##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One)  x
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004 OR  o
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For
the transition period from
 to Commission File No. 1-3305 MERCK & CO., INC.
P. O. Box 100
One Merck Drive
Whitehouse Station, N.J. 08889-0100
(908) 423-1000 Incorporated in New Jersey
    
    I.R.S. Employer IdentificationNo. 22-1109110
 The number of shares of common stock outstanding as of the close of business on October 29, 2004: Class
    
    
    
    Number of Shares OutstandingCommon Stock
    
    
    
    
    2,217,584,609
 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes x                    No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes x                    No o




---



TABLE OF CONTENTS  Part I  Financial InformationItem 1. Financial StatementsINTERIM CONSOLIDATED STATEMENT OF INCOMECONSOLIDATED BALANCE SHEETINTERIM CONSOLIDATED STATEMENT OF CASH FLOWSNotes to Consolidated Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition andItem 4. Controls and ProceduresPART II -  Other InformationItem 1. Legal ProceedingsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 6. ExhibitsSignaturesEXHIBIT INDEXEX-3.1 RESTATED CERTIFICATE OF INCORPORATIONEX-12 COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGESEX-31.1 CERTIFICATIONEX-31.2 CERTIFICATIONEX-32.1 CERTIFICATIONEX-32.2 CERTIFICATION    Table of Contents  
 Part I - Financial Information 
 Item 1. Financial Statements 
 MERCK & CO., INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(Unaudited, $ in millions except per share amounts) Three Months
    
    Nine MonthsEnded September 30
    
    Ended September 302004
    
    2003
    
    2004
    
    2003Sales
    
    $
    5,538.1
    
    
    $
    5,762.0
    
    
    $
    17,190.7
    
    
    $
    16,858.8Costs, Expenses and OtherMaterials and production
    
    
    1,364.2
    
    
    
    1,083.4
    
    
    
    3,676.2
    
    
    
    3,209.7Marketing and administrative
    
    
    1,752.9
    
    
    
    1,463.6
    
    
    
    4,980.5
    
    
    
    4,567.5Research and development
    
    
    919.3
    
    
    
    776.5
    
    
    
    2,901.6
    
    
    
    2,373.6Equity income from affiliates
    
    
    (307.1
    )
    
    
    (183.4
    )
    
    
    (722.3
    )
    
    
    (468.2
    )Other (income) expense, net
    
    
    (4.2
    )
    
    
    17.1
    
    
    
    (240.0
    )
    
    
    (114.5
    )3,725.1
    
    
    
    3,157.2
    
    
    
    10,596.0
    
    
    
    9,568.1Income from Continuing Operations Before Taxes
    
    
    1,813.0
    
    
    
    2,604.8
    
    
    
    6,594.7
    
    
    
    7,290.7Taxes on Income
    
    
    487.4
    
    
    
    739.8
    
    
    
    1,882.4
    
    
    
    2,096.3Income from Continuing Operations
    
    
    1,325.6
    
    
    
    1,865.0
    
    
    
    4,712.3
    
    
    
    5,194.4Income (Loss) from Discontinued Operations, Net of Taxes
    
    
    
    
    
    
    (6.7
    )
    
    
    
    
    
    
    241.3Net Income
    
    $
    1,325.6
    
    
    $
    1,858.3
    
    
    $
    4,712.3
    
    
    $
    5,435.7Basic Earnings per Common ShareContinuing Operations
    
    $
    .60
    
    
    $
    .83
    
    
    $
    2.12
    
    
    $
    2.32Discontinued Operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    .11Net Income
    
    $
    .60
    
    
    $
    .83
    
    
    $
    2.12
    
    
    $
    2.43Earnings per Common Share Assuming DilutionContinuing Operations
    
    $
    .60
    
    
    $
    .83
    
    
    $
    2.11
    
    
    $
    2.30Discontinued Operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    .11Net Income
    
    $
    .60
    
    
    $
    .82
    *
    
    $
    2.11
    
    
    $
    2.41Dividends Declared per Common Share
    
    $
    .38
    
    
    $
    .37
    
    
    $
    1.12
    
    
    $
    1.09
 *Amount does not add as a result of rounding. The accompanying notes are an integral part of this consolidated financial statement. - 1 -




---



##### Table of Contents



MERCK & CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
(Unaudited, $ in millions) September 30
    
    December 312004
    
    2003ASSETSCurrent AssetsCash and cash equivalents
    
    $
    2,666.9
    
    
    $
    1,201.0Short-term investments
    
    
    4,289.9
    
    
    
    2,972.0Accounts receivable
    
    
    3,908.0
    
    
    
    4,023.6Inventories
    
    
    2,213.2
    
    
    
    2,554.7Prepaid expenses and taxes
    
    
    782.4
    
    
    
    775.9Total current assets
    
    
    13,860.4
    
    
    
    11,527.2Investments
    
    
    7,256.9
    
    
    
    7,941.2Property, Plant and Equipment, at cost,
net of allowance for depreciation of
$7,821.4 in 2004 and $7,124.7 in 2003
    
    
    14,433.1
    
    
    
    14,169.0Goodwill
    
    
    1,085.7
    
    
    
    1,085.4Other Intangibles, net
    
    
    725.7
    
    
    
    864.0Other Assets
    
    
    5,512.6
    
    
    
    5,000.7$
    42,874.4
    
    
    $
    40,587.5LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesLoans payable and current portion of long-term debt
    
    $
    2,192.4
    
    
    $
    1,700.0Trade accounts payable
    
    
    544.5
    
    
    
    520.5Accrued and other current liabilities
    
    
    4,308.6
    
    
    
    3,987.5Income taxes payable
    
    
    2,901.4
    
    
    
    2,538.9Dividends payable
    
    
    843.0
    
    
    
    822.7Total current liabilities
    
    
    10,789.9
    
    
    
    9,569.6Long-Term Debt
    
    
    4,394.2
    
    
    
    5,096.0Deferred Income Taxes and Noncurrent Liabilities
    
    
    6,441.6
    
    
    
    6,430.3Minority Interests
    
    
    3,937.2
    
    
    
    3,915.2Stockholders EquityCommon stockAuthorized - 5,400,000,000 sharesIssued - 2,976,230,393 shares
    
    
    29.8
    
    
    
    29.8Other paid-in capital
    
    
    6,885.9
    
    
    
    6,956.6Retained earnings
    
    
    36,366.4
    
    
    
    34,142.0Accumulated other comprehensive (loss) income
    
    
    (7.7
    )
    
    
    65.543,274.4
    
    
    
    41,193.9Less treasury stock, at cost759,278,885
shares - September 30, 2004754,466,884
shares - December 31, 2003
    
    
    25,962.9
    
    
    
    25,617.5Total stockholders equity
    
    
    17,311.5
    
    
    
    15,576.4$
    42,874.4
    
    
    $
    40,587.5
 The accompanying notes are an integral part of this consolidated financial statement. - 2 -




---



##### Table of Contents



MERCK & CO., INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(Unaudited, $ in millions) Nine MonthsEnded September 302004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES OF CONTINUING OPERATIONSNet Income
    
    $
    4,712.3
    
    
    $
    5,435.7Less: Income from discontinued operations, net of tax
    
    
    
    
    
    
    (241.3
    )Income from continuing operations
    
    
    4,712.3
    
    
    
    5,194.4Adjustments to reconcile income from continuing operations to
net cash provided by operating activities from continuing operations:Depreciation and amortization
    
    
    1,051.3
    
    
    
    993.6Deferred income taxes
    
    
    198.8
    
    
    
    319.4Other
    
    
    552.1
    
    
    
    (210.3
    )Net changes in assets and liabilities
    
    
    (83.2
    )
    
    
    (698.7
    )NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS
    
    
    6,431.3
    
    
    
    5,598.4CASH FLOWS FROM INVESTING ACTIVITIES OF CONTINUING OPERATIONSCapital expenditures
    
    
    (1,209.4
    )
    
    
    (1,374.1
    )Purchase of securities, subsidiaries and other investments
    
    
    (52,770.5
    )
    
    
    (41,789.7
    )Proceeds from sale of securities, subsidiaries and other investments
    
    
    52,218.0
    
    
    
    39,839.9Banyu acquisition
    
    
    (12.7
    )
    
    
    (1,389.5
    )Other
    
    
    (5.4
    )
    
    
    (3.4
    )NET CASH USED BY INVESTING ACTIVITIES OF CONTINUING OPERATIONS
    
    
    (1,780.0
    )
    
    
    (4,716.8
    )CASH FLOWS FROM FINANCING ACTIVITIES OF CONTINUING OPERATIONSNet change in short-term borrowings
    
    
    (558.0
    )
    
    
    516.1Proceeds from issuance of debt
    
    
    405.1
    
    
    
    1,295.9Payments on debt
    
    
    (10.5
    )
    
    
    (721.6
    )Purchase of treasury stock
    
    
    (688.0
    )
    
    
    (1,389.0
    )Dividends paid to stockholders
    
    
    (2,467.7
    )
    
    
    (2,423.4
    )Other
    
    
    116.3
    
    
    
    222.9NET CASH USED BY FINANCING ACTIVITIES OF CONTINUING OPERATIONS
    
    
    (3,202.8
    )
    
    
    (2,499.1
    )EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
    
    
    17.4
    
    
    
    112.4DISCONTINUED OPERATIONSNet cash provided by discontinued operations
    
    
    
    
    
    
    248.0Dividend received from Medco Health, net of intercompany settlements and
cash transferred
    
    
    
    
    
    
    1,187.9NET CASH PROVIDED BY DISCONTINUED OPERATIONS
    
    
    
    
    
    
    1,435.9NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    1,465.9
    
    
    
    (69.2
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    
    
    1,201.0
    
    
    
    2,243.0CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    2,666.9
    
    
    $
    2,173.8
 The accompanying notes are an integral part of this consolidated financial statement. 
 Notes to Consolidated Financial Statements  1.
    
    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. The interim statements should be read in conjunction with the
financial statements and notes thereto included in the Companys
latest Annual Report on Form 10-K.  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
with current year presentation. - 3 -




---



##### Table of Contents



Notes to Consolidated Financial Statements (continued)  In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities (FIN
46). FIN 46 requires a variable interest entity (VIE) to be consolidated
when a company is subject to the majority of the risk of loss from the
VIEs activities or is entitled to receive the majority of the entitys
residual returns, or both. In December 2003, the FASB issued a revision to
FIN 46 (FIN 46R) which partially delayed the effective date of the
interpretation to March 31, 2004 and added additional scope exceptions.
Adoption of FIN 46R did not have a material impact on the Companys
financial position or results of operations.  2.
    
    On September 30, 2004, the Company announced a voluntary worldwide
withdrawal of Vioxx, its arthritis and acute pain medication. The
Companys decision, which was effective immediately, was based on new
three-year data from a prospective, randomized, placebo-controlled
clinical trial, APPROVe (Adenomatous Polyp Prevention on Vioxx).The trial, which was stopped, was designed to evaluate the efficacy of
Vioxx25 mg in preventing the recurrence of colorectal polyps in patients
with a history of colorectal adenomas and to further assess the
cardiovascular safety of Vioxx. In this study, there was an increased
relative risk for confirmed cardiovascular events, such as heart attack and
stroke, beginning after 18 months of treatment in the patients taking Vioxx
compared to those taking placebo. The results for the first 18 months of
the APPROVe study did not show any increased risk of confirmed
cardiovascular events on Vioxx, and in this respect, were similar to the
results of two placebo-controlled studies described in the most recent U.S.
labeling for Vioxx.As a result of the withdrawal, the Company recorded an unfavorable
adjustment to net income of $552.6 million, or $.25 per share, in the third
quarter. The adjustment to pre-tax income was $726.2 million. Of this
amount, $491.6 million related to estimated customer returns of product
previously sold and was recorded as a reduction of Sales; $93.2 million
related to write-offs of inventory held by the Company and was recorded in
Materials and production expense; and $141.4 million related to estimated
costs to undertake the withdrawal of the product and was recorded in
Marketing and administrative expense. These amounts did not include any
provisions for any potential legal actions relating to Vioxx(see Note 12).
The tax benefit of this loss was determined to be approximately $173.6
million, which reflects the geographical mix of Vioxxreturns and the cost
of the withdrawal. At September 30, 2004, $318.5 million of the accrued
balance was reported in Accrued and other current liabilities and $314.5
million was reported as a reduction to Accounts receivable. The Company
may incur additional costs in the fourth quarter related to the withdrawal
of Vioxx.3.
    
    In April, Merck and Bristol-Myers Squibb Company (Bristol-Myers Squibb)
entered into a global collaborative agreement for muraglitazar,
Bristol-Myers Squibbs dual PPAR (peroxisome proliferator-activated
receptor) agonist, currently in Phase III clinical development for use
in treating both blood glucose and lipid abnormalities in patients with
type 2 diabetes. Under the terms of the agreement, Bristol-Myers Squibb
received a $100.0 million upfront payment and may receive up to $275.0
million in additional payments based upon the achievement of certain
regulatory milestones. The Company recorded the upfront payment as
Research and development expense in the second quarter. The companies
will jointly develop the clinical and marketing strategy for
muraglitazar and share equally in future development and
commercialization costs.4.
    
    In March, Merck completed the sale of its 50-percent equity stake in
Johnson & Johnson/MSD Europe, a non-prescription pharmaceuticals joint
venture, to Johnson & Johnson for $244.0 million and recorded a $176.8
million gain as Other (income) expense, net in the first quarter. In
addition to the sales proceeds, Merck will continue to benefit through
royalties on certain products. Merck has also regained the rights to
potential future products that switch from prescription to
over-the-counter status in Europe. Johnson & Johnson/Merck Consumer
Pharmaceuticals Co., a 50/50 joint venture between Johnson & Johnson and
Merck that operates in the United States and Canada, is unaffected by
this transaction.5.
    
    In March, the Company acquired Aton Pharma, Inc. (Aton), a privately
held biotechnology company focusing on the development of novel
treatments for cancer and other serious diseases. Atons clinical
pipeline of histone deacetylase inhibitors represents a class of
anti-tumor agents with potential for efficacy based on a novel mechanism
of action. Atons lead product candidate, suberoylanilide hydroxamic
acid, known as SAHA, has been extensively studied in Phase I clinical
trials and is currently in Phase II clinical trials for the treatment of
cutaneous T-cell lymphoma. Consideration for the acquisition consisted
of an upfront payment and may include contingent payments based upon the
regulatory filing, approval and sale of products. In connection with
the transaction, the Company recorded a charge of $125.5 million for
acquired research associated with products in development for which, at
the acquisition date, technological feasibility had not been established
and no alternative future use existed. This charge - 4 -




---



##### Table of Contents



Notes to Consolidated Financial Statements (continued)  was recorded in Research and development expense in the first quarter and
was determined based upon the present value of projected future cash flows
utilizing an income approach reflecting the appropriate risk-adjusted
discount rate based on the product candidates stage of completion and its
probability of technical and marketing success. The remaining net assets
acquired in this transaction were not material. Because Aton was a
development stage company that had not commenced its planned principal
operations, the transaction was accounted for as an acquisition of assets
rather than as a business combination and, therefore, goodwill was not
recorded. Atons results of operations have been included with the
Companys since the acquisition date.6.
    
    In February, Merck and H. Lundbeck A/S (Lundbeck) entered into an
agreement for the exclusive U.S. development and commercialization of
gaboxadol, a compound currently in Phase III development for the
treatment of sleep disorders. Under the terms of the agreement, Merck
made an initial payment of $70.0 million, recorded as Research and
development expense in the first quarter and may pay up to $200.0
million in additional milestone payments in the future. Merck and
Lundbeck will jointly complete the ongoing Phase III clinical program,
with Merck funding the majority of the remaining development activities.
In the second quarter, Merck and Lundbeck announced an extension of
their agreement for the exclusive development and commercialization of
gaboxadol to Japan.7.
    
    In August 2003, Merck completed the spin-off of Medco Health Solutions,
Inc. (Medco Health). Following the spin-off, the Companys prior period
Consolidated Statements of Income and Cash Flows and related disclosures
have been restated to present the results of Medco Health separately as
discontinued operations.Summarized financial information for discontinued operations is as follows: ($ in millions)Three Months
    
    Nine MonthsEnded September 30, 2003*
    
    Ended September 30, 2003*Total net revenues
    
    $
    4,755.9
    
    
    $
    20,328.7Income (loss) before taxes
    
    
    (5.2
    )
    
    
    369.6Taxes on income
    
    
    1.5
    
    
    
    128.3Income (loss), net of taxes
    
    
    (6.7
    )
    
    
    241.3
 *Includes operations up through August 19, 2003 (date of spin-off).  8.
    
    In 2003, the Company announced plans to eliminate approximately 4,400
positions worldwide as part of an effort to fundamentally lower its cost
structure. As of September 30, 2004 approximately 4,500 positions had
been eliminated, as the Company identified additional opportunities to
eliminate positions and reduce costs. The program is expected to be
completed by the end of 2004. For the three months ended September 30,
2004, the Company recorded restructuring costs of $34.5 million, of
which $26.9 million related to employee severance benefits and $7.4
million related to termination charges on the Companys pension and
other postretirement benefit plans (see Note 15) and $.2 million related
to a modification in the terms of certain employees stock option
grants. For the nine months ended September 30, 2004, the Company
recorded restructuring costs of $89.1 million, of which $71.5 million
related to employee severance benefits, $16.0 million related to
termination charges on the Companys pension and other postretirement
benefit plans (see Note 15) and $1.6 million related to a modification
in the terms of certain employees stock option grants. In the fourth
quarter of 2003, the Company recorded restructuring costs of $194.6
million, of which $101.8 million related to employee severance benefits,
$86.0 million related to curtailment, settlement and termination charges
on the Companys pension and other postretirement benefit plans and $6.8
million related to a modification in the terms of certain employees
stock option grants. All restructuring costs were recorded in Marketing
and administrative expense. Additional costs may be incurred as the
program is completed by the end of 2004.A summary of the employee severance liability is as follows: ($ in millions)2003 expense
    
    $
    101.82003 payments
    
    
    (23.5
    )Accrued balance as of December 31, 2003
    
    
    78.3Nine months-to-date expense
    
    
    71.5Nine months-to-date payments
    
    
    (84.2
    )Accrued balance as of September 30, 2004
    
    $
    65.6
 - 5 -




---



##### Table of Contents



Notes to Consolidated Financial Statements (continued)  9.
    
    In 2004, as part of an ongoing compensation review, the Company made
certain changes to its stock-based compensation programs. Under the new
approach, the Company began granting performance share units (PSUs) and
restricted stock units (RSUs), in addition to stock options, to certain
management level employees. The financial value of individual
stock-based incentive grants under the new approach is designed to be
equivalent to the prior approach, only the mix of stock vehicles has
changed. Both PSU and RSU payouts will be in shares of Company stock
after the end of a three-year period, subject to the terms applicable to
such awards. Additionally, PSU payouts will be contingent on the
Company achieving certain earnings per share related targets.Employee stock-based compensation is recognized using the intrinsic value
method. Generally, employee stock options are granted to purchase shares
of Company stock at the fair market value at the time of grant.
Accordingly, no compensation expense is recognized for the Companys
stock-based compensation programs other than for its employee
performance-based awards (including PSUs), RSUs and options granted to
employees of certain equity method investees.Option grants beginning in 2002 generally vest ratably over three years,
while grants prior to 2002 generally vest after five years. Prior to
January 1, 2004, pro forma compensation expense for options with graded
vesting terms has been calculated using the Black-Scholes model based on a
single-option valuation approach using the straight-line method of
amortization. In January 2004, the Company revised the assumptions
utilized by the Black-Scholes model in determining pro forma compensation
expense based on historical data, such that the expense is determined using
separate expected term assumptions for each vesting tranche. As a result,
beginning in January 2004, the Company has calculated pro forma
compensation expense for any stock options granted since that time using
the accelerated amortization method prescribed in FASB Interpretation No.
28, Accounting for Stock Appreciation Rights and Other Variable Stock
Option or Award Plans.The effect on net income and earnings per common share if the Company had
applied the fair value method for recognizing employee stock-based
compensation is as follows: ($ in millions)Three Months
    
    Nine MonthsEnded September 30
    
    Ended September 302004
    
    2003
    
    2004
    
    2003Net income, as reported
    
    $
    1,325.6
    
    
    $
    1,858.3
    
    
    $
    4,712.3
    
    
    $
    5,435.7Compensation expense, net of tax:Reported
    
    
    2.2
    
    
    
    (1.4
    )
    
    
    12.5
    
    
    
    1.2Fair value method
    
    
    (125.5
    )
    
    
    (199.3
    )
    
    
    (365.0
    )
    
    
    (442.5
    )Pro forma net income
    
    $
    1,202.3
    
    
    $
    1,657.6
    
    
    $
    4,359.8
    
    
    $
    4,994.4Earnings per common share from
continuing operations:Assuming dilution  as reported
    
    $
    .60
    
    
    $
    .83
    
    
    $
    2.11
    
    
    $
    2.30Assuming dilution  pro forma
    
    $
    .54
    
    
    $
    .78
    
    
    $
    1.95
    
    
    $
    2.15Earnings per common share:Basic  as reported
    
    $
    .60
    
    
    $
    .83
    
    
    $
    2.12
    
    
    $
    2.43Basic  pro forma
    
    $
    .54
    
    
    $
    .74
    
    
    $
    1.96
    
    
    $
    2.23Assuming dilution  as reported
    
    $
    .60
    
    
    $
    .82
    
    
    $
    2.11
    
    
    $
    2.41Assuming dilution  pro forma
    
    $
    .54
    
    
    $
    .74
    
    
    $
    1.95
    
    
    $
    2.21
 - 6 -




---



##### Table of Contents



Notes to Consolidated Financial Statements (continued)  10.
    
    Inventories consisted of: ($ in millions)September 30
    
    December 312004
    
    2003Finished goods
    
    $
    419.3
    
    
    $
    552.5Raw materials and work in process
    
    
    2,139.2
    
    
    
    2,309.8Supplies
    
    
    109.2
    
    
    
    90.5Total (approximates current cost)
    
    
    2,667.7
    
    
    
    2,952.8Reduction to LIFO cost for domestic inventories
    
    
    (80.4
    )
    
    
    $
    2,587.3
    
    
    $
    2,952.8Recognized as:Inventories
    
    $
    2,213.2
    
    
    $
    2,554.7Other assets
    
    
    374.1
    
    
    
    398.1
  Amounts recognized as Other assets consist of raw materials and work in
process inventories produced in preparation for product launches not
expected to be sold within one year.11.
    
    In the first quarter of 2004, the Company issued $350.0 million of 2.5%
three-year notes and $50.0 million of variable rate notes due in 2044
that are subject to repayment at the option of the holders on an annual
basis. The Company also entered into an interest rate swap contract
that effectively converts the 2.5% fixed rate notes to floating rate
instruments. The interest rate swap is designated as a hedge 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 are fully offset in interest expense by the fair value
changes in the swap contract.In July 2004, a seven-year combined interest rate and currency swap
contract that the Company was a party to matured, with an immaterial impact
on net income. This contract was used to convert a foreign currency
denominated investment to a U.S. dollar investment.12.
    
    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.As previously disclosed, federal and state personal injury lawsuits
involving individual claims, as well as several putative class actions have
been filed against the Company with respect to Vioxx. As of October 31,
2004, the Company has been served or is aware that it has been named as a
defendant in approximately 375 lawsuits, which include approximately 1,000
plaintiff groups alleging personal injuries resulting from the use of
Vioxx. Certain of these lawsuits include allegations regarding
gastrointestinal bleeding, cardiovascular events and kidney damage. The
Company has also been named as a defendant in several putative class
actions seeking medical monitoring as a result of the putative class
members use of Vioxx. In addition, certain state court actions seek
various remedies under state consumer fraud and fair business practice
statutes, including recovering the cost of Vioxxpurchased by individuals
and third-party payers such as union health plans (all of the actions
discussed in this paragraph are collectively referred to as the Vioxx
Personal Injury Lawsuits). The actions filed in the state courts of
California and New Jersey, respectively, have been transferred to a single
judge in each state for coordinated proceedings. In addition, the Company
has filed a motion with the Judicial Panel on Multidistrict Litigation to
transfer to a single federal judge and consolidate for pretrial purposes
all federal cases of a similar nature alleging personal injury and/or
economic loss relating to the purchase or use of Vioxx; several plaintiffs
in certain VioxxPersonal Injury Lawsuits pending in federal court have
made similar requests.As previously disclosed, in addition to the VioxxPersonal Injury Lawsuits,
a number of purported class action lawsuits also were filed in the third
quarter of 2003 and the first quarter of 2004 by several individual
shareholders in the United States District Court for the Eastern District
of Louisiana naming as defendants the Company and several current or former
officers of the Company, and alleging that the defendants made false and
misleading statements regarding Vioxxin violation of the federal
securities laws. The plaintiffs request certification of a class of
purchasers of the Companys common stock between May 22, 1999 and October
22, 2003, and seek unspecified compensatory damages and the costs of suit,
including attorney fees. After the announcement of the withdrawal of
Vioxx, the Company was named as a defendant in four additional purported
securities class action lawsuits filed in federal courts in New Jersey and
Pennsylvania. These later-filed actions request certification of a class
of purchasers of Company stock during various periods between September 23,
2003 and September 30, 2004. The allegations in the later-filed actions
are similar to those in the earlier-filed actions, except that the
later-filed actions - 7 -




---



##### Table of Contents



Notes to Consolidated Financial Statements (continued)  also contain allegations relating to the withdrawal of Vioxxfrom the
market. The complaint in the earlier-filed consolidated actions has been
amended to include allegations regarding the withdrawal of Vioxxand to
extend the purported class period until October 29, 2004. In October
2004, a purported class action lawsuit was filed in the New Jersey Superior
Court for Hunterdon County against the Company and certain officers and
members of the Board of Directors (past and present) alleging that the
defendants made incomplete and misleading statements and omissions in a
registration statement and certain prospectuses filed in connection with
the Merck Stock Investment Plan, a dividend reinvestment plan. The
plaintiffs in this case request certification of a class of investors who
acquired the Companys common stock through the Merck Stock Investment Plan
between April 26, 2002 and September 30, 2004, and seek unspecified
compensatory damages, rescission and the costs of suit, including attorney
fees (all of the actions discussed in this paragraph are collectively
referred to as the VioxxSecurities Lawsuits).As previously disclosed, in March 2004, two shareholder derivative actions
were filed in the United States District Court for the Eastern District of
Louisiana naming the Company and certain members of the Board (past and
present), together with certain executive officers, as defendants. The
complaints arise out of substantially the same factual allegations that are
made in the Vioxx-related federal securities putative class actions filed
against the Company, which principally allege that the Company made false
and misleading statements regarding Vioxx. The derivative suits, which are
purportedly brought to assert rights of the Company, assert claims against
the Board members and officers for breach of fiduciary duty, waste of
corporate assets and unjust enrichment. The court in the Eastern District
of Louisiana has consolidated the shareholder derivative actions with the
earlier-filed consolidated securities actions. In October 2004, two
shareholder derivative actions were filed in the New Jersey Superior Court
for Hunterdon County against the Company and certain officers and members
of the Board (past and present). The allegations in the later-filed
actions are similar to those in the earlier-filed actions, except that the
later-filed actions also contain allegations relating to the withdrawal of
Vioxxfrom the market (all of the actions discussed in this paragraph are
collectively referred to as the VioxxDerivative Lawsuits). On October
29, 2004, attorneys representing two individual shareholders
made a demand on the Board to take legal action against Mr. Raymond
Gilmartin, Chairman, President and Chief Executive Officer and other
unspecified individuals for allegedly causing damage to the Company with
respect to the allegedly improper marketing of Vioxx.In addition to these shareholder actions, since the announcement of the
withdrawal of Vioxx, seven putative class actions have been filed against the
Company, two in the United States District Court for the Eastern District
of Louisiana and five in the United States District Court for the District
of New Jersey (the VioxxERISA Lawsuits and, together with the Vioxx
Securities Lawsuits and the VioxxDerivative Lawsuits, the Vioxx
Shareholder Lawsuits) on behalf of certain of the Companys current and
former employees who are participants in certain of the Companys
retirement plans asserting claims under the Employee Retirement Income
Security Act (ERISA). The lawsuits make similar allegations to the
allegations contained in the shareholder lawsuits described above. The
plaintiff in one of the VioxxERISA Lawsuits has filed a motion with the
Judicial Panel on Multidistrict Litigation to transfer to a single federal
judge and consolidate for pretrial purposes all of the VioxxERISA Lawsuits.In addition to the lawsuits discussed above, the Company has been named as
a defendant in actions in various countries in Europe, Canada, Brazil and
Israel related to Vioxx.The Company has product liability insurance for claims brought in the Vioxx
Personal Injury Lawsuits of up to approximately $630 million after
deductibles and co-insurance. This insurance provides coverage for legal
defense costs and potential damage amounts that have been or will be
incurred in connection with the VioxxPersonal Injury Lawsuits. The
Company believes that this insurance coverage extends to additional Vioxx
Personal Injury Lawsuits that may be filed in the future. Certain of the
Companys insurers have reserved their rights to take a contrary position
with respect to certain coverage and there could be disputes with insurers
about coverage matters. The Company currently believes that it has at
least approximately $190 million of Directors and Officers insurance
coverage for the VioxxSecurities Lawsuits and VioxxDerivative Lawsuits,
and at least approximately $275 million of insurance coverage for the Vioxx
ERISA Lawsuits. Additional insurance coverage for these claims may also be
available under upper level excess policies that provide coverage for a
variety of risks. There may be disputes with insurers about the
availability of some or all of this insurance coverage.The Company is unable at this time to determine whether the Companys
insurance coverage with respect to the VioxxPersonal Injury Lawsuits and
the VioxxShareholder Lawsuits (collectively, the VioxxLawsuits) will be
adequate to cover its defense costs and losses, if any. - 8 -




---



##### Table of Contents



Notes to Consolidated Financial Statements (continued)  Based on media reports and other sources, the Company anticipates that
additional VioxxLawsuits will be filed against it and/or certain of its
current and former officers and directors in the future.In addition, in November, the Company was advised by the
staff of the Securities and Exchange Commission (SEC) that it was
commencing an informal inquiry concerning Vioxx. Also, the
Company has received a subpoena from the U.S. Department of
Justice requesting information related to the Companys
research, marketing and selling activities with respect to
Vioxx in a federal healthcare investigation under criminal
statutes. The Company will cooperate with the SEC and the Justice
Department. The Company cannot predict the outcome of these
inquiries, however, it is possible that highly unfavorable outcomes,
including a potential civil disposition from the SEC and/or potential
civil or criminal dispositions from the Justice Department, could
have a material adverse effect on the Companys financial
position, liquidity and results of operations.The Company currently anticipates that one or more of the VioxxPersonal
Injury Lawsuits may go to trial in the first half of 2005. The Company
cannot predict the timing of any trials with respect to the Vioxx
Shareholder Lawsuits. The Company believes that it has meritorious
defenses to the VioxxLawsuits 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 VioxxLawsuits. The Company has
not established any reserves for any potential liability relating to the
VioxxLawsuits. A series of highly unfavorable outcomes could have a
material adverse effect on the Companys financial position, liquidity and
results of operations.As previously disclosed, beginning in 1993, the Company was named in a
number of antitrust suits, certain of which were certified as class
actions, instituted by most of the nations retail pharmacies and consumers
in several states. In 1994, these actions, except for those pending in
state courts, were consolidated for pre-trial purposes in the federal court
in Chicago, Illinois. In 1996, the Company and several other defendants
settled the federal class action, which represented the single largest
group of claims. Since that time, the Company has settled substantially
all of the remaining cases on satisfactory terms. The Company has not
engaged in any conspiracy and no admission of wrongdoing was made nor was
included in any settlement agreements. While it is not feasible to predict
the final outcome of the few remaining cases, in the opinion of the
Company, these proceedings should not ultimately result in any liability
which would have a material adverse effect on the Companys financial
position, results of operations or liquidity.As previously disclosed, the Company is a party in claims brought under the
Consumer Protection Act of 1987 in the United Kingdom, which allege that
certain children suffer from a variety of conditions as a result of being
vaccinated with various bivalent vaccines for measles and rubella and/or
trivalent vaccines for measles, mumps and rubella, including the Companys
M-M-RII. The conditions include autism, with or without inflammatory
bowel disease, epilepsy, diabetes, encephalitis, encephalopathy, deafness,
chronic fatigue syndrome and transverse myelitis. In early September 2003,
the Legal Services Commission announced its decision to withdraw public
funding of the litigation brought by the claimants. This decision was
confirmed on appeal by the Funding Review Committee (FRC) on September
30, 2003. The claimants application for judicial review of the decision
to withdraw public funding was dismissed in February 2004 and the April
2004 trial date was vacated. The lead claimants have decided not to apply
to the Court of Appeal for permission to appeal that decision. Therefore,
legal aid for all lead claimants has now been discharged. The non-lead
claimants were subject to a show cause procedure to withdraw legal aid
unless the claimants could show cause as to why it should not be withdrawn.
The FRC heard 37 of the show cause appeals by the non-lead claimants in
October 2004. The appeals involving autism (26) were unsuccessful, but
funding was reinstated for 11 appeals involving other non-autism
conditions, such as epilepsy, deafness, encephalitis and transverse
myelitis. It is not yet known how many of the 11 appeals involve claimants
suing the Company. All claimants for all conditions have until December
2004 to give notice of their intention to continue or discontinue with
their claims, irrespective of whether or not they have secured legal aid
funding. Directions from the court for the future conduct of the
litigation will be made at a case management hearing in 2005.As previously disclosed, the Company is also a party to individual and
class action product liability lawsuits and claims in the United States
involving pediatric vaccines (i.e., hepatitis B vaccine and haemophilus
influenzatype b vaccine) that contained thimerosal, a preservative used in
vaccines. Other defendants include vaccine manufacturers who produced
pediatric vaccines containing thimerosal as well as manufacturers of
thimerosal. In these actions, the plaintiffs allege, among other things,
that they have suffered neurological and other injuries as a result of
having thimerosal introduced into their developing bodies. The Company has
been successful in having many of these cases either dismissed or stayed on
the ground that the National Vaccine Injury Compensation Program (NVICP)
prohibits any person from filing or maintaining a civil action seeking
damages against a vaccine manufacturer for vaccine-related injuries unless
a petition is first filed in the United States Court of Federal Claims. A
number of similar cases (M-M-RII alone and/or thimerosal-containing
vaccines) have been filed in the United States Court of Federal Claims
under the NVICP for a determination first on general causation issues.
Three state - 9 -




---



##### Table of Contents



Notes to Consolidated Financial Statements (continued)  court cases and two Federal District Court cases are scheduled for trial in
2005. The Company believes that these lawsuits and claims are without
merit and will vigorously defend against them in the proceedings in which
it is a party.The Company has been named as a defendant in antitrust cases in federal
court in Minnesota and in state court in California, each alleging an
unlawful conspiracy among different sets of pharmaceutical manufacturers to
protect high prices in the United States by impeding importation into the
United States of lower-priced pharmaceuticals from Canada.A suit in federal court in Alabama by two providers of health services to
needy patients alleges that 15 pharmaceutical companies overcharged the
plaintiffs and a class of those similarly situated, for pharmaceuticals
purchased by the plaintiffs under the program established by Section 340B
of the Public Health Service Act. The Company and the other defendants
have filed a motion to dismiss the complaint on numerous grounds.As previously disclosed, the Company has received a subpoena from the U.S.
Department of Justice in connection with its investigation of the Companys
marketing and selling activities. The Company has also reported that it
has received a Civil Investigative Demand from the Attorney General of
Texas regarding the Companys marketing and selling activities relating to
Texas. In April 2004, the Company received a subpoena from the office of
the Inspector General for the District of Columbia in connection with an
investigation of the Companys interactions with physicians in the District
of Columbia, Maryland, and Virginia. The Company is cooperating with all of
these investigations. The Company cannot predict the outcome of these
investigations, however, it is possible that highly unfavorable outcomes
could have a material adverse effect on the Companys financial position,
liquidity and results of operations. In addition, from time to time, other
federal or state regulators may seek information about practices in the
pharmaceutical industry in inquiries other than the investigations
discussed in this paragraph. It is not feasible to predict the outcome of
any such inquiries.As previously disclosed, on July 6, 2004, the United
States District Court
for the District of New Jersey granted a motion by the Company, Medco
Health Solutions, Inc. (Medco Health) and certain officers and directors
to dismiss a purported class action complaint involving claims related to
the Companys revenue recognition practice for retail co-payments paid by
individuals to whom Medco Health provides pharmaceutical benefits as well
as other allegations. The complaint was dismissed with prejudice. On
August 20, 2004 the same court granted the Companys motion to dismiss with
prejudice a related shareholder derivative action. Plaintiffs in both
actions have appealed the decisions.Prior to the spin-off of Medco
Health, as previously disclosed, the Company and Medco Health agreed to
settle, on a class action basis, a number of lawsuits asserting violations
of ERISA. Medco Health and the Company agreed to the settlement in order
to avoid the significant cost and distraction of protracted litigation. By
order dated May 25, 2004, the United States District Court for the Southern
District of New York certified a class action, determined that the
settlement was fair, reasonable, and adequate, and gave final approval to
the settlement agreement among the Company, Medco Health and Class Counsel.
Under the settlement, the Company and Medco Health have agreed to pay a
total of $42.5 million, and Medco Health has agreed to modify certain
business practices or to continue certain specified business practices for
a period of five years. The financial compensation is intended to benefit
members of the settlement class, which includes ERISA plans for which Medco
Health administered a pharmacy benefit at any time between December 17,
1994 and the date of final approval.The settlement becomes final only if and when all appeals have been
resolved. Two notices of appeal have been filed. Certain class member
plans have indicated that they will not participate in the settlement.
Currently, cases initiated by three such plans and two individuals remain
pending in the Southern District of New York. Plaintiffs in these cases
have asserted claims that are the same as or similar to the claims that had
been asserted by settling class members. The Company, along with Medco
Health, is a named defendant in these cases.At the time of the spin-off of Medco Health, Medco Health assumed
substantially all of the liability exposure for the matters discussed in
the foregoing two paragraphs. The Company believes that these cases, which
are being defended by Medco Health, are without merit.There are various other legal proceedings, principally product liability
and intellectual property suits involving the Company, which are pending
but not discussed in this report. While it is not feasible to predict the
outcome of these proceedings, in the opinion of the Company, such
proceedings are either adequately covered by insurance or, if not so
covered, should not ultimately result in any liability that would have a
material adverse effect on the financial position, liquidity or results of
operations of the Company. - 10 -




---



##### Table of Contents



Notes to Consolidated Financial Statements (continued)  13.
    
    The Companys decision to obtain insurance coverage is dependent on
market conditions, including cost and availability, existing at the time
such decisions are made. As a result of a number of factors, product
liability insurance has become less available while the cost has
increased significantly. The Company has evaluated its risks and has
determined that the cost of obtaining product liability insurance
outweighs the likely benefits of the coverage that is available and as
such, has no insurance for certain product liabilities effective August
1, 2004, including liability for products first sold after that date.
The Company will continue to evaluate its insurance needs and the costs,
availability and benefits of product liability insurance in the future.14.
    
    As previously disclosed, the IRS has substantially completed its
examination of the Companys tax returns for the years 1993 to 1996 and
on April 28, 2004 issued a preliminary notice of deficiency with respect
to a partnership transaction entered into in 1993. Specifically, the
IRS is proposing to disallow certain royalty and other expenses claimed
as deductions on the 1993-1996 tax returns of the Company. The Company
anticipates receiving a similar notice for 1997-1999, shortly. If the
IRS ultimately prevails in its positions, the Companys income tax due
for the years 1993-1999 would increase by approximately $970 million
plus interest of approximately $490 million. The IRS will likely make
similar claims for years subsequent to 1999 in future audits with
respect to this transaction. The potential disallowance for these later
years, computed on a similar basis to the 1993-1999 disallowances, would
be approximately $540 million plus interest of approximately $40
million. The IRS has proposed penalties on the Company with respect to
all periods that have been examined and the Company anticipates the IRS
would seek to impose penalties on all other periods.The Company vigorously disagrees with the proposed adjustments and intends
to aggressively contest this matter through applicable IRS and judicial
procedures, as appropriate. Although the final resolution of the proposed
adjustments is uncertain and involves unsettled areas of the law, based on
currently available information, the Company has provided for the best
estimate of the probable tax liability for this matter. While the
resolution of the issue may result in tax liabilities which are
significantly higher or lower than the reserves established for this
matter, management currently believes that the resolution will not have a
material effect on the Companys financial position or liquidity. However,
an unfavorable resolution could have a material effect on the Companys
results of operations or cash flows in the quarter in which an adjustment
is recorded or the tax is due or paid.15.
    
    The Company has defined benefit pension plans covering eligible
employees in the United States and in certain of its international
subsidiaries. The net cost of such plans consisted of the following
components: ($ in millions)Three Months
    
    Nine MonthsEnded September 30
    
    Ended September 302004
    
    2003
    
    2004
    
    2003Service cost
    
    $
    73.1
    
    
    $
    65.4
    
    
    $
    225.7
    
    
    $
    194.4Interest cost
    
    
    70.2
    
    
    
    64.6
    
    
    
    214.1
    
    
    
    193.8Expected return on plan assets
    
    
    (93.1
    )
    
    
    (84.4
    )
    
    
    (274.8
    )
    
    
    (253.9
    )Net amortization
    
    
    37.2
    
    
    
    28.3
    
    
    
    97.2
    
    
    
    86.2Settlements
    
    
    17.3
    
    
    
    
    
    
    
    17.3
    
    
    
    Termination benefits
    
    
    6.4
    
    
    
    
    
    
    
    13.5
    
    
    
    $
    111.1
    
    
    $
    73.9
    
    
    $
    293.0
    
    
    $
    220.5
  The Company provides medical, dental and life insurance benefits,
principally to its eligible U.S. retirees and similar benefits to their
dependents, through its other postretirement benefits plans. The net cost
of such plans consisted of the following components: ($ in millions)Three Months
    
    Nine MonthsEnded September 30
    
    Ended September 302004
    
    2003
    
    2004
    
    2003Service cost
    
    $
    20.8
    
    
    $
    16.7
    
    
    $
    61.6
    
    
    $
    51.3Interest cost
    
    
    25.6
    
    
    
    22.2
    
    
    
    76.1
    
    
    
    68.1Expected return on plan assets
    
    
    (22.2
    )
    
    
    (15.3
    )
    
    
    (61.0
    )
    
    
    (46.8
    )Net amortization
    
    
    6.5
    
    
    
    6.9
    
    
    
    20.9
    
    
    
    21.1Curtailments
    
    
    
    
    
    
    (4.1
    )
    
    
    (12.3
    )
    
    
    (7.7
    )Termination benefits
    
    
    1.0
    
    
    
    
    
    
    
    2.5
    
    
    
    $
    31.7
    
    
    $
    26.4
    
    
    $
    87.8
    
    
    $
    86.0
 - 11 -




---



##### Table of Contents



Notes to Consolidated Financial Statements (continued)  During the second quarter 2004, in accordance with FASB Staff Position No.
106-2, Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (the Act), the
Company began accounting for the effect of the federal subsidy under the
Act, which reduced the benefit obligation of certain of its other
postretirement benefit plans by $169.0 million. The service cost, interest
cost and net amortization components of net postretirement benefit cost
were reduced by $2.0 million, $2.6 million and $3.2 million, respectively,
for the three month period ended September 30, 2004 and $6.0 million, $7.9
million and $9.4 million, respectively, for
the nine month period ended September 30, 2004. While the Company is
recognizing the subsidy in accordance with current accounting requirements,
it will continue to evaluate the Act and regulations that follow to
determine the optimal approach to incorporating the impact of the Act.The Company changed participant contributions and the service recognized
for eligibility for certain of its other postretirement benefit plans.
These amendments generated curtailment gains of $4.1 million for the three
month period ended September 30, 2003, and $12.3 million and $7.7 million
for the nine month periods ended September 30, 2004 and 2003, respectively.The Company recorded termination charges for the three and nine month
periods ended September 30, 2004 of $6.4 million and $13.5 million,
respectively, on its pension plans and $1.0 million and $2.5 million,
respectively, on its other postretirement benefit plans related to expanded
eligibility for certain employees under the restructuring action (see Note
8).In addition, the Company recorded a settlement charge of $17.3 million in
the third quarter of 2004 on certain of its domestic pension plans
resulting from employees electing to receive their pension benefits as lump
sum payments.16.
    
    Other (income) expense, net, consisted of: ($ in millions)Three Month
    
    Nine MonthsEnded September 30
    
    Ended September 302004
    
    2003
    
    2004
    
    2003Interest income
    
    $
    (75.7
    )
    
    $
    (66.9
    )
    
    $
    (209.8
    )
    
    $
    (236.5
    )Interest expense
    
    
    72.4
    
    
    
    81.1
    
    
    
    216.8
    
    
    
    270.9Exchange losses/(gains)
    
    
    2.8
    
    
    
    (1.7
    )
    
    
    9.9
    
    
    
    (25.1
    )Minority interests
    
    
    37.6
    
    
    
    39.1
    
    
    
    114.0
    
    
    
    131.5Other, net
    
    
    (41.3
    )
    
    
    (34.5
    )
    
    
    (370.9
    )
    
    
    (255.3
    )$
    (4.2
    )
    
    $
    17.1
    
    
    $
    (240.0
    )
    
    $
    (114.5
    )
  Minority interests include third parties share of exchange gains and
losses arising from translation of the financial statements into U.S.
dollars.Other, net for the nine month period ended September 30, 2004 reflects the
gain on the divestiture of Mercks 50-percent equity stake in Johnson &
Johnson/MSD Europe.Interest paid for the nine month periods ended September 30, 2004 and 2003
was $238.1 million and $302.2 million, respectively.17.
    
    President Bush recently signed the American Jobs Creation Act of 2004
(the Jobs Creation Act). The Jobs Creation Act contains a number of
provisions that might affect the Companys future effective tax rate.
The most significant provision would allow the Company to elect to
deduct from its taxable income 85% of certain eligible dividends
received by the Company from non-U.S. subsidiaries before the end of
2005 if those dividends are reinvested in the U.S. for eligible
purposes. The Company is currently evaluating the amount of such
eligible dividends that its non-U.S. subsidiaries will remit, as well as
the effects the Jobs Creation Act will have on its effective tax rate and deferred
tax assets and liabilities.18.
    
    The weighted average common shares used in the computations of basic
earnings per common share and earnings per common share assuming
dilution (shares in millions) are as follows: Three Months
    
    Nine MonthsEnded September 30
    
    Ended September 302004
    
    2003
    
    2004
    
    2003Average common shares outstanding
    
    
    2,218.5
    
    
    
    2,237.0
    
    
    
    2,220.7
    
    
    
    2,240.7Common shares issuable(1)
    
    
    7.7
    
    
    
    16.9
    
    
    
    8.8
    
    
    
    18.2Average common shares outstanding assuming dilution
    
    
    2,226.2
    
    
    
    2,253.9
    
    
    
    2,229.5
    
    
    
    2,258.9
  (1)
    
    Issuable primarily under stock-based compensation programs,
including unvested PSUs and RSUs. - 12 -




---



##### Table of Contents



Notes to Consolidated Financial Statements (continued)  19.
    
    Comprehensive income for the three months ended September 30, 2004 and
2003, representing all changes in stockholders equity during the period
other than changes resulting from the Companys stock, was $1,367.5
million and $1,884.3 million, respectively. Comprehensive income for
the nine months ended September 30, 2004 and 2003 was $4,639.1 million
and $5,389.1 million, respectively.20.
    
    The Companys operations are principally managed on a products basis.
The Merck Pharmaceutical segment includes products marketed either
directly or through joint ventures. These products consist of
therapeutic and preventive agents, sold by prescription, for the
treatment of human disorders. Other segment revenues include
non-reportable human and animal health segments.Revenues and profits for these segments are as follows: ($ in millions)Three Months
    
    Nine MonthsEnded September 30
    
    Ended September 302004
    
    2003
    
    2004
    
    2003Segment revenues:Merck Pharmaceutical
    
    $
    5,134.9
    
    
    $
    5,348.1
    
    
    $
    16,129.4
    
    
    $
    15,779.8Other segment revenues
    
    
    345.6
    
    
    
    350.9
    
    
    
    887.8
    
    
    
    909.1$
    5,480.5
    
    
    $
    5,699.0
    
    
    $
    17,017.2
    
    
    $
    16,688.9Segment profits:Merck Pharmaceutical
    
    $
    3,056.7
    
    
    $
    3,511.0
    
    
    $
    10,235.2
    
    
    $
    10,159.1Other segment profits
    
    
    388.4
    
    
    
    363.4
    
    
    
    909.4
    
    
    
    879.2$
    3,445.1
    
    
    $
    3,874.4
    
    
    $
    11,144.6
    
    
    $
    11,038.3
  A reconciliation of total segment revenues to consolidated sales is as follows: ($ in millions)Three Months
    
    Nine MonthsEnded September 30
    
    Ended September 302004
    
    2003
    
    2004
    
    2003Segment revenues
    
    $
    5,480.5
    
    
    $
    5,699.0
    
    
    $
    17,017.2
    
    
    $
    16,688.9Other revenues
    
    
    57.6
    
    
    
    63.0
    
    
    
    173.5
    
    
    
    169.9$
    5,538.1
    
    
    $
    5,762.0
    
    
    $
    17,190.7
    
    
    $
    16,858.8
  Other revenues are primarily comprised of miscellaneous corporate revenues,
sales related to divested products or businesses and other supply sales.Net sales by category of the Companys products were as follows: ($ in millions)Three Months
    
    Nine MonthsEnded September 30
    
    Ended September 302004
    
    2003
    
    2004
    
    2003Atherosclerosis
    
    $
    1,226.4
    
    
    $
    1,421.1
    
    
    $
    3,906.9
    
    
    $
    3,852.0Hypertension/heart failure
    
    
    895.6
    
    
    
    848.2
    
    
    
    2,676.6
    
    
    
    2,488.9Osteoporosis
    
    
    777.7
    
    
    
    686.7
    
    
    
    2,328.7
    
    
    
    2,026.3Respiratory
    
    
    625.7
    
    
    
    615.6
    
    
    
    1,891.2
    
    
    
    1,502.2Anti-inflammatory/analgesics
    
    
    250.0
    
    
    
    543.1
    
    
    
    1,687.0
    
    
    
    1,906.7Anti-bacterial/anti-fungal
    
    
    304.9
    
    
    
    280.9
    
    
    
    859.9
    
    
    
    754.3Vaccines/biologicals
    
    
    297.8
    
    
    
    311.3
    
    
    
    750.2
    
    
    
    789.2Urology
    
    
    179.8
    
    
    
    126.3
    
    
    
    539.1
    
    
    
    437.7Ophthalmologicals
    
    
    178.2
    
    
    
    166.2
    
    
    
    525.2
    
    
    
    485.7Human immunodeficiency virus (HIV)
    
    
    64.9
    
    
    
    64.3
    
    
    
    193.4
    
    
    
    228.7Other
    
    
    737.1
    
    
    
    698.3
    
    
    
    1,832.5
    
    
    
    2,387.1$
    5,538.1
    
    
    $
    5,762.0
    
    
    $
    17,190.7
    
    
    $
    16,858.8
  Anti-inflammatory/analgesics includes sales of Vioxx which
was voluntarily withdrawn worldwide on September 30, 2004 (see
Note 2). Other primarily includes sales of other human pharmaceuticals, pharmaceutical
and animal health supply sales to the Companys joint ventures and revenue
from the Companys relationship with AstraZeneca LP. - 13 -




---



##### Table of Contents



Notes to Consolidated Financial Statements (continued)  Segment profits are comprised of segment revenues less certain elements of
materials and production costs and operating expenses, including components
of equity income from affiliates and depreciation and amortization
expenses. For internal management reporting presented to the chief
operating decision maker, the Company does not allocate the vast majority
of indirect production costs, research and development expenses and general
and administrative expenses, as well as the cost of financing these
activities. Separate divisions maintain responsibility for monitoring and
managing these costs, including depreciation related to fixed assets
utilized by these divisions and, therefore, they are not included in
segment profits.A reconciliation of segment profits to total income from continuing
operations before taxes is as follows: ($ in millions)Three Months
    
    Nine MonthsEnded September 30
    
    Ended September 302004
    
    2003
    
    2004
    
    2003Segment profits
    
    $
    3,445.1
    
    
    $
    3,874.4
    
    
    $
    11,144.6
    
    
    $
    11,038.3Other profits
    
    
    (24.4
    )
    
    
    72.8
    
    
    
    .2
    
    
    
    138.9Adjustments
    
    
    112.3
    
    
    
    104.1
    
    
    
    346.1
    
    
    
    310.7Unallocated:Interest income
    
    
    75.7
    
    
    
    66.9
    
    
    
    209.8
    
    
    
    236.5Interest expense
    
    
    (72.4
    )
    
    
    (81.1
    )
    
    
    (216.8
    )
    
    
    (270.9
    )Equity income from affiliates
    
    
    21.9
    
    
    
    11.2
    
    
    
    82.0
    
    
    
    40.2Depreciation and amortization
    
    
    (312.1
    )
    
    
    (277.8
    )
    
    
    (936.1
    )
    
    
    (854.8
    )Research and development
    
    
    (919.3
    )
    
    
    (776.5
    )
    
    
    (2,901.6
    )
    
    
    (2,373.6
    )Other expenses, net
    
    
    (513.8
    )
    
    
    (389.2
    )
    
    
    (1,133.5
    )
    
    
    (974.6
    )$
    1,813.0
    
    
    $
    2,604.8
    
    
    $
    6,594.7
    
    
    $
    7,290.7
  Other profits are primarily comprised of miscellaneous corporate profits as
well as operating profits related to divested products or businesses and
other supply sales. Adjustments represent the elimination of the effect of
double counting certain items of income and expense. Equity income from
affiliates includes taxes paid at the joint venture level and a portion of
equity income that is not reported in segment profits. Other expenses,
net, include expenses from corporate and manufacturing cost centers and
other miscellaneous income (expense), net. - 14 -




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations Operating Results Summary Earnings per share for the third quarter of 2004 were $0.60, including a
$0.25 unfavorable effect associated with the Companys voluntary worldwide
withdrawal of Vioxxdescribed below. The unfavorable impact includes
estimated customer returns of product previously sold, write-offs of
inventory held by Merck and costs to undertake the withdrawal of the product.
Net income was $1,325.6 million, including a $552.6 million unfavorable
effect related to the withdrawal of Vioxx. Worldwide sales were $5.5 billion
for the quarter, including a $491.6 million unfavorable effect related to the
withdrawal of Vioxx. For the third quarter of 2003, earnings per share from
continuing operations(1)were $0.83, income from continuing operations was
$1,865.0 million and sales were $5.8 billion. Global sales performance
includes a 2-point favorable effect from foreign exchange for the third
quarter of 2004. For the first nine months of 2004, earnings per share were $2.11, net income
was $4,712.3 million and sales were $17.2 billion for the period. These
amounts include the unfavorable effects described above associated with the
withdrawal of Vioxx. Earnings per share from continuing operations were
$2.30, income from continuing operations was $5,194.4 million and sales were
$16.9 billion for the comparable period in 2003. Global sales performance
includes a 3-point favorable effect from foreign exchange for the first nine
months of 2004. The Companys gross margin was 75.4% in the third quarter of 2004 compared to
81.2% in the third quarter of 2003 and 78.6% compared to 81.0% for the
respective nine-month period, reflecting the unfavorable effects associated
with the withdrawal of Vioxxas well as the impact of changes in product mix. Merck is redeploying research and development and marketing and sales
personnel formerly dedicated to Vioxxto areas where additional growth
opportunities exist, including other research programs, support of in-line
products and upcoming product launches. In addition, the Company will
continue to drive down its cost structure through a number of initiatives
already under way. In October 2003, Merck announced plans to eliminate
approximately 4,400 positions by the end of 2004. As of September 30, 2004
approximately 4,500 positions had been eliminated, as the Company identified
additional opportunities to eliminate positions and reduce costs. Beginning
in 2005, this action is expected to lower the Companys annual payroll and
benefit costs by approximately $250 to $300 million. Marketing and administrative expenses increased 20% compared to the third
quarter of 2003, including the effect of $141.4 million for estimated costs
related to the withdrawal of Vioxxand the impact of $34.5 million for
restructuring costs related to previously announced position eliminations.
Excluding these effects, marketing and administrative expenses for the third
quarter increased 8% from the third quarter of 2003. For the first nine
months of 2004, marketing and administrative expenses increased 9%, including
the aforementioned effect related to the withdrawal of Vioxxand the impact
of $89.1 million for restructuring costs related to previously announced
position eliminations. Excluding these effects, marketing and administrative
expenses for the first nine months increased 4% from the comparable 2003
period. Research and development expenses increased 18% during the third quarter,
reflecting Mercks ongoing commitment to both basic and clinical research, as
well as the impact of the Companys external collaborations, such as with DOV
Pharmaceutical, Inc. (DOV) and Nastech Pharmaceutical Company Inc. (Nastech).
For the first nine months of 2004, research and development expenses
increased 22% from the comparable period in 2003, reflecting the same factors
affecting the third quarter increase as well as the impact of additional
external collaborations, including those with Bristol-Myers Squibb Company
(Bristol-Myers Squibb), H. Lundbeck A/S (Lundbeck) and Vertex Pharmaceuticals
Incorporated (Vertex), and higher acquired research expense related to the
acquisition of Aton Pharma, Inc. in 2004 compared with the acquired research
expense related to the increase in the Companys ownership of Banyu
Pharmaceutical Co. Ltd. in 2003. Voluntary Withdrawal of Vioxx On September 30, 2004 Merck announced a voluntary worldwide withdrawal of
Vioxx, its arthritis and acute pain medication. The Companys decision,
which was effective immediately, was based on new three-year data from a
prospective, randomized, placebo-controlled clinical trial, APPROVe
(Adenomatous Polyp Prevention on Vioxx). The trial, which was stopped, was designed to evaluate the efficacy of Vioxx
25 mg in preventing the recurrence of colorectal polyps in patients with a
history of colorectal adenomas and to further assess the cardiovascular
safety of Vioxx. In this study, there was an increased relative risk for
confirmed cardiovascular events, such as heart attack and stroke, beginning
after 18 months of treatment in the patients taking Vioxxcompared to those
taking placebo. The results for the first 18 months of the APPROVe study did
not show any increased risk of confirmed cardiovascular events on Vioxx, and
in this respect, were similar to the results of two placebo-controlled
studies described in the most recent U.S. labeling for Vioxx. (1) Continuing operations exclude only the results from Medco Health Solutions,
Inc., which was spun off on August 19, 2003. - 15 -




---



##### Table of Contents



Merck presented data from APPROVe at the American College of Rheumatology
(ACR) Annual Scientific Meeting in San Antonio on October 18, 2004. The
Company had requested the opportunity to present the data at the ACR meeting. The Company estimates that there were 105 million U.S. prescriptions written
for Vioxxfrom May 1999 through August 2004. Based on this estimate, the
Company estimates that the number of patients who have taken Vioxxin the
United States since its 1999 launch is approximately 20 million. The number
of patients outside the United States who have taken Vioxxis undetermined at
this time. The Company has received a letter from Senator Charles Grassley requesting
certain documents and information related to Vioxx. The Company intends to
cooperate with Senator Grassleys inquiry so that the Company can continue to
describe the reasons for the Companys voluntary withdrawal of Vioxxand to
answer any questions related to the Companys development and extensive
testing of the medicine and its disclosures of the results of its studies. In October, the Company received a letter from a group of five state
Attorneys General raising concerns that the Companys return and refund
program for unused Vioxxwill not provide consumers with adequate notice and
will be unduly burdensome. The Company is cooperating with the Attorneys
General to respond to their concerns. Arcoxia On October 29, 2004, the Company confirmed that it had received an
approvable letter from the U.S. Food and Drug Administration (FDA) for the
Companys New Drug Application (NDA) for Arcoxia. The FDA informed Merck in
the letter that before approval of the NDA can be issued, additional safety
and efficacy data for Arcoxiaare required. On October 22, 2004, the European Medicines Agency announced that it will
conduct a review of all COX-2 inhibitors, including Arcoxia, in light of the
worldwide withdrawal of Vioxx. The agency said that it had been asked to
conduct the review by the European Commission as a precautionary measure
and that it would look at all aspects of the cardiovascular safety of COX-2
inhibitors, including thrombotic and cardio-renal events. The aim of the
review is to determine whether there is a need to make EU-wide changes to the
products marketing authorizations, including labeling, and whether
additional studies are needed. Arcoxiahas been launched in 48 countries worldwide in Europe, Latin America
and the Asia-Pacific region. Merck will continue to work with regulatory
agencies in the countries where Arcoxiais approved, including the European
Medicines Agency, to assess whether changes to the prescribing information
for this class of drugs, including Arcoxia, are warranted. Sales Net sales by category of the Companys products were as follows: ($ in millions)Three Months
    
    Nine MonthsEnded September 30
    
    Ended September 302004
    
    2003
    
    2004
    
    2003Atherosclerosis
    
    $
    1,226.4
    
    
    $
    1,421.1
    
    
    $
    3,906.9
    
    
    $
    3,852.0Hypertension/heart failure
    
    
    895.6
    
    
    
    848.2
    
    
    
    2,676.6
    
    
    
    2,488.9Osteoporosis
    
    
    777.7
    
    
    
    686.7
    
    
    
    2,328.7
    
    
    
    2,026.3Respiratory
    
    
    625.7
    
    
    
    615.6
    
    
    
    1,891.2
    
    
    
    1,502.2Anti-inflammatory/analgesics
    
    
    250.0
    
    
    
    543.1
    
    
    
    1,687.0
    
    
    
    1,906.7Anti-bacterial/anti-fungal
    
    
    304.9
    
    
    
    280.9
    
    
    
    859.9
    
    
    
    754.3Vaccines/biologicals
    
    
    297.8
    
    
    
    311.3
    
    
    
    750.2
    
    
    
    789.2Urology
    
    
    179.8
    
    
    
    126.3
    
    
    
    539.1
    
    
    
    437.7Ophthalmologicals
    
    
    178.2
    
    
    
    166.2
    
    
    
    525.2
    
    
    
    485.7Human immunodeficiency virus (HIV)
    
    
    64.9
    
    
    
    64.3
    
    
    
    193.4
    
    
    
    228.7Other
    
    
    737.1
    
    
    
    698.3
    
    
    
    1,832.5
    
    
    
    2,387.1$
    5,538.1
    
    
    $
    5,762.0
    
    
    $
    17,190.7
    
    
    $
    16,858.8
 Sales by individual therapeutic class are presented net of rebates and
discounts, which in the aggregate, reduced revenues by $982.8 million and
$986.1 million for the three month periods ended September 30, 2004 and 2003,
respectively, and $3.0 billion and $2.3 billion for the nine month periods
ended September 30, 2004 and 2003, respectively. Provisions for rebates and
discounts cover discounts that result from sales to a customer through an
intermediary wholesale purchaser as well as rebates owed based upon
contractual agreements or legal requirements with benefit providers,
including Medicaid, after the final dispensing of the product by a pharmacy
to a benefit plan - 16 -




---



##### Table of Contents



participant. In the preceding
table, Anti-inflammatory/analgesics includes sales of Vioxx which was
voluntarily withdrawn worldwide on September 30, 2004. Other primarily includes sales of
other human pharmaceuticals, pharmaceutical and animal health supply sales to
the Companys joint ventures and revenue from the Companys relationship with
AstraZeneca LP (AZLP). In connection with the U.S. wholesaler distribution
program, implemented in the fourth quarter of 2003, inventory levels at key
wholesalers for each of the Companys major products approximate two to three
weeks of supply. Worldwide sales of Singulair, a once-a-day oral medicine indicated for the
treatment of chronic asthma and the relief of symptoms associated with
seasonal allergic rhinitis, reached $625.7 million in the third quarter,
which was 2% higher than the third quarter of 2003. Sales in the third
quarter of 2003 were favorably impacted by approximately $120 million of
wholesaler buy-in. U.S. mail-order-adjusted prescription levels for
Singulairincreased by approximately 18 percent for the quarter, as compared
to the third quarter of 2003. Sales for the first nine months were $1.9
billion, a 26% increase over the comparable 2003 period. Singulaircontinues
to be the second-most-prescribed product in the overall respiratory market in
the United States as patients, physicians and managed care organizations
continue to recognize the value Singulairoffers to those who suffer from
asthma or seasonal allergic rhinitis. Fosamaxcontinued as the most-prescribed medicine worldwide for the treatment
of postmenopausal, male and glucocorticoid-induced osteoporosis. Global
sales were strong, reaching $777.7 million during the quarter and $2.3
billion for the first nine months, representing growth of 13% and 15% over
the respective periods of 2003. U.S. mail-order-adjusted prescription levels
for Fosamaxwere in line with third-quarter 2003 levels. In April, the Journal of Internal Medicinepublished findings from the first
international head-to-head study that compared the efficacy of FosamaxOnce
Weekly (alendronate) 70 mg to Evista (raloxifene) 60 mg once daily, which
showed that Fosamaxprovided significantly greater increases in bone mineral
density (BMD) at the lumbar spine and total hip. Results from the FosamaxActonel Comparison Trial (FACT) were presented on
October 1, 2004 at the American Society for Bone Mineral Research meeting.
This is the first head-to-head study comparing FDA-approved once-weekly
osteoporosis treatments in postmenopausal women with osteoporosis conducted
in the United States. FACT showed that Fosamaxdemonstrated significantly
greater increases in BMD and reductions in markers of bone-turnover than
Actonel. Fosamaxincreased BMD 62 percent more than Actonel at the hip
trochanter (hip bone), with similar tolerability. BMD is a major determinant
of bone strength; the lower the BMD score the greater the risk of fracture. Global sales of Mercks
antihypertensive medicines, Cozaarand Hyzaar(2),
were strong, reaching $706.2 million for the third quarter and $2.1 billion
for the first nine months, representing growth of 14% and 15% over the
respective periods in 2003. Cozaaris the second-most-frequently prescribed
angiotensin II antagonist (AIIA) in the United States and the largest-selling
AIIA in Europe. U.S. mail-order-adjusted prescription levels for Cozaarand
Hyzaarincreased by approximately 4 percent for the quarter, as compared to
the third quarter of 2003. Worldwide sales of Zocor, Mercks statin for modifying cholesterol, were $1.2
billion in the third quarter and $3.9 billion for the first nine months.
Third-quarter Zocorperformance includes an unfavorable comparison to 2003,
which was affected by approximately $110 million of wholesaler buy-in,
resulting in a decline in sales of 13% from the same period in 2003. Zocor
sales growth for the first nine months was 2% compared to the first nine
months of 2003. U.S. mail-order-adjusted prescription levels for Zocor
increased by approximately 2 percent for the quarter, as compared to the
third quarter of 2003. In July, the National Cholesterol Education Program (NCEP) issued a report
recommending modifications to the Adult Treatment Panel III (ATP III)
guidelines. The report, which was based on five major studies, including
HPS, was endorsed by: the American Heart Association; the American College of
Cardiology; and the National Heart, Lung, and Blood Institute. The new
report may lead to an increase in the number of people for whom
cholesterol-lowering medicines should be considered. Under the NCEP ATP III
guidelines, an estimated 36 million people would be eligible for
cholesterol-lowering medication such as Zocorfor cholesterol management.
According to the new report, in high-risk persons, the recommended LDL-C goal
is < 100 mg/dL. The report also indicates that when risk is very high,
such as for a patient with established cardiovascular disease plus multiple
major risk factors (especially diabetes), an LDL-C goal of < 70 mg/dL is a
reasonable clinical strategy for physicians. Global sales of Mercks coxib, Arcoxia, reached $61.1 million in the third
quarter and $153.5 million for the first nine months. To date, Arcoxiahas
been launched in 48 countries in Europe, Latin America and Asia. On October
29, 2004, the Company confirmed that it had received an approvable letter
from the FDA for the Companys NDA for Arcoxia. The FDA informed Merck in
the letter that before approval of the NDA can be issued, additional safety
and efficacy data for Arcoxiaare required. (2) COZAAR and HYZAAR are registered trademarks of E.I. DuPont de Nemours &
Company, Wilmington, Del. - 17 -




---



##### Table of Contents



Results from two acute dental pain studies with Arcoxiawere published during
the second quarter. The first study, published in Clinical Therapeutics,
showed that patients taking Arcoxia120 mg experienced pain relief lasting
for a full 24 hours compared with 10 hours for patients taking ibuprofen. In
the second study, published in the Clinical Journal of Pain, patients taking
Arcoxia120 mg or naproxen sodium 550 mg had significantly greater pain
relief scores over eight hours than those taking a commonly used narcotic,
acetaminophen with codeine. In October, results of a new clinical study were presented at the annual
meeting of the American College of Rheumatology which showed Arcoxia
demonstrated significantly fewer discontinuations due to gastrointestinal
side effects compared to diclofenac sodium, a commonly prescribed
non-steroidal anti-inflammatory drug. In this one-year study, known as the
EDGE (Etoricoxib Diclofenac Gastrointestinal Evaluation) study, the rates of
confirmed thrombotic cardiovascular events were similar for Arcoxiaand
diclofenac sodium. Sales of Mercks other promoted medicines and vaccines were $1.4 billion
during the third quarter and $3.8 billion for the first nine months,
representing 5% growth over each of the respective periods of 2003. These
products treat or prevent a broad range of conditions, such as infectious
disease, glaucoma, benign prostate enlargement and migraine. In support of the call to action issued on October 19 by the U.S. Department
of Health and Human Services that emphasizes the importance of pneumococcal
vaccine, Merck is increasing its available supply of Pneumovax 23.
Typically, Merck sells 6 to 7 million doses in the United States annually.
The Company is increasing its supply of Pneumovax 23by 11 million doses. Global sales of Zetia(branded Ezetroloutside of the United States), the
cholesterol-absorption inhibitor developed and marketed by the
Merck/Schering-Plough partnership, reached $293.1 million in the third
quarter and $724.8 million for the first nine months. U.S. prescription
levels for Zetiaincreased by approximately 70 percent for the quarter, as
compared to the third quarter of 2003. In September, Zetiaaccounted for
approximately 6 percent of total prescriptions in the lipid-lowering market
(3) and is now reimbursed for nearly 90 percent of all patients in managed
care plans in the United States. To date, Ezetrolhas been launched in more
than 40 countries outside of the United States and continues to show solid
incremental growth. Worldwide sales of Zetiahave exceeded $1 billion since
its 2002 launch. Vytorin(marketed as Inegyin many countries outside of the United States),
developed and marketed by the Merck/Schering-Plough partnership, was approved
by the FDA on July 23, 2004 and has been recently launched in the United
States. In the 12 weeks since the product was approved in the U.S., Vytorin
has already accounted for nearly 2 percent of new prescriptions in the U.S.
lipid-lowering market(4). Worldwide sales of Vytorinwere $51.6 million for
the third quarter. In addition to the United States, Vytorinhas now been
approved in 10 countries, including Argentina, Brazil, Germany and Mexico.
Vytorinis performing well in all markets. Vytorinis the first single tablet to provide powerful LDL cholesterol
reduction through dual inhibition of the two sources of cholesterol by
inhibiting the production of cholesterol in the liver and blocking absorption
of cholesterol in the intestine, including cholesterol from food. In two
separate clinical trials, Vytorinprovided greater reductions in LDL
cholesterol than Lipitor or Zocoracross the dosing ranges. The Company records the results from its interest in the
Merck/Schering-Plough partnership in Equity income from affiliates. Research and Development On November 4, 2004 the Company announced it had filed a Biologics License
Application for ProQuad[Measles, Mumps, Rubella and Varicella (Oka/Merck)
Virus Vaccine Live] with the FDA. ProQuadis an investigational vaccine
for simultaneous vaccination against measles, mumps, rubella and varicella in
children 12 months to 12 years of age. ProQuadcombines two established
Merck vaccines, M-M-RII (Measles, Mumps, Rubella Virus Vaccine Live) and
Varivax[Varicella (Oka/Merck) Virus Vaccine Live]. In a new study presented at the National Immunization Conference in May, a
single dose of ProQuadin 4- to 6-year-olds used in place of the routinely
administered second dose of M-M-RII was generally well-tolerated and
resulted in antibody responses similar to those developed with M-M-RII and
Varivaxseparately. In addition, muraglitazar, the first-in-class dual PPAR agonist for the
treatment of type II diabetes in which Merck is in collaboration with
Bristol-Myers Squibb, is targeted for submission to the FDA in the fourth
quarter. (3) Source: IMS NPA Plus Monthly Data (4) Source: IMS NPA Plus 7 Weekly Data, week ended October 8 - 18 -




---



##### Table of Contents



As previously announced, Merck intends to submit applications to the FDA for
three investigational vaccines in the second half of 2005. The research and
development programs for these investigational vaccines remain on track. The
three vaccines are: RotaTeq, a vaccine to protect against rotavirus, a
highly contagious virus that causes gastroenteritis and results in
approximately 50,000 hospitalizations in the United
States each year; a vaccine to reduce the incidence of human papillomavirus (HPV)
infection and the associated development of cervical cancer 
one of the most common cancers among women worldwide  and genital warts; and a
vaccine to reduce the pain that accompanies shingles, which afflicts 1
million American adults each year. RotaTeqdemonstrated 100-percent efficacy against severe rotavirus
gastroenteritis and 74-percent efficacy against rotavirus gastroenteritis of
any severity in healthy infants, according to results from a new dose-ranging
study presented at the annual meeting of the European Society for Pediatric
Infectious Diseases in May. Merck is currently conducting the large-scale
Rotavirus Efficacy and Safety Trial (REST) with more than 65,000 infants at
clinical sites around the world, which will provide additional safety and
efficacy data. Data from an investigational HPV vaccine studied by Merck was presented on
November 1, 2004 at the Interscience Conference on Antimicrobial Agents and
Chemotherapy (ICAAC). In the study of 2,391 women aged 16-23 who were HPV
16-naïve at baseline, administration of the HPV 16 vaccine resulted in a 94
percent reduction in the combined incidence of persistent HPV 16 infection
and HPV 16-related cervical precancerous lesions (Cervical Intraepithelial
Neoplasia = CIN). Of particular importance, the vaccine was 100 percent
efficacious in preventing the development of HPV 16-related CIN 2/3
(high-grade cervical pre-cancer, the immediate precursor to invasive cervical
cancer). These are the final results of this study after the completion of 48
months of follow-up on all active study participants. The vaccine used in
this study was an investigational monovalent vaccine intended to prevent
infection by HPV type 16; it is a component of Mercks investigational
quadrivalent HPV (types 6, 11, 16, 18) L1 VLP vaccine. Merck continued to augment its internal research efforts with a comprehensive
licensing and external alliance strategy across the entire spectrum of
collaborations from early research to late-stage compounds, as well as new
technologies and targeted acquisitions. During the first nine months of
2004, Merck executed 41 significant transactions, including research
collaborations, pre-clinical and clinical compounds and technology
transactions, as well as the acquisition of Aton Pharma, Inc. Merck has more
than 40 opportunities currently in detailed review. For the full year of
2003, Merck completed 47 such transactions. In April, Merck and Bristol-Myers Squibb entered into a global collaborative
agreement for muraglitazar, Bristol-Myers Squibbs dual PPAR (peroxisome
proliferator-activated receptor) agonist, currently in Phase III clinical
development for use in treating both blood glucose and lipid abnormalities in
patients with type 2 diabetes. Bristol-Myers Squibb received a $100.0
million upfront payment and may receive up to $275.0 million in additional
payments based on the achievement of certain regulatory milestones. Merck and
Bristol-Myers Squibb plan to file the U.S. NDA for muraglitazar in the fourth
quarter. Merck and Bristol-Myers Squibb will jointly develop the clinical
and marketing strategy for muraglitazar and share equally in future
development and commercialization costs. Both companies will co-promote the
product to physicians on a global basis, and Merck will receive payments
based on net sales levels. In June, Merck and Vertex entered into a global collaboration to develop and
commercialize VX-680, Vertexs lead Aurora kinase inhibitor that is expected
to enter clinical development this year for the treatment of cancer. Aurora
kinases are implicated in the onset and progression of many different human
cancers, and novel Aurora kinase inhibitors such as VX-680 have the potential
to play an important future role in the treatment and management of a wide
range of tumor types. Vertex received a $20.0 million upfront payment and
could receive up to an additional $14.0 million in research funding over the
next two years. In addition, Vertex could receive additional milestone
payments based upon the achievement of significant development events,
regulatory filings and other events and approvals. Also in June, Merck and Lundbeck announced an extension of their agreement
for the exclusive development and commercialization of the sleep disorder
compound gaboxadol to Japan. In February, the two companies announced their
alliance for the exclusive U.S. development and commercialization of
gaboxadol. Under the terms of the agreement, Merck made an initial payment
of $70.0 million and may pay up to $200.0 million in additional milestone
payments in the future. The companies anticipate that Merck will file an NDA
with the FDA between late 2006 and mid-2007. Under the terms of the extended
agreement, Merck and Lundbeck will jointly conduct the clinical program
required for filing an NDA in Japan, with Merck funding the majority of the
development activities. Following approval, the companies plan to co-promote
gaboxadol in Japan. Lundbeck will receive a share of Japanese gaboxadol
sales. In August, Merck and DOV announced an agreement for the development and
commercialization of DOVs novel triple-uptake inhibitors being developed for
depression and related psychiatric disorders. DOV received a $35.0 million
up-front payment and could receive additional milestone payments based upon
the achievement of significant development events, regulatory filings and
other events and approvals. Merck has licensed exclusive worldwide rights to
DOV 21,947, which is in Phase I, for all therapeutic indications. - 19 -




---



##### Table of Contents



In September, Merck and Nastech announced a global alliance to develop and
commercialize Peptide YY (PYY) 3-36 Nasal Spray, Nastechs product for the
treatment of obesity, which is currently in Phase I development. The
investigational PYY 3-36 Nasal Spray is designed to deliver the natural,
appetite-regulating hormone PYY directly to the bloodstream. Financial Guidance for 2004 Worldwide net sales will be driven by the Companys major in-line products,
including the impact of new studies and indications. Sales forecasts for
those products for 2004 are as follows: Zocor$4.9 to $5.1 billion; Fosamax
$3.0 to $3.2 billion; Cozaarand Hyzaar$2.7 to $2.9 billion; and Singulair
$2.4 to $2.7 billion. Under an agreement with AZLP, Merck receives revenue at predetermined rates
on the U.S. sales of certain products by AZLP, most notably Prilosecand
Nexium. In 2004, Merck anticipates these revenues to be approximately $1.4
to $1.6 billion. The income contribution related to the Merck/Schering-Plough partnership is
expected to be positive in 2004. Equity income from affiliates includes the
results of the Merck/Schering-Plough partnership combined with the results of
Mercks other joint venture relationships. Equity income from affiliates is
expected to be approximately $900 million to $1.0 billion for 2004. Merck continues to expect that manufacturing productivity will offset
inflation on product costs. Product gross margin percentage is estimated to be approximately 76.5% to
77.5% for the fourth quarter of 2004 and 78% to 79% for the full year 2004 as
a result of changes to the sales mix. This guidance excludes adjustments
related to the withdrawal of Vioxx. Research and development expense (which excludes joint ventures) is
anticipated to increase at a high-teens percentage growth rate over the
full-year 2003 level. This guidance includes acquired research and
development expenses in 2003 and 2004. Consolidated marketing and administrative expense is estimated to be at the
same level as the full-year 2003 expense. This guidance excludes
restructuring costs in 2003 and 2004 and excludes adjustments related to the
withdrawal of Vioxx. The consolidated 2004 tax rate is estimated to be approximately 28 to 29%.
This guidance excludes adjustments related to the withdrawal of Vioxx. Merck plans to continue its stock buyback program in 2004. As of September
30, 2004 $8.8 billion remains under the current buyback authorizations
approved by Mercks Board of Directors. Approximately 4,500 positions had been eliminated as of September 30, 2004 as
the Company identified additional opportunities to eliminate positions and
reduce costs. This program, which was announced in October 2003, will be
completed by the end of 2004. Restructuring costs for full-year 2004 are
expected to be approximately $90 to $95 million. Given these guidance elements, Merck anticipates fourth-quarter earnings per
share (EPS) of $0.48 to $0.53, which includes the impact of approximately
$700 to $750 million in foregone sales of Vioxxand potential additional
fourth-quarter costs for the withdrawal of Vioxx. As a result, Merck
anticipates full-year 2004 EPS guidance of $2.59 to $2.64, which includes the
expectation that the impact of the withdrawal will negatively affect
full-year EPS by $0.50 to $0.55. Liquidity and Capital Resources ($ in millions)
    
    September 30, 2004
    
    December 31, 2003Cash, cash equivalents and short-term
investments
    
    $
    6,956.8
    
    
    $
    4,173.0Working capital
    
    $
    3,070.5
    
    
    $
    1,957.6Total debt to total liabilities and equity
    
    
    15.4
    %
    
    
    16.7
    %
 Cash provided by operations continues to be the Companys primary source of
funds to finance operating needs and capital expenditures. Net cash provided
by operating activities totaled $6.4 billion and $5.6 billion for the nine
months ended September 30, 2004 and 2003, respectively. Capital expenditures for the nine months totaled $1.2 billion and $1.4
billion in 2004 and 2003, respectively. Capital expenditures for the full
year 2004 are expected to approximate $1.5 billion. - 20 -




---



##### Table of Contents



Dividends paid to stockholders were $2.5 billion and $2.4 billion for the
first nine months of 2004 and 2003, respectively. In May and July 2004, the
Board of Directors declared quarterly dividends of 37 and 38 cents per share
on the Companys common stock for the third and fourth quarters of 2004,
respectively. The Companys total dividends paid during 2004 will be $1.49
per share, a three percent increase over the amount paid during the same
period in 2003. The Company purchased $688.0 million of its Common Stock (14.9 million
shares) for its Treasury during the first nine months of 2004. The Company
has approximately $8.8 billion remaining under the July 2002 treasury stock
purchase authorization. On October 22, 2004, President Bush signed the American Jobs Creation Act of
2004 (the Jobs Creation Act). The Jobs Creation Act includes a temporary
incentive for U.S. multinationals to repatriate foreign earnings, a domestic
manufacturing deduction and international tax reforms designed to improve the
global competitiveness of U.S. businesses. The Company is in the process of
evaluating the impact of the Jobs Creation Act and has not yet determined the
effects on its effective tax rate and deferred tax assets and liabilities. Legal Proceedings As previously disclosed, federal and state personal injury lawsuits involving
individual claims, as well as several putative class actions have been filed
against the Company with respect to Vioxx. As of October 31, 2004, the
Company has been served or is aware that it has been named as a defendant in
approximately 375 lawsuits, which include approximately 1,000 plaintiff
groups alleging personal injuries resulting from the use of Vioxx. Certain
of these lawsuits include allegations regarding gastrointestinal bleeding,
cardiovascular events and kidney damage. The Company has also been named as
a defendant in several putative class actions seeking medical monitoring as a
result of the putative class members use of Vioxx. In addition, certain
state court actions seek various remedies under state consumer fraud and fair
business practice statutes, including recovering the cost of Vioxxpurchased
by individuals and third-party payers such as union health plans (all of the
actions discussed in this paragraph are collectively referred to as the
VioxxPersonal Injury Lawsuits). The actions filed in the state courts of
California and New Jersey, respectively, have been transferred to a single
judge in each state for coordinated proceedings. In addition, the Company
has filed a motion with the Judicial Panel on Multidistrict Litigation to
transfer to a single federal judge and consolidate for pretrial purposes all
federal cases of a similar nature alleging personal injury and/or economic
loss relating to the purchase or use of Vioxx; several plaintiffs in certain
VioxxPersonal Injury Lawsuits pending in federal court have made similar
requests. As previously disclosed, in addition to the VioxxPersonal Injury Lawsuits, a
number of purported class action lawsuits also were filed in the third
quarter of 2003 and the first quarter of 2004 by several individual
shareholders in the United States District Court for the Eastern District of
Louisiana naming as defendants the Company and several current or former
officers of the Company, and alleging that the defendants made false and
misleading statements regarding Vioxxin violation of the federal securities
laws. The plaintiffs request certification of a class of purchasers of the
Companys common stock between May 22, 1999 and October 22, 2003, and seek
unspecified compensatory damages and the costs of suit, including attorney
fees. After the announcement of the withdrawal of Vioxx, the Company was
named as a defendant in four additional purported securities class action
lawsuits filed in federal courts in New Jersey and Pennsylvania. These
later-filed actions request certification of a class of purchasers of Company
stock during various periods between September 23, 2003 and September 30,
2004. The allegations in the later-filed actions are similar to those in the
earlier-filed actions, except that the later-filed actions also contain
allegations relating to the withdrawal of Vioxxfrom the
market. The complaint in the earlier-filed consolidated actions has
been amended to include allegations
regarding the withdrawal of Vioxxand to extend the purported class period
until October 29, 2004. In October 2004, a purported class action lawsuit
was filed in the New Jersey Superior Court for Hunterdon County against the
Company and certain officers and members of the Board of Directors (past and
present) alleging that the defendants made incomplete and misleading
statements and omissions in a registration statement and certain prospectuses
filed in connection with the Merck Stock Investment Plan, a dividend
reinvestment plan. The plaintiffs in this case request certification of a
class of investors who acquired the Companys common stock through the Merck
Stock Investment Plan between April 26, 2002 and September 30, 2004, and seek
unspecified compensatory damages, rescission and the costs of suit, including
attorney fees (all of the actions discussed in this paragraph are
collectively referred to as the VioxxSecurities Lawsuits). As previously disclosed, in March 2004, two shareholder derivative actions
were filed in the United States District Court for the Eastern District of
Louisiana naming the Company and certain members of the Board (past and
present), together with certain executive officers, as defendants. The
complaints arise out of substantially the same factual allegations that are
made in the Vioxx-related federal securities putative class actions filed
against the Company, which principally allege that the Company made false and
misleading statements regarding Vioxx. The derivative suits, which - 21 -




---



##### Table of Contents



are purportedly brought to assert rights of the Company, assert claims
against the Board members and officers for breach of fiduciary duty, waste of
corporate assets and unjust enrichment. The court in the Eastern District of
Louisiana has consolidated the shareholder derivative actions with the
earlier-filed consolidated securities actions. In October 2004, two
shareholder derivative actions were filed in the New Jersey Superior Court
for Hunterdon County against the Company and certain officers and members of
the Board (past and present). The allegations in the later-filed actions are
similar to those in the earlier-filed actions, except that the later-filed
actions also contain allegations relating to the withdrawal of Vioxxfrom the
market (all of the actions discussed in this paragraph are collectively
referred to as the VioxxDerivative Lawsuits). On October 29, 2004,
attorneys representing two individual shareholders made a demand
on the Board to take legal action against Mr. Raymond Gilmartin, Chairman,
President and Chief Executive Officer and other unspecified individuals for
allegedly causing damage to the Company with respect to the allegedly
improper marketing of Vioxx. In addition to these shareholder actions, since the announcement of the
withdrawal of Vioxx, seven putative class actions have been filed against the
Company, two in the United States District Court for the Eastern District of
Louisiana and five in the United States District Court for the District of
New Jersey (the VioxxERISA Lawsuits and, together with the Vioxx
Securities Lawsuits and the VioxxDerivative Lawsuits, the VioxxShareholder
Lawsuits) on behalf of certain of the Companys current and former employees
who are participants in certain of the Companys retirement plans asserting
claims under the Employee Retirement Income Security Act (ERISA). The
lawsuits make similar allegations to the allegations contained in the
shareholder lawsuits described above. The plaintiff in one of the Vioxx
ERISA Lawsuits has filed a motion with the Judicial Panel on Multidistrict
Litigation to transfer to a single federal judge and consolidate for pretrial
purposes all of the VioxxERISA Lawsuits. In addition to the lawsuits discussed above, the Company has been named as a
defendant in actions in various countries in Europe, Canada, Brazil and
Israel related to Vioxx. The Company has product liability insurance for claims brought in the Vioxx
Personal Injury Lawsuits of up to approximately $630 million after
deductibles and co-insurance. This insurance provides coverage for legal
defense costs and potential damage amounts that have been or will be incurred
in connection with the VioxxPersonal Injury Lawsuits. The Company believes
that this insurance coverage extends to additional VioxxPersonal Injury
Lawsuits that may be filed in the future. Certain of the Companys insurers
have reserved their rights to take a contrary position with respect to
certain coverage and there could be disputes with insurers about coverage
matters. The Company currently believes that it has at least approximately
$190 million of Directors and Officers insurance coverage for the Vioxx
Securities Lawsuits and Vioxx Derivative Lawsuits, and at
least approximately $275 million of insurance coverage for the
Vioxx ERISA Lawsuits. Additional insurance coverage for these claims may also
be available under upper level excess policies that provide coverage for a
variety of risks. There may be disputes with insurers about the availability
of some or all of this insurance coverage. The Company is unable at this time to determine whether the Companys
insurance coverage with respect to the VioxxPersonal Injury Lawsuits and the
VioxxShareholder Lawsuits (collectively, the VioxxLawsuits) will be
adequate to cover its defense costs and losses, if any. Based on media reports and other sources, the Company anticipates that
additional VioxxLawsuits will be filed against it and/or certain of its
current and former officers and directors in the future. In addition, in November, the Company was advised by the
staff of the Securities and Exchange Commission (SEC) that it was
commencing an informal inquiry concerning Vioxx. Also, the
Company has received a subpoena from the U.S. Department of
Justice requesting information related to the Companys
research, marketing and selling activities with respect to
Vioxx in a federal healthcare investigation under criminal
statutes. The Company will cooperate with the SEC and the Justice
Department. The Company cannot predict the outcome of these
inquiries, however, it is possible that highly unfavorable outcomes,
including a potential civil disposition from the SEC and/or potential
civil or criminal dispositions from the Justice Department, could
have a material adverse effect on the Companys financial
position, liquidity and results of operations. The Company currently anticipates that one or more of the VioxxPersonal
Injury Lawsuits may go to trial in the first half of 2005. The Company
cannot predict the timing of any trials with respect to the VioxxShareholder
Lawsuits. The Company believes that it has meritorious defenses to 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
VioxxLawsuits. The Company has not established any reserves for any
potential liability relating to the VioxxLawsuits. A series of highly
unfavorable outcomes could have a material adverse effect on the Companys
financial position, liquidity and results of operations. As previously disclosed, the Company is a party in claims brought under the
Consumer Protection Act of 1987 in the United Kingdom, which allege that
certain children suffer from a variety of conditions as a result of being
vaccinated with various bivalent vaccines for measles and rubella and/or
trivalent vaccines for measles, mumps and rubella, including the Companys
M-M-RII. The conditions include autism, with or without inflammatory bowel
disease, epilepsy, diabetes, encephalitis, encephalopathy, deafness, chronic
fatigue syndrome and transverse myelitis. In early - 22 -




---



##### Table of Contents



September 2003, the Legal Services Commission announced its decision to
withdraw public funding of the litigation brought by the claimants. This
decision was confirmed on appeal by the Funding Review Committee (FRC) on
September 30, 2003. The claimants application for judicial review of the
decision to withdraw public funding was dismissed in February 2004 and the
April 2004 trial was vacated. The lead claimants have decided not to apply
to the Court of Appeal for permission to appeal that decision. Therefore,
legal aid for all lead claimants has now been discharged. The non-lead
claimants were subject to a show cause procedure to withdraw legal aid
unless the claimants could show cause as to why it should not be withdrawn.
The FRC heard 37 of the show cause appeals by the non-lead claimants in
October 2004. The appeals involving autism (26) were unsuccessful, but
funding was reinstated for 11 appeals involving other non-autism conditions,
such as epilepsy, deafness, encephalitis and transverse
myelitis. It is not yet known how many of the 11 appeals involve claimants
suing the Company. All claimants for all conditions have until December 2004
to give notice of their intention to continue or discontinue with their
claims, irrespective of whether or not they have secured legal aid funding.
Directions from the court for the future conduct of the litigation will be
made at a case management hearing in 2005. As previously disclosed, the Company is also a party to individual and class
action product liability lawsuits and claims in the United States involving
pediatric vaccines (i.e., hepatitis B vaccine and haemophilus influenzatype
b vaccine) that contained thimerosal, a preservative used in vaccines. Other
defendants include vaccine manufacturers who produced pediatric vaccines
containing thimerosal as well as manufacturers of thimerosal. In these
actions, the plaintiffs allege, among other things, that they have suffered
neurological and other injuries as a result of having thimerosal introduced
into their developing bodies. The Company has been successful in having many
of these cases either dismissed or stayed on the ground that the National
Vaccine Injury Compensation Program (NVICP) prohibits any person from filing
or maintaining a civil action seeking damages against a vaccine manufacturer
for vaccine-related injuries unless a petition is first filed in the United
States Court of Federal Claims. A number of similar cases (M-M-RII alone
and/or thimerosal-containing vaccines) have been filed in the United States
Court of Federal Claims under the NVICP for a determination first on general
causation issues. Three state court cases and two Federal District Court
cases are scheduled for trial in 2005. The Company believes that these
lawsuits and claims are without merit and will vigorously defend against them
in the proceedings in which it is a party. The Company has been named as a defendant in antitrust cases in federal court
in Minnesota and in state court in California, each alleging an unlawful
conspiracy among different sets of pharmaceutical manufacturers to protect
high prices in the United States by impeding importation into the United
States of lower-priced pharmaceuticals from Canada. A suit in federal court in Alabama by two providers of health services to
needy patients alleges that 15 pharmaceutical companies overcharged the
plaintiffs and a class of those similarly situated, for pharmaceuticals
purchased by the plaintiffs under the program established by Section 340B of
the Public Health Service Act. The Company and the other defendants have
filed a motion to dismiss the complaint on numerous grounds. As previously disclosed, on July 6, 2004, the United States District Court
for the District of New Jersey granted a motion by the Company, Medco Health
Solutions, Inc. (Medco Health) and certain officers and directors to
dismiss a purported class action complaint involving claims related to the
Companys revenue recognition practice for retail co-payments paid by
individuals to whom Medco Health provides pharmaceutical benefits as well as
other allegations. The complaint was dismissed with prejudice. On August
20, 2004 the same court granted the Companys motion to dismiss with
prejudice a related shareholder derivative action. Plaintiffs in both
actions have appealed the decisions. In the previously-disclosed European Patent Offices opposition proceedings
challenging the Companys patent for the weekly administration of
alendronate, on August 19, 2004 the written opinion was issued confirming the
oral decision revoking the Companys patent. On September 16, 2004 the
Company filed an appeal of this decision. In an action in Australia challenging the validity of the Companys
Australian patent for the weekly administration of alendronate, on October 5,
2004 the patent was found invalid. The Company is planning to appeal this
decision. 
 Item 4. Controls and Procedures Management of the Company, with the participation of its Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of the
Companys disclosure controls and procedures. Based on their evaluation, as
of the end of the period covered by this Form 10-Q, the Companys Chief
Executive Officer and Chief Financial Officer have concluded that the
Companys disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended) are
effective. There have been no significant changes in internal control over
financial reporting, for the period covered by this report, that have
materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting. - 23 -




---



##### Table of Contents



CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS This report and other written reports and oral statements made from time to
time by the Company may contain so-called forward-looking
statements, all
of which are subject to risks and uncertainties. One can identify these
forward-looking statements by their use of words such as
expects, plans,
will, estimates, forecasts,
projects and other words of similar
meaning. One can identify them by the fact that they do not relate strictly
to historical or current facts. These statements are likely to address the
Companys growth strategy, financial results, product approvals and
development programs. One must carefully consider any such statement and
should understand that many factors could cause actual results to differ from
the Companys forward-looking statements. These factors include inaccurate
assumptions and a broad variety of other risks and uncertainties, including
some that are known and some that are not. No forward-looking statement can
be guaranteed and actual future results may vary materially. The Company does not assume the obligation to update any forward-looking
statement. One should carefully evaluate such statements in light of factors
described in the Companys filings with the Securities and Exchange
Commission, especially on Forms 10-K, 10-Q and 8-K. In Item 1 of
the Companys Annual Report on Form 10-K for the year ended December 31,
2003, as filed on March 10, 2004, the Company discusses in more detail
various important factors that could cause actual results to differ from
expected or historic results. The Company notes these factors for investors
as permitted by the Private Securities Litigation Reform Act of 1995. One
should understand that it is not possible to predict or identify all such
factors. Consequently, the reader should not consider any such list to be a
complete statement of all potential risks or uncertainties. 
 PART II -  Other Information 
 Item 1. Legal Proceedings Information with respect to certain legal proceedings is incorporated by
reference from Managements Discussion and Analysis of Financial Condition
and Results of Operations contained in Part 1 of this report. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Issuer purchases of equity securities for the three month period ended
September 30, 2004 is as follows: ISSUER PURCHASES OF EQUITY SECURITIES ($ in millions)Approximate Dollar ValueTotal Number
    
    
    
    
    
    of Shares That May Yetof Shares
    
    Average Price
    
    Be Purchased Under thePeriod
    
    Purchased(1)
    
    Paid Per Share
    
    Plans or Programs(1)July 1  July 31, 2004
    
    
    1,842,300
    
    
    $
    45.55
    
    
    $
    8,991,718,824August 1  August 31, 2004
    
    
    1,945,100
    
    
    $
    45.10
    
    
    $
    8,903,991,109September 1  September 30, 2004
    
    
    1,605,500
    
    
    $
    45.09
    
    
    $
    8,831,602,312Total
    
    
    5,392,900
    
    
    $
    45.25
    
    
    $
    8,831,602,312
  (1)
    
    All shares purchased during the period were made as part of a plan
announced in July 2002 to purchase $10 billion in Merck shares. - 24 -




---



##### Table of Contents



Item 6. Exhibits Exhibits 3.1
    
    Restated Certificate of Incorporation of Merck & Co., Inc. (October 1, 2004)3.2
    
    By-Laws of Merck & Co., Inc. (as amended effective September 28, 2004) 
Incorporated by reference to Current Report on Form 8-K dated
September 28, 200412
    
    Computation of Ratios of Earnings to Fixed Charges31.1
    
    Rule 13a  14(a)/15d  14(a) Certification of Chief Executive Officer31.2
    
    Rule 13a  14(a)/15d  14(a) Certification of Chief Financial Officer32.1
    
    Section 1350 Certification of Chief Executive Officer32.2
    
    Section 1350 Certification of Chief Financial Officer
 - 25 -




---



##### Table of Contents



Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. MERCK & CO., INC.Date: November 8, 2004
    
    /s/ Kenneth C. FrazierKENNETH C. FRAZIERSenior Vice President and General CounselDate: November 8, 2004
    
    /s/ Richard C. HenriquesRICHARD C. HENRIQUESVice President, Controller
 - 26 -




---



##### Table of Contents



EXHIBIT INDEX Number
    
    Description3.1
    
    Restated Certificate of Incorporation of Merck & Co., Inc. (October 1, 2004)3.2
    
    By-Laws of Merck & Co., Inc. (as amended effective September 28, 2004) 
Incorporated by reference to Current Report on Form 8-K dated
September 28, 200412
    
    Computation of Ratios of Earnings to Fixed Charges31.1
    
    Rule 13a  14(a)/15d  14(a) Certification of Chief Executive Officer31.2
    
    Rule 13a  14(a)/15d  14(a) Certification of Chief Financial Officer32.1
    
    Section 1350 Certification of Chief Executive Officer32.2
    
    Section 1350 Certification of Chief Financial Officer
 - 27 -