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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 March 31, 2004 OR [   ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from
 to Commission File No. 1-3305 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 April 30, 2004: Class
    
    Number of Shares OutstandingCommon Stock
    
    
    2,222,109,433
 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 [   ]
 Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes  [X]
    No [   ]




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TABLE OF CONTENTS  Part I - Financial InformationItem 1. Financial StatementsINTERIM CONSOLIDATED STATEMENT OF INCOMECONSOLIDATED BALANCE SHEETINTERIM CONSOLIDATED STATEMENT OF CASH FLOWSItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 4. Controls and ProcedurePart II  Other InformationItem 1. Legal ProceedingsItem 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity SecuritiesItem 6. Exhibits and Reports on Form 8-KSignaturesEXHIBIT INDEXCOMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGESCERTIFICATION OF CHIEF EXECUTIVE OFFICERCERTIFICATION OF CHIEF FINANCIAL OFFICERCERTIFICATION OF CHIEF EXECUTIVE OFFICERCERTIFICATION OF CHIEF FINANCIAL OFFICER    Table of Contents  
 Part I - Financial Information 
 Item 1. Financial Statements 
 MERCK & CO., INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(Unaudited, $ in millions except per share amounts) Three MonthsEnded March 312004
    
    2003Sales
    
    $
    5,630.8
    
    
    $
    5,571.4Costs, Expenses and OtherMaterials and production
    
    
    1,115.8
    
    
    
    1,080.1Marketing and administrative
    
    
    1,611.4
    
    
    
    1,513.9Research and development
    
    
    996.3
    
    
    
    810.7Equity income from affiliates
    
    
    (194.7
    )
    
    
    (97.3
    )Other (income) expense, net
    
    
    (240.9
    )
    
    
    47.83,287.9
    
    
    
    3,355.2Income from Continuing Operations Before Taxes
    
    
    2,342.9
    
    
    
    2,216.2Taxes on Income
    
    
    724.3
    
    
    
    671.2Income from Continuing Operations
    
    
    1,618.6
    
    
    
    1,545.0Income from Discontinued Operations, net of taxes
    
    
    
    
    
    
    165.4Net Income
    
    $
    1,618.6
    
    
    $
    1,710.4Basic Earnings per Common ShareContinuing Operations
    
    $
    .73
    
    
    $
    .69Discontinued Operations
    
    
    
    
    
    
    .07Net Income
    
    $
    .73
    
    
    $
    .76Earnings per Common Share Assuming DilutionContinuing Operations
    
    $
    .73
    
    
    $
    .68Discontinued Operations
    
    
    
    
    
    
    .07Net Income
    
    $
    .73
    
    
    $
    .76
    *Dividends Declared per Common Share
    
    $
    .37
    
    
    $
    .36
 *Amount does not add as a result of rounding. The accompanying notes are an integral part of this consolidated financial statement. - 1 -




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MERCK & CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 2004 AND DECEMBER 31, 2003
(Unaudited, $ in millions) March 31
    
    December 312004
    
    2003ASSETSCurrent AssetsCash and cash equivalents
    
    $
    1,762.1
    
    
    $
    1,201.0Short-term investments
    
    
    3,549.8
    
    
    
    2,972.0Accounts receivable
    
    
    4,199.6
    
    
    
    4,023.6Inventories
    
    
    2,658.6
    
    
    
    2,554.7Prepaid expenses and taxes
    
    
    791.2
    
    
    
    775.9Total current assets
    
    
    12,961.3
    
    
    
    11,527.2Investments
    
    
    7,573.0
    
    
    
    7,941.2Property, Plant and Equipment, at cost,
net of allowance for depreciation of
$7,358.2 in 2004 and $7,124.7 in 2003
    
    
    14,182.2
    
    
    
    14,169.0Goodwill
    
    
    1,086.0
    
    
    
    1,085.4Other Intangibles, net
    
    
    817.4
    
    
    
    864.0Other Assets
    
    
    5,045.3
    
    
    
    5,000.7$
    41,665.2
    
    
    $
    40,587.5LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesLoans payable and current portion of long-term debt
    
    $
    1,945.1
    
    
    $
    1,700.0Trade accounts payable
    
    
    519.2
    
    
    
    520.5Accrued and other current liabilities
    
    
    3,819.6
    
    
    
    3,987.5Income taxes payable
    
    
    3,007.3
    
    
    
    2,538.9Dividends payable
    
    
    823.0
    
    
    
    822.7Total current liabilities
    
    
    10,114.2
    
    
    
    9,569.6Long-Term Debt
    
    
    4,931.7
    
    
    
    5,096.0Deferred Income Taxes and Noncurrent Liabilities
    
    
    6,409.9
    
    
    
    6,430.3Minority Interests
    
    
    3,938.2
    
    
    
    3,915.2Stockholders EquityCommon stockAuthorized
    -    5,400,000,000 sharesIssued
            -    2,976,230,393
shares - March 31, 2004-    2,976,230,393 shares - December 31, 2003
    
    
    29.8
    
    
    
    29.8Other paid-in capital
    
    
    6,875.6
    
    
    
    6,956.6Retained earnings
    
    
    34,937.6
    
    
    
    34,142.0Accumulated other comprehensive loss
    
    
    80.4
    
    
    
    65.541,923.4
    
    
    
    41,193.9Less treasury stock, at cost753,663,189
shares - March 31, 2004754,466,884
shares - December 31, 2003
    
    
    25,652.2
    
    
    
    25,617.5Total stockholders equity
    
    
    16,271.2
    
    
    
    15,576.4$
    41,665.2
    
    
    $
    40,587.5
 The accompanying notes are an integral part of this consolidated financial statement. - 2 -




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MERCK & CO., INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(Unaudited, $ in millions) Three MonthsEnded March 312004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES OF CONTINUING OPERATIONSNet Income
    
    $
    1,618.6
    
    
    $
    1,710.4Less: Income from discontinued operations, net of tax
    
    
    
    
    
    
    (165.4
    )Income from continuing operations
    
    
    1,618.6
    
    
    
    1,545.0Adjustments to reconcile income from continuing operations to net cash provided by
operating activities from continuing operations:Depreciation and amortization
    
    
    348.2
    
    
    
    326.1Deferred income taxes
    
    
    (3.2
    )
    
    
    101.5Other
    
    
    (144.9
    )
    
    
    50.2Net changes in assets and liabilities
    
    
    (4.7
    )
    
    
    (289.4
    )NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS
    
    
    1,814.0
    
    
    
    1,733.4CASH FLOWS FROM INVESTING ACTIVITIES OF CONTINUING OPERATIONSCapital expenditures
    
    
    (322.8
    )
    
    
    (421.1
    )Purchase of securities, subsidiaries and other investments
    
    
    (15,633.4
    )
    
    
    (12,166.0
    )Proceeds from sale of securities, subsidiaries and other investments
    
    
    15,590.4
    
    
    
    11,875.8Banyu acquisition
    
    
    
    
    
    
    (1,389.5
    )Other
    
    
    (1.3
    )
    
    
    (1.5
    )NET CASH USED BY INVESTING ACTIVITIES OF CONTINUING OPERATIONS
    
    
    (367.1
    )
    
    
    (2,102.3
    )CASH FLOWS FROM FINANCING ACTIVITIES OF CONTINUING OPERATIONSNet change in short-term borrowings
    
    
    (314.9
    )
    
    
    291.5Proceeds from issuance of debt
    
    
    400.0
    
    
    
    975.8Payments on debt
    
    
    (3.9
    )
    
    
    (2.4
    )Purchase of treasury stock
    
    
    (227.9
    )
    
    
    (295.8
    )Dividends paid to stockholders
    
    
    (822.4
    )
    
    
    (808.3
    )Other
    
    
    85.9
    
    
    
    80.8NET CASH (USED)/PROVIDED BY FINANCING ACTIVITIES OF CONTINUING
OPERATIONS
    
    
    (883.2
    )
    
    
    241.6EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
    
    
    (2.6
    )
    
    
    27.1NET CASH PROVIDED BY DISCONTINUED OPERATIONS
    
    
    
    
    
    
    74.1NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    561.1
    
    
    
    (26.1
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    
    
    1,201.0
    
    
    
    2,243.0CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    1,762.1
    
    
    $
    2,216.9
 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 -




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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.
    
    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 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 MonthsEnded March 312004
    
    2003Net income, as reported
    
    $
    1,618.6
    
    
    $
    1,710.4Compensation expense, net of tax:Reported
    
    
    4.4
    
    
    
    .7Fair value method
    
    
    (117.0
    )
    
    
    (117.8
    )Pro forma net income
    
    $
    1,506.0
    
    
    $
    1,593.3Earnings per common share from
continuing operations:Assuming dilution  as reported
    
    $
    .73
    
    
    $
    .68Assuming dilution  pro forma
    
    $
    .67
    
    
    $
    .64Earnings per common share:Basic  as reported
    
    $
    .73
    
    
    $
    .76Basic  pro forma
    
    $
    .68
    
    
    $
    .71Assuming dilution  as reported
    
    $
    .73
    
    
    $
    .76Assuming dilution  pro forma
    
    $
    .67
    
    
    $
    .70
 - 4 -




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Notes to Consolidated Financial Statements (continued)  3.
    
    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 was recorded in Research and development expense 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.4.
    
    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 million, recorded as Research and
development expense in the Consolidated Statement of Income and may pay
up to $200 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.5.
    
    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 million and recorded a $177
million gain in Other (income) expense, net in the Consolidated Statement
of Income. 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.6.
    
    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 MonthsEnded March 31, 2003Total net revenues
    
    $
    7,817.0Income before taxes
    
    
    247.7Taxes on income
    
    
    82.3Income, net of taxes
    
    
    165.4
  7.
    
    In 2003, the Company announced the reduction of 4,400 positions
worldwide as part of an effort to fundamentally lower its cost structure.
Approximately 3,800 positions had been eliminated as of March 31, 2004
and the program is expected to be completed by the end of 2004. For the
three months ended March 31, 2004, the Company recorded restructuring
costs of $34.1 million in Marketing and administrative expense, of which
$26.5 million related to employee severance benefits, $6.2 million
related to termination charges on the Companys pension and other
postretirement benefit plans (see Note 13) and $1.4 million related to a
modification in the terms of certain employees stock option grants. In
2003, the Company recorded restructuring costs of $194.6 million in
Marketing and administrative expense, 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. Additional costs
are expected to be incurred in 2004 as the program is completed. - 5 -




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Notes to Consolidated Financial Statements (continued) 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
    
    
    78.3First Quarter 2004 Expense
    
    
    26.5First Quarter 2004 Payments
    
    
    (36.2
    )Accrued balance as of March 31, 2004
    
    $
    68.6
  8.
    
    Inventories consisted of: ($ in millions)March 31
    
    December 312004
    
    2003Finished goods
    
    $
    579.4
    
    
    $
    552.5Raw materials and work in process
    
    
    2,352.5
    
    
    
    2,309.8Supplies
    
    
    97.9
    
    
    
    90.5Total (approximates current cost)
    
    
    3,029.8
    
    
    
    2,952.8Reduction to LIFO cost
    
    
    
    
    
    
    $
    3,029.8
    
    
    $
    2,952.8Recognized as:Inventories
    
    $
    2,658.6
    
    
    $
    2,554.7Other assets
    
    
    371.2
    
    
    
    398.1
  Amounts recognized as Other assets consist of inventories held in
preparation for product launches not expected to be sold within one year.9.
    
    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.10.
    
    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, 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, alleging antitrust violations. 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, Federal and state lawsuits involving numerous
individual claims, as well as some putative class actions, have been filed
against the Company with respect to Vioxx. Some of the lawsuits also name
as a defendant Pfizer Inc., which markets a competing product. Certain of
the lawsuits include allegations regarding gastrointestinal bleeding,
cardiovascular events and kidney damage. The lawsuits have been filed in
federal courts as well as in a number of state courts. While cases in
other jurisdictions are proceeding separately, the actions filed in the
state courts of California and New Jersey have been transferred to a single
judge in each state for coordinated proceedings. The Company anticipates
that one or more of the lawsuits in various jurisdictions may go to trial
in the second half of 2004. Litigation is inherently subject to
uncertainties and no assurance can be given on the outcome of any given
trial. However, the Company believes that these lawsuits are without merit
and will vigorously defend against them. - 6 -




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Notes to Consolidated Financial Statements (continued)  As previously disclosed, a number of purported class action lawsuits have
been filed 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 the
Companys drug 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. The Company believes that these lawsuits are without merit and will
vigorously defend against them.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. 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 on September 30, 2003. The claimants application for judicial
review of the decision to withdraw public funding has been dismissed. The
lead claimants have decided not to apply to the Court of Appeal for
permission to appeal that decision. The April 2004 trial date has been
vacated and each claimant has been ordered to indicate by May 14 whether he
or she intends to discontinue or proceed with their claim. Directions from
the Judge for the future conduct of the litigation will be made at a case
management hearing in July. The Company believes that these lawsuits are
without merit and will vigorously defend against them.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. 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.In March 2004, two shareholder derivative actions were filed in federal
court in New Orleans 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
has consolidated the shareholder derivative actions with the securities
actions. The Company believes that the lawsuits are without merit.There are various other legal proceedings, principally product liability
and intellectual property suits involving the Company, which are pending.
While it is not feasible to predict the outcome of these proceedings or the
proceedings discussed above, in the opinion of the Company, all 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. In addition, from time to time, federal or
state regulators seek information about practices in the pharmaceutical
industry. While it is not feasible to predict the outcome of any requests
for information, the Company does not expect such inquiries to have a
material adverse effect on the financial position, liquidity or results of
operations of the Company. - 7 -




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Notes to Consolidated Financial Statements (continued)  11.
    
    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 to
date 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 to date 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.12.
    
    Net sales consisted of: ($ in millions)Three MonthsEnded March 312004
    
    2003Atherosclerosis
    
    $
    1,304.3
    
    
    $
    1,191.6Hypertension/heart failure
    
    
    827.2
    
    
    
    846.0Osteoporosis
    
    
    759.0
    
    
    
    794.7Anti-inflammatory/analgesics
    
    
    705.6
    
    
    
    533.5Respiratory
    
    
    623.0
    
    
    
    464.6Anti-bacterial/anti-fungal
    
    
    268.3
    
    
    
    230.7Vaccines/biologicals
    
    
    228.9
    
    
    
    241.4Urology
    
    
    174.8
    
    
    
    130.7Ophthalmologicals
    
    
    171.9
    
    
    
    146.3Human immunodeficiency virus (HIV)
    
    
    64.2
    
    
    
    83.3Other
    
    
    503.6
    
    
    
    908.6$
    5,630.8
    
    
    $
    5,571.4
  Sales by individual therapeutic class are presented net of rebates and
discounts. Other primarily includes sales of other human pharmaceuticals,
also net of rebates and discounts, and pharmaceutical and animal health
supply sales to the Companys joint ventures and AstraZeneca LP.13.
    
    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 MonthsEnded March 312004
    
    2003Service cost
    
    $
    70.5
    
    
    $
    58.7Interest cost
    
    
    63.9
    
    
    
    58.6Expected return on plan assets
    
    
    (80.9
    )
    
    
    (76.4
    )Net amortization
    
    
    29.9
    
    
    
    27.4Termination benefits
    
    
    5.5
    
    
    
    $
    88.9
    
    
    $
    68.3
 - 8 -




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Notes to Consolidated Financial Statements (continued)  The Company provides medical, dental and life insurance benefits, principally
to its eligible U.S. retirees and similar benefits to their dependants,
through its other postretirement benefits plans. The net cost of such plans
consisted of the following components: ($ in millions)Three MonthsEnded March 312004
    
    2003Service cost
    
    $
    25.9
    
    
    $
    17.0Interest cost
    
    
    32.1
    
    
    
    22.6Expected return on plan assets
    
    
    (23.5
    )
    
    
    (15.5
    )Net amortization
    
    
    9.8
    
    
    
    7.0Termination benefits
    
    
    .7
    
    
    
    $
    45.0
    
    
    $
    31.1
  The Company recorded termination charges of $5.5 million on its pension plans
and $0.7 million on its other postretirement benefit plans related to
expanded eligibility for certain employees under the restructuring action
(see Note 7).14.
    
    Other (income) expense, net, consisted of: ($ in millions)Three MonthsEnded March 312004
    
    2003Interest income
    
    $
    (65.7
    )
    
    $
    (87.4
    )Interest expense
    
    
    72.8
    
    
    
    95.2Exchange gains
    
    
    (7.8
    )
    
    
    (7.1
    )Minority interests
    
    
    39.6
    
    
    
    51.8Amortization of other intangibles
    
    
    37.3
    
    
    
    31.3Other, net
    
    
    (317.1
    )
    
    
    (36.0
    )$
    (240.9
    )
    
    $
    47.8
  Minority interests include third parties share of exchange gains and losses
arising from translation of the financial statements into U.S. dollars.The change in Other, net for the three months ended March 31, 2004 reflects
the gain on the divestiture of Mercks 50-percent equity stake in Johnson &
Johnson/MSD Europe, as well as realized gains on the Companys investment
portfolios.Interest paid for the three-month periods ended March 31, 2004 and 2003 was
$88.5 million and $111.9 million, respectively.15.
    
    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 MonthsEnded March 312004
    
    2003Average common shares outstanding
    
    
    2,222.6
    
    
    
    2,244.3Common
shares issuable(1)
    
    
    9.9
    
    
    
    17.8Average common shares outstanding assuming dilution
    
    
    2,232.5
    
    
    
    2,262.1
  (1)
    
    Issuable primarily under stock-based compensation programs,
including unvested PSUs and RSUs.  16.
    
    Comprehensive income for the three months ended March 31, 2004 and 2003,
representing all changes in stockholders equity during the period other
than changes resulting from the Companys stock, was $1,633.5 million and
$1,700.2 million, respectively. - 9 -




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##### Table of Contents



Notes to Consolidated Financial Statements (continued)  17.
    
    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. All Other includes non-reportable human and animal health
segments.Revenues and profits for these segments are as follows: ($ in millions)Three MonthsEnded March 312004
    
    2003Segment revenues:Merck Pharmaceutical
    
    $
    5,291.5
    
    
    $
    5,231.4All Other
    
    
    276.3
    
    
    
    285.2$
    5,567.8
    
    
    $
    5,516.6Segment profits:Merck Pharmaceutical
    
    $
    3,404.7
    
    
    $
    3,326.7All Other
    
    
    266.1
    
    
    
    253.0$
    3,670.8
    
    
    $
    3,579.7
  Segment profits are comprised of segment revenues less certain elements of
materials and production costs and operating expenses, including components
of equity income (loss) 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 MonthsEnded March 312004
    
    2003Segment profits
    
    $
    3,670.8
    
    
    $
    3,579.7Other profits
    
    
    39.4
    
    
    
    39.8Adjustments
    
    
    115.9
    
    
    
    99.5Unallocated:Interest income
    
    
    65.7
    
    
    
    87.4Interest expense
    
    
    (72.8
    )
    
    
    (95.2
    )Equity income (loss) from affiliates
    
    
    42.5
    
    
    
    (1.8
    )Depreciation and amortization
    
    
    (309.9
    )
    
    
    (282.5
    )Research and development
    
    
    (996.3
    )
    
    
    (810.7
    )Other expenses, net
    
    
    (212.4
    )
    
    
    (400.0
    )$
    2,342.9
    
    
    $
    2,216.2
 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 (loss)
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. - 10 -




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations Operating Results Earnings per share for the first quarter of 2004 were $0.73, a 7% increase over
earnings per share from continuing operations* in the same period in 2003. Net
income was $1,618.6 million, compared to income from continuing operations of
$1,545.0 million in the first quarter of last year. Worldwide sales were $5.6
billion for the quarter. Total sales increased 1% for the quarter, reflecting strong growth in Mercks
major in-line franchises, offset by lower revenues from Mercks relationship
with AstraZeneca LP, which were primarily driven by generic competition for
Prilosec. Mercks major in-line franchises collectively grew 11%. Overall,
first-quarter sales performance included a 5-point favorable effect from
foreign exchange. Sales outside of the United States accounted for 42% of
first-quarter sales, compared to 38% of sales for the first quarter of 2003. The Companys gross margin was 80.2% in the 2004 first quarter compared to
80.6% in the first quarter of 2003, reflecting the impact of changes in product
mix. Marketing and administrative expenses increased 6% compared to the first
quarter of 2003. Excluding the impact of $34 million for restructuring costs
related to position eliminations, marketing and administrative expenses
increased 4% for the quarter. The Company is on track to eliminate 4,400
positions worldwide. Approximately 3,800 positions had been eliminated as of
March 31. This program, which was announced in October 2003, will be completed
by the end of 2004. Also contributing to Mercks results in the first quarter was Other Income of
$241 million, which includes a $177 million gain on the sale of Mercks
50-percent equity stake in Johnson & Johnson/MSD Europe and realized gains on
the Companys investment portfolios. The effective tax rate of 30.9% in the first quarter reflects the impact of
product mix, changes in the Companys tax reserve position and the
nondeductibility of the acquired research expense in connection with the Aton
acquisition. Merck complements its internal research program with an aggressive 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. Research and development expenses increased 23% during
the first quarter, reflecting acquired research resulting from the acquisition
of Aton Pharma, Inc. (Aton), as well as licensing activities, including the
Companys collaboration with H. Lundbeck A/S (Lundbeck). In February, Merck and 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, Lundbeck received an initial payment of $70 million and may
receive up to $200 million in additional milestone payments. Merck and
Lundbeck will jointly complete the ongoing Phase III clinical program, with
Merck funding the majority of the remaining development activities. The
companies anticipate that Merck will file a New Drug Application (NDA) with the
U.S. Food and Drug Administration (FDA) between late 2006 and mid-2007.
Following FDA approval, the companies plan to co-promote gaboxadol in the
United States. Lundbeck will receive a share of gaboxadol sales in the United
States. On April 28, 2004, Merck and Bristol-Myers Squibb Company announced that the
companies have 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 will receive a $100 million
upfront payment and $275 million in additional payments based upon the
achievement of certain regulatory milestones. The companies 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. It is expected that muraglitazar will be
submitted within the next nine to 12 months for U.S. regulatory approval. In
addition, Merck received rights to co-develop and jointly commercialize a
back-up compound to muraglitazar, which is entering Phase II clinical trials
for the treatment of diabetes. In March, Merck acquired Aton, a privately held biotechnology company focusing
on the development of novel treatments for cancer and other serious diseases.
The acquisition resulted in $125 million of acquired research expense in the
first quarter. Former shareholders of Aton will receive additional payments
which are contingent upon regulatory filing, approval, and sale of certain Aton
products.  *
    
    Continuing operations exclude only the results from Medco Health Solutions,
Inc., which was spun off on Aug. 19, 2003. - 11 -




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In March, Merck completed its acquisition of Banyu Pharmaceutical Co., Ltd.
Full ownership of Banyu enhances Mercks position in Japan, the worlds
second-largest pharmaceutical market, while simultaneously strengthening the
Companys position as one of the worlds largest research-based pharmaceutical
companies. The acquisition of Banyu expands the Companys network of wholly
owned operations to every major market of the world. Also 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. In addition to an upfront payment, 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. Mercks largest products, which continue to benefit from ongoing clinical
studies and new treatment options, drove the Companys sales. Each of Mercks
major in-line franchises ranks either No. 1 or 2 in its class, in terms of
sales, worldwide. Merck implemented a new U.S. wholesaler distribution program during the fourth
quarter of 2003. As a result of the program, inventory levels at key
wholesalers for each of the major products approximate two to three weeks of
supply. Implementation of the program had an estimated $100 million overall
residual buy-out effect on first-quarter 2004 revenues. Zocor, Mercks statin for modifying cholesterol, achieved worldwide sales of
$1.3 billion in the first quarter, an increase of 10% from the comparable prior
year period. U.S. mail-order-adjusted prescription levels for Zocorincreased
by approximately 5% during the quarter. Merck continues to promote the
landmark Heart Protection Study (HPS) to physicians and consumers. The HPS
demonstrated that Zocor40 mg, along with diet, is the first and only
cholesterol-lowering medicine proven to reduce the risk of heart attacks and
stroke in people with heart disease or diabetes, regardless of cholesterol
level. During the first quarter of 2004, Fosamaxcontinued as the most-prescribed
medicine worldwide for the treatment of postmenopausal, male and
glucocorticoid-induced osteoporosis, with $759 million in global sales, a
decrease of 4% from the comparable prior year period. U.S. mail-order-adjusted
prescription levels for Fosamaxincreased by 3% during the quarter. Results from the longest prospective clinical trial in the treatment of
postmenopausal osteoporosis were published in March in the New England Journal
of Medicine. The study showed that postmenopausal women taking Fosamax
maintained or continued to experience increases in bone mineral density at the
hip and spine through 10 years of treatment. Global sales of Mercks antihypertensive medicines, Cozaarand Hyzaar**,
reached $629 million for the quarter, a decrease of 1% from the comparable
prior year period. Cozaarand Hyzaarcompete in the fastest-growing class in
the antihypertensive market, angiotensin II antagonists (AIIA). Cozaaris the
second-most-frequently prescribed AIIA in the United States and the
largest-selling AIIA in Europe. U.S. mail-order-adjusted prescription levels
for Cozaarand Hyzaarincreased by 8% during the quarter. Worldwide sales of Singulair, a once-a-day oral medicine indicated for the
treatment of chronic asthma and the relief of symptoms of seasonal allergic
rhinitis, reached $623 million in the first quarter, an increase of 34% from
the comparable prior year period. U.S. mail-order-adjusted prescription levels
for Singulairincreased by 32% during the quarter. Sales in the first quarter were driven by strong performance in the asthma
market, as well as in the seasonal allergic rhinitis market. Singulair
continues to be the second-most-prescribed product in the overall respiratory
market in the United States and the largest-selling asthma controller brand in
pediatrics worldwide. Worldwide sales of Vioxx, Mercks arthritis and pain medicine, reached $661
million for the first quarter of 2004, an increase of 30% from the comparable
prior year period. U.S. mail-order-adjusted prescription levels for Vioxx
decreased by 3% during the quarter. In markets outside of the United States,
Vioxxcontinues to be the best-selling arthritis and pain medicine.  **
    
    Cozaarand Hyzaarare registered trademarks of E.I. DuPont de Nemours &
Company, Wilmington, Del. - 12 -




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On March 26, the FDA approved a supplemental New Drug Application (sNDA) for
Vioxxfor the acute treatment of migraine attacks with or without aura in
adults. Vioxxis the first and only coxib approved to relieve migraine pain
and associated migraine symptoms. During the first quarter, the FDA also
accepted for filing another sNDA for Vioxxbased on studies in juvenile
rheumatoid arthritis, and has granted an additional six months of marketing
exclusivity in the United States for Vioxxbased on that filing. Indications
for Vioxxfor migraine and juvenile rheumatoid arthritis also are being sought
outside of the United States. Global sales of Arcoxiareached $30 million in the first quarter of 2004. To
date, Arcoxiahas been launched in 44 countries outside of the United States,
most recently in Italy, Portugal and Belgium. Additional launches will
continue in other countries throughout the year. On March 12, the FDA accepted for filing Mercks NDA for Arcoxia. The NDA
seeks indications for Arcoxiafor the treatment of osteoarthritis, rheumatoid
arthritis, chronic low-back pain, acute pain, dysmenorrhea, acute gouty
arthritis and ankylosing spondylitis. No other coxib currently has indications
for chronic low-back pain, acute gouty arthritis or ankylosing spondylitis. Results from a new acute gouty arthritis study for Arcoxiawere published in
the February issue of Arthritis & Rheumatism. The study showed that Arcoxia
120 mg once daily provided the same degree of pain relief as indomethacin (50
mg three times daily)  the standard treatment for acute gouty arthritis  and
confirmed earlier findings showing Arcoxiaoffered a similar clinical benefit
to indomethacin. Sales of Mercks other promoted medicines and vaccines during the first quarter
were $1.2 billion, compared to $1.1 billion for the same period of last year.
These products treat or prevent a broad range of conditions. Global sales of Zetia(branded Ezetrol outside of the United States), the
cholesterol absorption inhibitor developed and marketed by
Merck/Schering-Plough Pharmaceuticals, reached $190 million in the first
quarter of 2004. More than 7.5 million prescriptions have been written in the
United States since the U.S. launch of Zetiain mid-November 2002, according to
IMS Health. Zetiacurrently accounts for more than 5 percent of new
prescriptions in the cholesterol-lowering class and is now reimbursed for
nearly 90 percent of all patients in managed care plans across the United
States. To date, Ezetrolhas been launched in more than 40 countries outside
of the United States. More markets are expected to launch Ezetrolin 2004 upon
completion of pricing/reimbursement national processes. Results from the EASE (Ezetimibe Add-On to Statin for Effectiveness) trial of
3,030 patients, which were presented at the American College of Cardiology
(ACC) meeting in March, showed that adding 10 mg of Zetiato ongoing stable
statin therapy lowered LDL (bad cholesterol) by an additional 26 percent,
compared to the 3 percent decrease seen in patients continuing their stable
dose of statin monotherapy over the course of the six-week trial. These
results were consistently seen across a number of pre-specified treatment
groups such as age, gender and the medical conditions diabetes and metabolic
syndrome. Merck/Schering-Plough Pharmaceuticals submitted an NDA for Vytorin
(ezetimibe/simvastatin) to the FDA on September 24, 2003. The filing was
accepted by the FDA for standard review on November 23, 2003. Vytorinis the
first product to target the bodys two sources of cholesterol through dual
inhibition  inhibiting both cholesterol production in the liver and absorption
in the intestine. Vytorin(branded Inegy in many countries outside of the
United States) has recently been launched in Germany and Mexico. Results from clinical trials conducted in support of Vytorin, also presented at
the ACC meeting, demonstrated that patients taking ezetimibe with simvastatin,
the active ingredients in Vytorin, achieved reductions in LDL ranging from 46
to 61 percent. Moreover, the studies demonstrated that patients taking
ezetimibe with simvastatin achieved significantly greater reductions in LDL
than with Lipitor or Zocoracross the dosage ranges. 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, coxibs (Vioxxand
Arcoxia) $2.6 to $2.8 billion, and Singulair$2.4 to $2.7 billion. Under an agreement with AstraZeneca (AZN), Merck receives revenue at
predetermined rates on the U.S. sales of certain products by AZN, most notably
Prilosec and Nexium. In 2004, Merck anticipates these revenues to be
approximately $1.6 to $1.8 billion. - 13 -




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The income contribution related to the Merck and Schering-Plough collaboration
is expected to be positive in 2004. Equity income from affiliates includes the
results of the Merck and Schering-Plough collaboration combined with the
results of Mercks other joint venture relationships. Equity income from
affiliates is expected to be approximately $800 to $900 million for 2004. Merck continues to expect that manufacturing productivity will offset inflation
on product costs. Product gross margin percentage is estimated to be approximately 80% to 81% as
a result of changes to the sales mix. 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. The consolidated 2004 tax rate is estimated to be approximately 28% to 29%. Merck plans to continue its stock buyback program in 2004. As of March 31,
$9.3 billion remains under the current buyback authorizations approved by
Mercks Board of Directors. The Company is on track to eliminate 4,400 positions worldwide. Approximately
3,800 positions had been eliminated as of March 31. 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 $75 to $125 million.
When complete, the cost reductions are expected to generate annual savings of
payroll and benefits costs of $250 to $300 million starting in 2005. Given these guidance elements, and including the effect of the restructuring,
Merck anticipates full-year 2004 earnings per share (EPS) of $3.11 to $3.17 and
second-quarter EPS of $0.78 to $0.82. Liquidity and Capital Resources($ in millions)
    
    March 31, 2004
    
    December 31, 2003Cash, cash equivalents and short-term
investments
    
    $
    5,311.9
    
    
    $
    4,173.0Working capital
    
    $
    2,847.1
    
    
    $
    1,957.6Total debt to total liabilities and equity
    
    
    16.5
    %
    
    
    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 $1.8 billion and $1.7 billion for the three
months ended March 31, 2004 and 2003, respectively. Capital expenditures for the three months totaled $322.8 million and $421.1
million in 2004 and 2003, respectively. Capital expenditures for the full year
2004 are expected to approximate $1.9 billion. Dividends paid to stockholders totaled $822.4 million and $808.3 million for
the first three months of 2004 and 2003, respectively. In February 2004, the
Board of Directors declared a quarterly dividend of 37 cents per share on the
Companys common stock for the second quarter of 2004. During the first quarter, the Company purchased $227.9 million of its Common
Stock (4.9 million shares) for its Treasury. The Company has approximately
$9.3 billion remaining under the July 2002 treasury stock purchase
authorization. Other Matters 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 to date 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 - 14 -




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##### Table of Contents



1993-1999
disallowances, would be approximately $540 million plus interest to date 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. Legal Proceedings 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. 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 on
September 30, 2003. The claimants application for judicial review of the
decision to withdraw public funding has been dismissed. The lead claimants
have decided not to apply to the Court of Appeal for permission to appeal that
decision. The April 2004 trial date has been vacated and each claimant has
been ordered to indicate by May 14 whether he or she intends to discontinue or
proceed with their claim. Directions from the Judge for the future conduct of
the litigation will be made at a case management hearing in July. The Company
believes that these lawsuits are without merit and will vigorously defend
against them. In March 2004, two shareholder derivative actions were filed in federal court
in New Orleans 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 has consolidated the shareholder
derivative actions with the securities actions. The Company believes that the
lawsuits are without merit. 
 Item 4. Controls and Procedure 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. 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. - 15 -




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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 (if any). 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. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities Issuer purchases of equity securities for the three month period ended March
31, 2004 is as follows: ISSUER PURCHASES OF EQUITY SECURITIES ($ in millions)Approximate Dollar Value ofTotal Number of
    
    
    
    
    
    Shares That May Yet BeShares
    
    Average Price
    
    Purchased Under thePeriod
    
    Purchased (1)
    
    Paid Per Share
    
    Plans or
Programs(1)Jan 1  Jan 31, 2004
    
    
    1,620,100
    
    
    $
    46.84
    
    
    $
    9,443.8Feb 1  Feb 29, 2004
    
    
    1,239,300
    
    
    $
    48.49
    
    
    $
    9,383.7Mar 1  Mar 31, 2004
    
    
    2,022,300
    
    
    $
    45.46
    
    
    $
    9,291.7Total (YTD Mar 2004)
    
    
    4,881,700
    
    
    $
    46.69
    
    
    $
    9,291.7
  (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. 
 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Number
    
    Description3.1
    
    Restated Certificate of Incorporation of Merck & Co., Inc. (September 1, 2000)- Incorporated by reference to Form 10-Q Quarterly Report for the period endedSeptember 30, 20003.2
    
    By-Laws of Merck & Co., Inc. (as amended effective February 25, 1997) -
Incorporated by reference to Form 10-Q Quarterly Report for the period ended
March 31, 199712
    
    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
 - 16 -




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(b)
    
    Reports on Form 8-K During the three-month period ending March 31, 2004, the Company:  (1)
    
    furnished one Current Report on Form 8-K pursuant to
Item 9  Regulation FD Disclosure and Item 12  Results of
Operations and Financial Condition: Report dated and furnished
January 27, 2004, regarding earnings for the fourth quarter 2003
and certain supplemental information; and(2)
    
    filed two Current Reports on Form 8-K under Item 5 -
Other Events:  (i)
    
    Report dated February 4, 2004 and filed
February 10, 2004, regarding an Underwriting Agreement the
Company entered into with Citigroup Global Markets Inc. and
Morgan Stanley & Co. Incorporated(ii)
    
    Report dated and filed February 26, 2004,
regarding the Companys Financial Statements, Notes to
Consolidated Financial Statements and Report of Independent
Auditors - 17 -




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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: May 7, 2004
    
    /s/ Kenneth C. FrazierKENNETH C. FRAZIERSenior Vice President and General CounselDate: May 7, 2004
    
    /s/ Richard C. HenriquesRICHARD C. HENRIQUESVice President, Controller
 - 18 -




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##### Table of Contents



EXHIBIT INDEX Number
    
    Description3.1
    
    Restated Certificate of Incorporation of Merck & Co., Inc. (September 1, 2000)
 Incorporated by reference to Form 10-Q Quarterly Report for the period
ended September 30, 20003.2
    
    By-Laws of Merck & Co., Inc. (as amended effective February 25, 1997) 
Incorporated by reference to Form 10-Q Quarterly Report for the period ended
March 31, 199712
    
    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