually recovered under the policies discussed in this paragraph may be less than the stated upper limits.

Investigations

     As previously disclosed, Old Merck has received subpoenas from the Department of Justice (“DOJ”) requesting information related to Old Merck’s research, marketing and selling activities with respect to Vioxx in a federal health care investigation under criminal statutes. This investigation included subpoenas for witnesses to appear before a grand jury. As previously disclosed, in March 2009, Old Merck received a letter from the U.S. Attorney’s Office for the District of Massachusetts identifying it as a target of the grand jury investigation regarding Vioxx. In the third quarter of 2010, the Company established a $950 million reserve (the “Vioxx Liability Reserve”) in connection with the anticipated resolution of the DOJ’s investigation. The Company’s discussions with the government are ongoing. Until they are concluded, there can be no certainty about a definitive resolution. The

Notes to Consolidated Financial Statements (unaudited) (continued)

Company is cooperating with the DOJ in its investigation (the “Vioxx Investigation”). The Company cannot predict the outcome of these inquiries; however, they could result in potential civil and/or criminal remedies.

Reserves

     There are no U.S. Vioxx Product Liability Lawsuits currently scheduled for trial in 2011. The Company cannot predict the timing of any other trials related to the Vioxx Litigation (as defined below). The Company believes that it has meritorious defenses to the Vioxx Product Liability Lawsuits, Vioxx Shareholder Lawsuits and Vioxx Foreign Lawsuits (collectively, the “Vioxx Lawsuits”) and will vigorously defend against them. In view of the inherent difficulty of predicting the outcome of litigation, particularly where there are many claimants and the claimants seek indeterminate damages, the Company is unable to predict the outcome of these matters, and at this time cannot reasonably estimate the possible loss or range of loss with respect to the Vioxx Lawsuits not included in the Settlement Program. Unfavorable outcomes in the Vioxx Litigation could have a material adverse effect on the Company’s financial position, liquidity and results of operations.

     Legal defense costs expected to be incurred in connection with a loss contingency are accrued when probable and reasonably estimable. As of December 31, 2010, the Company had an aggregate reserve of approximately $76 million (the “Vioxx Legal Defense Costs Reserve”) solely for future legal defense costs related to the Vioxx Litigation.

     During the first six months of 2011, the Company spent approximately $37 million in the aggregate, including $21 million in the second quarter, in legal defense costs worldwide related to (i) the Vioxx Product Liability Lawsuits, (ii) the Vioxx Shareholder Lawsuits, (iii) the Vioxx Foreign Lawsuits, and (iv) the Vioxx Investigation (collectively, the “Vioxx Litigation”). In addition, in the second quarter, the Company recorded a charge of $19 million solely for its future legal defense costs for the Vioxx Litigation. Consequently, as of June 30, 2011, the aggregate amount of the Vioxx Legal Defense Costs Reserve was approximately $58 million, which is solely for future legal defense costs for the Vioxx Litigation. Some of the significant factors considered in the review of the Vioxx Legal Defense Costs Reserve were 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 the Vioxx Litigation, including the Settlement Agreement and the lawsuits that are continuing; 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 Vioxx Litigation. The amount of the Vioxx Legal Defense Costs Reserve as of June 30, 2011 represents the Company’s best estimate of the minimum amount of defense costs to be incurred in connection with the remaining aspects of the Vioxx Litigation; however, events such as additional trials in the Vioxx Litigation and other events that could arise in the course of the Vioxx Litigation could affect the ultimate amount of 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 Vioxx Legal Defense Costs Reserve at any time in the future if, based upon the factors set forth, it believes it would be appropriate to do so.

Other Product Liability Litigation

Fosamax

     As previously disclosed, Old Merck is a defendant in product liability lawsuits in the United States involving Fosamax (the “Fosamax Litigation”). As of June 30, 2011, approximately 1,650 cases, which include approximately 2,050 plaintiff groups, had been filed and were pending against Old Merck in either federal or state court, including one case which seeks class action certification, as well as damages and/or medical monitoring. In approximately 1,115 of these actions, plaintiffs allege, among other things, that they have suffered osteonecrosis of the jaw (“ONJ”), generally subsequent to invasive dental procedures, such as tooth extraction or dental implants and/or delayed healing, in association with the use of Fosamax. In addition, plaintiffs in approximately 535 of these actions generally allege that they sustained femur fractures and/or other bone injuries in association with the use of Fosamax.

     Cases Alleging ONJ and/or Other Jaw Related Injuries

     In August 2006, the JPML ordered that certain Fosamax product liability cases pending in federal courts nationwide should be transferred and consolidated into one multidistrict litigation (the “Fosamax MDL”) for coordinated pre-trial proceedings. The Fosamax MDL has been transferred to Judge John Keenan in the U.S. District Court for the Southern District of New York. As a result of the JPML order, approximately 910 of the cases are before Judge Keenan. Judge Keenan issued a Case Management Order (and various amendments thereto) which set forth a schedule governing the proceedings focused primarily upon resolving the class action certification

Notes to Consolidated Financial Statements (unaudited) (continued)

motions in 2007 and completing fact discovery in an initial group of 25 cases by October 1, 2008. In January 2008, briefing and argument on plaintiffs’ motions for certification of medical monitoring classes were completed in 2007 after Judge Keenan issued an order denying the motions. Also in January 2008, Judge Keenan issued a further order dismissing with prejudice all class claims asserted in the first four class action lawsuits filed against Old Merck that sought personal injury damages and/or medical monitoring relief on a class wide basis. Daubert motions were filed in May 2009 and Judge Keenan conducted a Daubert hearing in July 2009. In July 2009, Judge Keenan issued his ruling on the parties’ respective Daubert motions. The ruling denied the Plaintiff Steering Committee’s motion and granted in part and denied in part Old Merck’s motion. In the first Fosamax MDL trial, Boles v. Merck, the Fosamax MDL court declared a mistrial because the eight person jury could not reach a unanimous verdict. The Boles case was retried in June 2010 and resulted in a verdict in favor of the plaintiff in the amount of $8 million. Merck filed post-trial motions seeking judgment as a matter of law or, in the alternative, a new trial. In October 2010, the court denied Merck’s post-trial motions but sua sponte ordered a remittitur, reducing the verdict to $1.5 million. Plaintiff rejected the remittitur ordered by the court and requested a new trial on damages. The Company has filed a motion for interlocutory appeal, which included Merck’s motion that the district court certify legal issues for appeal to the U.S. Court of Appeals for the Second Circuit. On June 29, 2011, the district court granted Merck’s motion and certified one legal question for appeal, which is now pending.

     In the next Fosamax MDL trial, Maley v. Merck, the jury in May 2010 returned a unanimous verdict in Merck’s favor. In February 2010, Judge Keenan selected a new bellwether case, Judith Graves v. Merck, to replace the Flemings bellwether case, which the Fosamax MDL court dismissed when it granted summary judgment in favor of Old Merck. In November 2010, the Second Circuit affirmed the court’s granting of summary judgment in favor of Old Merck in the Flemings case. In Graves, the jury returned a unanimous verdict in favor of Old Merck in November 2010.

     The next trials scheduled in the Fosamax MDL are Secrest v. Merck, which was scheduled to begin on March 14, 2011, but has been continued until September 7, 2011, and Hester v. Merck, which was scheduled to begin on May 9, 2011, but after Merck filed its motion for summary judgment, plaintiff’s counsel dismissed Hester with prejudice. On April 27, 2011, Judge Keenan selected Raber v. Merck as the case to replace Hester and set the trial for Raber to begin on November 7, 2011. In addition, Judge Keenan ordered on February 4, 2011 that there will be two further bellwether trials conducted in the Fosamax MDL: Spano v. Merck is expected to be tried on February 27, 2012 and Jellema v. Merck is expected be tried on May 13, 2012.

     Outside the Fosamax MDL, a trial in Florida, Anderson v. Merck, was scheduled to begin in June 2010 but the Florida state court postponed the trial date and a new date has been set for March 5, 2012. The trial ready date in Carballo v. Merck has been continued from August 22, 2011 until January 9, 2012.

     In addition, in July 2008, an application was made by the Atlantic County Superior Court of New Jersey requesting that all of the Fosamax cases pending in New Jersey be considered for mass tort designation and centralized management before one judge in New Jersey. In October 2008, the New Jersey Supreme Court ordered that all pending and future actions filed in New Jersey arising out of the use of Fosamax and seeking damages for existing dental and jaw-related injuries, including ONJ, but not solely seeking medical monitoring, be designated as a mass tort for centralized management purposes before Judge Carol E. Higbee in Atlantic County Superior Court. As of June 30, 2011, approximately 190 ONJ cases were pending against Old Merck in Atlantic County, New Jersey. In July 2009, Judge Higbee entered a Case Management Order (and various amendments thereto) setting forth a schedule that contemplates completing fact and expert discovery in an initial group of cases to be reviewed for trial. On February 14, 2011, the jury in Rosenberg v. Merck, the first trial in the New Jersey coordinated proceeding, returned a verdict in Merck’s favor. A trial in the Rifkin v. Merck, Flores v. Merck and Sessner v. Merck cases is scheduled for February 27, 2012.

     In California, the parties are reviewing the claims of three plaintiffs in the Carrie Smith, et al. v. Merck case and the claims in Pedrojetti v. Merck. The cases of one or more of these plaintiffs is expected to be tried in March 2012.

     Discovery is ongoing in the Fosamax MDL litigation, the New Jersey coordinated proceeding, and the remaining jurisdictions where Fosamax cases are pending. The Company intends to defend against these lawsuits.

     Cases Alleging Femur Fractures and/or Other Bone Injuries

     As of June 30, 2011, approximately 430 cases alleging femur fractures and/or other bone injuries have been filed in New Jersey state court and are pending before Judge Higbee in Atlantic County Superior Court. A Case

Notes to Consolidated Financial Statements (unaudited) (continued)

Management Order setting forth a schedule with respect to the review of these cases is expected but has not yet been entered and no trial dates for any of the New Jersey state femur fracture cases has been set.

     On March 23, 2011, Merck submitted a Motion to Transfer to the JPML seeking to have all federal cases alleging femur fractures and other bone injuries consolidated into one multidistrict litigation for coordinated pre-trial proceedings. The Motion to Transfer was granted on May 23, 2011, and all federal cases involving allegations of femur fracture or other bone injuries have been or will be transferred to the District of New Jersey where the Fosamax MDL is sited. Judge Garrett Brown has been assigned to preside over this second Fosamax MDL proceeding.

     A petition was filed seeking to coordinate all femur fracture cases filed in California state court before a single judge in Orange County, California. The petition was granted and Judge Ronald L. Bauer will preside over the coordinated proceedings. No scheduling order has yet been entered.

     Additionally, there are three femur fracture cases pending in other state courts. One case is pending in Massachusetts, one is pending in Florida, and one is pending in Oregon.

     Discovery is ongoing in the federal and state courts where femur fracture cases are pending and the Company intends to defend against these lawsuits.

NuvaRing

     Beginning in May 2007, a number of complaints were filed in various jurisdictions asserting claims against the Company’s subsidiaries Organon USA, Inc., Organon Pharmaceuticals USA, Inc., Organon International (collectively, “Organon”), and Schering-Plough arising from Organon’s marketing and sale of NuvaRing, a combined hormonal contraceptive vaginal ring. The plaintiffs contend that Organon and Schering-Plough failed to adequately warn of the alleged increased risk of venous thromboembolism (“VTE”) posed by NuvaRing, and/or downplayed the risk of VTE. The plaintiffs seek damages for injuries allegedly sustained from their product use, including some alleged deaths, heart attacks and strokes. The majority of the cases are currently pending in a federal multidistrict litigation (the “NuvaRing MDL”) venued in Missouri and in New Jersey state court.

     As of June 30, 2011, there were approximately 815 NuvaRing cases. Of these cases, 690 are pending in the NuvaRing MDL in the U.S. District Court for the Eastern District of Missouri before Judge Rodney Sippel, and 122 are pending in consolidated discovery proceedings in the Bergen County Superior Court of New Jersey before Judge Brian R. Martinotti. Four additional cases are pending in various other state courts.

     Pursuant to orders of Judge Sippel in the NuvaRing MDL, the parties selected 26 trial pool cases which are the subject of fact discovery and this pool was recently narrowed to eight cases from which the first trial cases will be selected. Pursuant to Judge Martinotti’s order, the parties selected an additional 10 trial pool cases that are the subject of fact discovery in the New Jersey consolidated proceedings. Based on a revised scheduling order entered in both jurisdictions, fact discovery in the trial pool cases ended on June 24, 2011 and the Company expects expert discovery to be completed by the end of February 2012. Based on the scheduling orders in place in each jurisdiction, the Company anticipates that status conferences in each coordinated proceeding will be held in March 2012 to determine a methodology for selecting the first cases to be tried. The Company intends to defend against these lawsuits.

Governmental Proceedings

     The DOJ has issued a subpoena requesting information related to the Company’s marketing and selling activities with respect to Temodar, PegIntron and Intron A, from January 1, 2004 to the present, in a federal health care investigation under criminal statutes. The Company is cooperating with the DOJ’s investigation.

Notes to Consolidated Financial Statements (unaudited) (continued)

Vytorin/Zetia Litigation

     As previously disclosed, in April 2008, an Old Merck shareholder filed a putative class action lawsuit in federal court in the Eastern District of Pennsylvania alleging that Old Merck violated the federal securities laws. This suit has since been withdrawn and re-filed in the District of New Jersey and has been consolidated with another federal securities lawsuit under the caption In re Merck & Co., Inc. Vytorin Securities Litigation. An amended consolidated complaint was filed in October 2008, and names as defendants Old Merck; Merck/Schering-Plough Pharmaceuticals, LLC; and certain of the Company’s current and former officers and directors. Specifically, the complaint alleges that Old Merck delayed releasing unfavorable results of the ENHANCE clinical trial regarding the efficacy of Vytorin and that Old Merck made false and misleading statements about expected earnings, knowing that once the results of the Vytorin study were released, sales of Vytorin would decline and Old Merck’s earnings would suffer. In December 2008, Old Merck and the other defendants moved to dismiss this lawsuit on the grounds that the plaintiffs failed to state a claim for which relief can be granted. In September 2009, the court issued an opinion and order denying the defendants’ motion to dismiss this lawsuit and, in October 2009, Old Merck and the other defendants filed an answer to the amended consolidated complaint. There is a similar consolidated, putative class action securities lawsuit pending in the District of New Jersey, filed by a Schering-Plough shareholder against Schering-Plough and its former Chairman, President and Chief Executive Officer, Fred Hassan, under the caption In re Schering-Plough Corporation/ENHANCE Securities Litigation. The amended consolidated complaint was filed in September 2008 and names as defendants Schering-Plough; Merck/Schering-Plough Pharmaceuticals, LLC; certain of the Company’s current and former officers and directors; and underwriters who participated in an August 2007 public offering of Schering-Plough’s common and preferred stock. In December 2008, Schering-Plough and the other defendants filed motions to dismiss this lawsuit on the grounds that the plaintiffs failed to state a claim for which relief can be granted. In September 2009, the court issued an opinion and order denying the defendants’ motion to dismiss this lawsuit. The defendants filed an answer to the consolidated amended complaint in November 2009.

     As previously disclosed, in April 2008, a member of an Old Merck ERISA plan filed a putative class action lawsuit against Old Merck and certain of the Company’s current and former officers and directors alleging they breached their fiduciary duties under ERISA. Since that time, there have been other similar ERISA lawsuits filed against Old Merck in the District of New Jersey, and all of those lawsuits have been consolidated under the caption In re Merck & Co., Inc. Vytorin ERISA Litigation. A consolidated amended complaint was filed in February 2009, and names as defendants Old Merck and various current and former members of the Company’s Board of Directors. The plaintiffs allege that the ERISA plans’ investment in Old Merck stock was imprudent because Old Merck’s earnings are dependent on the commercial success of its cholesterol drug Vytorin and that defendants knew or should have known that the results of a scientific study would cause the medical community to turn to less expensive drugs for cholesterol management. In April 2009, Old Merck and the other defendants moved to dismiss this lawsuit on the grounds that the plaintiffs failed to state a claim for which relief can be granted. In September 2009, the court issued an opinion and order denying the defendants’ motion to dismiss this lawsuit. In November 2009, the plaintiffs moved to strike certain of the defendants’ affirmative defenses. That motion was denied in part and granted in part in June 2010, and an amended answer was filed in July 2010.

     There is a similar consolidated, putative class action ERISA lawsuit currently pending in the District of New Jersey, filed by a member of a Schering-Plough ERISA plan against Schering-Plough and certain of its current and former officers and directors, alleging they breached their fiduciary duties under ERISA, and under the caption In re Schering-Plough Corp. ENHANCE ERISA Litigation. The consolidated amended complaint was filed in October 2009 and names as defendants Schering-Plough, various current and former members of Schering-Plough’s Board of Directors and current and former members of committees of Schering-Plough’s Board of Directors. In November 2009, the Company and the other defendants filed a motion to dismiss this lawsuit on the grounds that the plaintiffs failed to state a claim for which relief can be granted. The plaintiffs’ opposition to the motion to dismiss was filed in December 2009, and the motion was fully briefed in January 2010. That motion was denied in June 2010. In September 2010, defendants filed an answer to the amended complaint in this matter.

Notes to Consolidated Financial Statements (unaudited) (continued)

     In November 2009, a stockholder of the Company filed a shareholder derivative lawsuit, In re Local No. 38 International Brotherhood of Electrical Workers Pension Fund v. Clark (“Local No. 38”), in the District of New Jersey, on behalf of the nominal defendant, the Company, and all shareholders of the Company, against the Company; certain of the Company’s officers, directors and alleged insiders; and certain of the predecessor companies’ former officers, directors and alleged insiders for alleged breaches of fiduciary duties, waste, unjust enrichment and gross mismanagement. A similar shareholder derivative lawsuit, Cain v. Hassan, was filed by a Schering-Plough stockholder and is currently pending in the District of New Jersey. An amended complaint was filed in May 2008, by the Schering-Plough stockholder on behalf of the nominal defendant, Schering-Plough, and all Schering-Plough shareholders. The lawsuit is against the Company, Schering-Plough’s then-current Board of Directors, and certain of Schering-Plough’s current and former officers, directors and alleged insiders. The plaintiffs in both Local No. 38 and Cain v. Hassan alleged that the defendants withheld the ENHANCE study results and made false and misleading statements, thereby deceiving and causing harm to the Company and Schering-Plough, respectively, and to the investing public, unjustly enriching insiders and wasting corporate assets. The plaintiff in Local No. 38 voluntarily dismissed the suit without prejudice on April 29, 2011. The defendants in Cain v. Hassan filed a second amended complaint on June 3, 2011. The defendants intend to move to dismiss the second amended complaint. In November 2010, a Company shareholder filed a derivative lawsuit in state court in New Jersey. This case, captioned Rose v. Hassan, asserts claims that are substantially identical to the claims alleged in Cain v. Hassan. On July 7, 2011, the defendants in Rose moved to stay the case or to dismiss it without prejudice in favor of the federal derivative action. That motion is fully briefed and a decision is pending.

     Discovery in the lawsuits referred to in this section (collectively, the “ENHANCE Litigation”) will be coordinated and has commenced. The Company believes that it has meritorious defenses to the ENHANCE Litigation and intends to vigorously defend against these lawsuits. The Company is unable to predict the outcome of these matters and at this time cannot reasonably estimate the possible loss or range of loss with respect to the ENHANCE Litigation. Unfavorable outcomes resulting from the ENHANCE Litigation could have a material adverse effect on the Company’s financial position, liquidity and results of operations.

Insurance

     The Company has Directors and Officers insurance coverage applicable to the Vytorin shareholder lawsuits with stated upper limits of approximately $250 million. The Company has Fiduciary and other insurance for the Vytorin ERISA lawsuits with stated upper limits of approximately $265 million. There are disputes with the insurers about the availability of some or all of the Company’s insurance coverage for these claims and there are likely to be additional disputes. The amounts actually recovered under the policies discussed in this paragraph may be less than the stated limits.

Commercial Litigation

AWP Litigation and Investigations

     As previously disclosed, the Company and/or certain of its subsidiaries remain defendants in cases brought by various states and certain New York counties alleging manipulation by pharmaceutical manufacturers of Average Wholesale Prices (“AWP”), which are sometimes used by public and private payors in calculating provider reimbursement levels. The outcome of these lawsuits could include substantial damages, the imposition of substantial fines and penalties and injunctive or administrative remedies. In January 2010, the U.S. District Court for the District of Massachusetts held that a unit of the Company and eight other drug makers overcharged New York City and 42 New York counties for certain generic drugs. The court has reserved the issue of damages and

Notes to Consolidated Financial Statements (unaudited) (continued)

any penalties for future proceedings. In a separate matter, in September 2010, a jury in the U.S. District Court for the District of Massachusetts found the Company liable on the ground that units of Schering-Plough caused Massachusetts to overpay pharmacists for prescriptions of albuterol. The District Court held that Massachusetts should be awarded approximately $13.8 million in treble damages and penalties, together with prejudgment interest and attorney’s fees, but Massachusetts has moved to amend the judgment to include substantially higher penalties. The Company intends to pursue a reversal of the verdict on appeal.

     During 2011, the Company settled certain AWP cases brought by the states of Utah, South Carolina, Alaska, Idaho, Kentucky, Pennsylvania, Mississippi, and Wisconsin. The Company and/or certain of its subsidiaries continue to be defendants in cases brought by 13 states and the New York counties.

Centocor Distribution Agreement

     In May 2009, Centocor, a wholly owned subsidiary of Johnson & Johnson, delivered to Schering-Plough a notice initiating an arbitration proceeding to resolve whether, as a result of the Merger, Centocor was permitted to terminate the Company’s rights to distribute and commercialize Remicade and Simponi. On April 15, 2011, the Company announced that it had settled the arbitration. Under the terms of the amended distribution agreement, Merck’s subsidiary, Schering-Plough (Ireland), relinquished exclusive marketing rights for Remicade and Simponi to Johnson & Johnson’s Janssen pharmaceutical companies in territories including Canada, Central and South America, the Middle East, Africa and Asia Pacific (“Relinquished Territories”), effective July 1, 2011. Merck retained exclusive marketing rights throughout Europe, Russia and Turkey (“Retained Territories”). The Retained Territories represent approximately 70% of Merck’s 2010 revenue of $2.8 billion from Remicade and Simponi, while the Relinquished Territories represent approximately 30%. In addition, all profit derived from Merck’s exclusive distribution of the two products in the Retained Territories will be equally divided between Merck and Johnson & Johnson, beginning July 1, 2011. Under the prior terms of the distribution agreement, the contribution income (profit) split, which was at 58% to Merck and 42% to Centocor Ortho Biotech Inc., would have declined for Merck and increased for Johnson & Johnson each year until 2014, when it would have been equally divided. Johnson & Johnson also received a one-time payment from Merck of $500 million in April 2011.

Patent Litigation

     From time to time, generic manufacturers of pharmaceutical products file Abbreviated New Drug Applications (“ANDAs”) 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. Certain products of the Company (or marketed via agreements with other companies) currently involved in such patent infringement litigation in the United States include: AzaSite, Cancidas, Integrilin, Nasonex, Nexium, Noxafil, Propecia, Temodar, Vytorin and Zetia. 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 generic 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, could result in significantly shortened periods of exclusivity for these products.

     AzaSite — In May 2011, a patent infringement suit was filed in the United States against Sandoz Inc. (“Sandoz”) in respect of Sandoz’s application to the FDA seeking pre-patent expiry approval to market a generic version of AzaSite. The lawsuit automatically stays FDA approval of Sandoz’s ANDA until October 2013 or until an adverse court decision, if any, whichever may occur earlier.

     Cancidas — In November 2009, a patent infringement lawsuit was filed in the United States against Teva Parenteral Medicines, Inc. (“TPM”) in respect of TPM’s application to the FDA seeking pre-patent expiry approval to sell a generic version of Cancidas. That lawsuit has been dismissed with no rights granted to TPM. Also, in March 2010, a patent infringement lawsuit was filed in the United States against Sandoz in respect of Sandoz’s application to the FDA seeking pre-patent expiry approval to sell a generic version of Cancidas. In June 2011, Sandoz amended its challenge to Merck’s Cancidas patents stating that it did not seek FDA approval any earlier than the expiry of a patent which occurs on July 26, 2015, but Sandoz did maintain its challenge to a Cancidas patent which expires on September 28, 2017. Therefore, the lawsuit will continue, however, the FDA cannot approve Sandoz’s application any earlier than July 26, 2015.

     Integrilin — In February 2009, a patent infringement lawsuit was filed (jointly with Millennium Pharmaceuticals, Inc. (“Millennium”)) in the United States against TPM in respect of TPM’s application to the FDA seeking approval to sell a generic version of Integrilin prior to the expiry of the last to expire listed patent. As TPM

Notes to Consolidated Financial Statements (unaudited) (continued)

did not challenge certain patents that will not expire until November 2014, FDA approval of the TPM application cannot occur any earlier than November 2014, however, it could be later in the event of a favorable decision in the lawsuit for the Company and Millennium.

     Nasonex — In December 2009, a patent infringement suit was filed in the United States against Apotex Corp. (“Apotex”) in respect of Apotex’s application to the FDA seeking pre-patent expiry approval to market a generic version of Nasonex. The lawsuit automatically stays FDA approval of Apotex’s ANDA until May 2012 or until an adverse court decision, if any, whichever may occur earlier.

     Nexium — In November 2005, a patent infringement lawsuit was filed (jointly with AstraZeneca) in the United States against Ranbaxy Laboratories Ltd. (“Ranbaxy”) in respect of Ranbaxy’s application to the FDA seeking pre-patent expiry approval to sell a generic version of Nexium. As previously disclosed, AstraZeneca, Merck and Ranbaxy entered into a settlement agreement which provided that Ranbaxy would be entitled to bring its generic esomeprazole product to market in the United States on May 27, 2014. The Company and AstraZeneca each received a Civil Investigative Demand (“CID”) from the Federal Trade Commission (“FTC”) in July 2008 regarding the settlement agreement with Ranbaxy. The Company is cooperating with the FTC in responding to this CID. In March 2006, a patent infringement lawsuit was filed (jointly with AstraZeneca) against IVAX Pharmaceuticals, Inc. (“IVAX”) (later acquired by Teva Pharmaceuticals, Inc. (“Teva”)), in respect of IVAX’s application to the FDA seeking pre-patent expiry approval to sell a generic version of Nexium. In January 2010, AstraZeneca, Merck and Teva/IVAX entered into a settlement agreement which provides that Teva/IVAX would be entitled to bring its generic esomeprazole product to market in the United States on May 27, 2014. Patent infringement lawsuits have also been filed in the United States against Dr. Reddy’s Laboratories (“Dr. Reddy’s”), Sandoz and Lupin Ltd. (“Lupin”) in respect to their respective applications to the FDA seeking pre-patent expiry approval to sell generic versions of Nexium. In January 2011, AstraZeneca, Merck and Dr. Reddy’s entered into a settlement agreement which provides that Dr. Reddy’s would be entitled to bring its generic esomeprazole product to market in the United States on May 27, 2014. In June 2011, AstraZeneca, Merck and Sandoz entered into a settlement agreement which provides that Sandoz would be entitled to bring its generic esomeprazole product to market in the United States on May 27, 2014. The lawsuit against Lupin is ongoing with no trial dates presently scheduled. In February 2011, a patent infringement lawsuit was filed (jointly with AstraZeneca) in the United States against Hamni USA, Inc. (“Hamni”) in respect of Hamni’s application to the FDA seeking pre-patent expiry approval to sell a generic version of Nexium. A patent infringement lawsuit was also filed (jointly with AstraZeneca) in February 2010 in the United States against Sun Pharma Global Fze in respect of its application to the FDA seeking pre-patent expiry approval to sell a generic version of Nexium IV.

     Noxafil — In May 2011, a patent infringement suit was filed in the United States against Sandoz in respect of Sandoz’s application to the FDA seeking pre-patent expiry approval to market a generic version of Noxafil. The lawsuit automatically stays FDA approval of Sandoz’s ANDA until September 2013 or until an adverse court decision, if any, whichever may occur earlier.

     Propecia — In December 2010, a patent infringement lawsuit was filed in the United States against Hetero Drugs Limited (“Hetero”) in respect of Hetero’s application to the FDA seeking pre-patent expiry approval to sell a generic version of Propecia. In March 2011, the Company settled this lawsuit with Hetero by agreeing to allow Hetero to sell a generic 1 mg finasteride product beginning on July 1, 2013.

     Temodar — In July 2007, a patent infringement action was filed (jointly with Cancer Research Technologies, Limited (“CRT”)) in the United States against Barr Laboratories (“Barr”) (later acquired by Teva) in respect of Barr’s application to the FDA seeking pre-patent expiry approval to sell a generic version of Temodar. In January 2010, the court issued a decision finding the CRT patent unenforceable on grounds of prosecution laches and inequitable conduct. In November 2010, the appeals court issued a decision reversing the trial court’s finding. In December 2010, Barr filed a petition seeking a rehearing en banc of the appeal, which petition was denied. In June 2011, Barr filed a petition for review by the United States Supreme Court. By virtue of an agreement that Barr not launch a product during the appeal process, the Company has agreed that Barr can launch a product in August 2013.

     In September 2010, a patent infringement lawsuit was filed (jointly with CRT) in the United States against Sun Pharmaceutical Industries Inc. (“Sun”) in respect of Sun’s application to the FDA seeking pre-patent expiry approval to sell a generic version of Temodar. The lawsuit automatically stays FDA approval of Sun’s ANDA until February 2013 or until an adverse court decision, if any, whichever may occur earlier. In November 2010, a patent infringement lawsuit was filed (jointly with CRT) in the United States against Accord HealthCare Inc. (“Accord”) in respect of its application to the FDA seeking pre-patent expiry approval to sell a generic version of Temodar. The Company, CRT and Accord have entered an agreement to stay the lawsuit pending the outcome of the appeal en banc process in the Barr lawsuit.

Notes to Consolidated Financial Statements (unaudited) (continued)

     Vytorin — In December 2009, a patent infringement lawsuit was filed in the United States against Mylan Pharmaceuticals, Inc. (“Mylan”) in respect of Mylan’s application to the FDA seeking pre-patent expiry approval to sell a generic version of Vytorin. The lawsuit automatically stays FDA approval of Mylan’s application until May 2012 or until an adverse court decision, if any, whichever may occur earlier. A trial against Mylan jointly in respect of Zetia and Vytorin is scheduled to begin on December 5, 2011. In February 2010, a patent infringement lawsuit was filed in the United States against Teva in respect of Teva’s application to the FDA seeking pre-patent expiry approval to sell a generic version of Vytorin. In July 2011, the patent infringement lawsuit was dismissed and Teva agreed not to sell generic versions of Zetia or Vytorin until the Company’s exclusivity rights expire on April 25, 2017, except in certain circumstances. In August 2010, a patent infringement lawsuit was filed in the United States against Impax Laboratories Inc. (“Impax”) in respect of Impax’s application to the FDA seeking pre-patent expiry approval to sell a generic version of Vytorin. An agreement was reached with Impax to stay the lawsuit pending the outcome of the lawsuit with Mylan.

     Zetia — In March 2007, a patent infringement lawsuit was filed in the United States against Glenmark Pharmaceuticals Inc., USA and its parent corporation (collectively, “Glenmark”) in respect of Glenmark’s application to the FDA seeking pre-patent expiry approval to sell a generic version of Zetia. In May 2010, Glenmark agreed to a settlement by virtue of which Glenmark will be permitted to launch its generic product in the United States on December 12, 2016, subject to receiving final FDA approval. In June 2010, a patent infringement lawsuit was filed in the United States against Mylan in respect of Mylan’s application to the FDA seeking pre-patent expiry approval to sell a generic version of Zetia. The lawsuit automatically stays FDA approval of Mylan’s application until December 2012 or until an adverse court decision, if any, whichever may occur earlier. A trial against Mylan jointly in respect of Zetia and Vytorin is scheduled to begin on December 5, 2011. In September 2010, a patent infringement lawsuit was filed in the United States against Teva in respect of Teva’s application to the FDA seeking pre-patent expiry approval to sell a generic version of Zetia. In July 2011, the patent infringement lawsuit was dismissed without any rights granted to Teva.

     NuvaRing — In February 2011, a patent infringement suit was brought against Merck in the International Trade Commission by Femina Pharma Incorporated (“Femina”) in respect of the product NuvaRing. The complaint alleges that NuvaRing infringes a patent owned by Femina. The lawsuit seeks an exclusion order against the importation of NuvaRing into the United States. Trial in the case is scheduled to begin on October 3, 2011.

Environmental Matters

     As previously disclosed, approximately 2,200 plaintiffs have filed an amended complaint against Old Merck and 12 other defendants in U.S. District Court, Eastern District of California asserting claims under the Clean Water Act, the Resource Conservation and Recovery Act, as well as negligence and nuisance. The suit seeks damages for personal injury, diminution of property value, medical monitoring and other alleged real and personal property damage associated with groundwater, surface water and soil contamination found at the site of a former Old Merck subsidiary in Merced, California. Certain of the other defendants in this suit have settled with plaintiffs regarding some or all aspects of plaintiffs’ claims. This lawsuit is proceeding in a phased manner. A jury trial commenced in February 2011 during which a jury was asked to make certain factual findings regarding whether contamination moved off-site to any areas where plaintiffs could have been exposed to such contamination and, if so, when, where and in what amounts. Defendants in this “Phase 1” trial include Old Merck and three of the other original 12 defendants. On March 31, 2011, the Phase 1 jury returned a mixed verdict, finding in favor of Old Merck and the other defendants as to some, but not all, of plaintiffs’ claims. Specifically, the jury found that contamination from the site did not enter or affect plaintiffs’ municipal water supply wells or any private domestic wells. The jury found, however, that plaintiffs could have been exposed to contamination via air emissions prior to 1994, as well as via surface water in the form of storm drainage channeled into an adjacent irrigation canal, including during a flood in April 2006. Old Merck has filed motions requesting that the court set aside those portions of the jury’s verdict that are adverse to Old Merck on the basis that those portions of the verdict are unsupported by the evidence and contrary to established legal principles. If necessary, Old Merck will seek to appeal, prior to commencement of any later phases of the litigation, those portions of the jury’s verdict adverse to Old Merck that are not set aside by the trial court. In the event the Phase 1 jury’s findings in favor of plaintiffs are not set aside by the trial court or on appeal, it is anticipated that later phases of the litigation would be required to address issues related to liability, causation and damages related to specific plaintiffs.

     In the second quarter of 2011, the DOJ and the U.S. Environmental Protection Agency (the “EPA”) notified the Company that they are pursuing civil penalties against Merck in excess of $2 million for alleged violations of air, water and waste regulations resulting from the EPA’s multi-media inspections of Merck’s West Point and Riverside, Pennsylvania facilities in 2006 and Merck’s subsequent information submissions to the EPA. The Company believes that it has meritorious defenses to these allegations.

     The EPA and Merck have entered into a consent decree under which Merck paid a $260,000 fine to resolve alleged environmental violations at Merck’s Las Piedras Puerto Rico facility. The alleged violations arose from an EPA air inspection conducted in July 2008 and were primarily based on the site’s leak detection and repair program.

Other Litigation

     There are various other legal proceedings, principally product liability and intellectual property suits, involving the Company that are pending. While it is not feasible to predict the outcome of such proceedings or

Notes to Consolidated Financial Statements (unaudited) (continued)

the proceedings discussed in this Note for which a separate assessment is not provided, in the opinion of the Company, the amount or range of reasonably possible loss associated with the resolution of such proceedings, either individually or in the aggregate, is not material.

10. Equity

																		Accumulated
										Other								Other												Non-
		Common Stock								Paid-In				Retained				Comprehensive				Treasury Stock								Controlling
($ in millions)		Shares				Par Value				Capital				Earnings				Loss				Shares				Cost				Interests				Total
Balance January 1, 2010			3,563			$	1,781			$	39,683			$	41,405			$	(2,767	)			454			$	(21,044	)		$	2,427			$	61,485
Net income attributable to Merck & Co., Inc.			—				—				—				1,051				—				—				—				—				1,051
Cash dividends declared on common stock			—				—				—				(2,374	)			—				—				—				—				(2,374	)
Treasury stock shares purchased			—				—				—				—				—				38				(1,297	)			—				(1,297	)
Share-based compensation plans and other			10				5				655				—				—				—				25				—				685
Other comprehensive loss			—				—				—				—				(1,892	)			—				—				—				(1,892	)
Net income attributable to noncontrolling interests			—				—				—				—				—				—				—				59				59
Distributions attributable to noncontrolling interests			—				—				—				—				—				—				—				(60	)			(60	)
Balance June 30, 2010			3,573			$	1,786			$	40,338			$	40,082			$	(4,659	)			492			$	(22,316	)		$	2,426			$	57,657
Balance January 1, 2011			3,577			$	1,788			$	40,701			$	37,536			$	(3,216	)			495			$	(22,433	)		$	2,429			$	56,805
Net income attributable to Merck & Co., Inc.			—				—				—				3,067				—				—				—				—				3,067
Cash dividends declared on common stock			—				—				—				(2,360	)			—				—				—				—				(2,360	)
Treasury stock shares purchased			—				—				—				—				—				9				(314	)			—				(314	)
Share-based compensation plans and other			—				—				(44	)			—				—				(10	)			331				—				287
Other comprehensive income			—				—				—				—				440				—				—				—				440
Net income attributable to noncontrolling interests			—				—				—				—				—				—				—				58				58
Distributions attributable to noncontrolling interests			—				—				—				—				—				—				—				(61	)			(61	)
Balance June 30, 2011			3,577			$	1,788			$	40,657			$	38,243			$	(2,776	)			494			$	(22,416	)		$	2,426			$	57,922