##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2007
 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.
     Incorporated in New Jersey
    
    I.R.S. Employer IdentificationNo. 22-1109110
  Class
    
    Number of Shares OutstandingCommon Stock
    
    2,169,064,468
  þ o
   Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
  o þ




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TABLE OF CONTENTS  Part I  Financial InformationItem 1. Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 4. Controls and ProceduresPART II   Other InformationItem 1. Legal ProceedingsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 4. Submission of Matters to a Vote of Security HoldersItem 6. ExhibitsSignaturesEXHIBIT INDEXEX-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
 
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Sales
    
    $
    6,111.4
    
    
    $
    5,771.7
    
    
    $
    11,880.7
    
    
    $
    11,181.5Costs, Expenses and OtherMaterials and production
    
    
    1,552.3
    
    
    
    1,445.2
    
    
    
    3,078.1
    
    
    
    2,787.9Marketing and administrative
    
    
    2,083.7
    
    
    
    1,734.0
    
    
    
    3,885.7
    
    
    
    3,449.0Research and development
    
    
    1,030.5
    
    
    
    1,172.5
    
    
    
    2,060.6
    
    
    
    2,114.5Restructuring costs
    
    
    55.8
    
    
    
    (6.9
    )
    
    
    121.6
    
    
    
    36.8Equity income from affiliates
    
    
    (759.1
    )
    
    
    (611.3
    )
    
    
    (1,411.7
    )
    
    
    (1,114.7
    )Other (income) expense, net
    
    
    (84.0
    )
    
    
    (70.1
    )
    
    
    (340.2
    )
    
    
    (170.7
    )3,879.2
    
    
    
    3,663.4
    
    
    
    7,394.1
    
    
    
    7,102.8Income Before Taxes
    
    
    2,232.2
    
    
    
    2,108.3
    
    
    
    4,486.6
    
    
    
    4,078.7Taxes on Income
    
    
    555.8
    
    
    
    609.0
    
    
    
    1,105.9
    
    
    
    1,059.4Net Income
    
    $
    1,676.4
    
    
    $
    1,499.3
    
    
    $
    3,380.7
    
    
    $
    3,019.3Basic Earnings per Common Share
    
    $
    0.77
    
    
    $
    0.69
    
    
    $
    1.56
    
    
    $
    1.38Earnings per Common Share Assuming Dilution
    
    $
    0.77
    
    
    $
    0.69
    
    
    $
    1.55
    
    
    $
    1.38Dividends Declared per Common Share
    
    $
    0.38
    
    
    $
    0.38
    
    
    $
    0.76
    
    
    $
    0.76
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##### Table of Contents



June 30,
    
    December 31,2007
    
    2006AssetsCurrent AssetsCash and cash equivalents
    
    $
    3,469.5
    
    
    $
    5,914.7Short-term investments
    
    
    2,034.5
    
    
    
    2,798.3Accounts receivable
    
    
    3,607.5
    
    
    
    3,314.8Inventories (excludes inventories of $413.3 in 2007 and $416.1
in 2006 classified in Other assets  see Note 4)
    
    
    1,759.5
    
    
    
    1,769.4Prepaid expenses and taxes
    
    
    1,564.7
    
    
    
    1,433.0Total current assets
    
    
    12,435.7
    
    
    
    15,230.2Investments
    
    
    7,643.0
    
    
    
    7,788.2Property, Plant and Equipment, at cost, net of allowance for
depreciation of $11,793.9 in 2007 and $11,015.4 in 2006
    
    
    12,767.4
    
    
    
    13,194.1Goodwill
    
    
    1,431.6
    
    
    
    1,431.6Other Intangibles, Net
    
    
    828.5
    
    
    
    943.9Other Assets
    
    
    9,076.6
    
    
    
    5,981.8$
    44,182.8
    
    
    $
    44,569.8Liabilities and Stockholders EquityCurrent LiabilitiesLoans payable and current portion of long-term debt
    
    $
    2,169.2
    
    
    $
    1,285.1Trade accounts payable
    
    
    454.6
    
    
    
    496.6Accrued and other current liabilities
    
    
    6,106.5
    
    
    
    6,653.3Income taxes payable
    
    
    723.5
    
    
    
    3,460.8Dividends payable
    
    
    827.2
    
    
    
    826.9Total current liabilities
    
    
    10,281.0
    
    
    
    12,722.7Long-Term Debt
    
    
    4,133.6
    
    
    
    5,551.0Deferred Income Taxes and Noncurrent Liabilities
    
    
    7,888.0
    
    
    
    6,330.3Minority Interests
    
    
    2,407.9
    
    
    
    2,406.1Stockholders EquityCommon stock, one cent par valueAuthorized - 5,400,000,000 sharesIssued - 2,976,223,337 shares
    
    
    29.8
    
    
    
    29.8Other paid-in capital
    
    
    7,353.3
    
    
    
    7,166.5Retained earnings
    
    
    40,905.1
    
    
    
    39,095.1Accumulated other comprehensive loss
    
    
    (1,112.6
    )
    
    
    (1,164.3
    )47,175.6
    
    
    
    45,127.1Less treasury stock, at cost808,434,585 shares  June 30, 2007808,437,892 shares  December 31, 2006
    
    
    27,703.3
    
    
    
    27,567.4Total stockholders equity
    
    
    19,472.3
    
    
    
    17,559.7$
    44,182.8
    
    
    $
    44,569.8
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##### Table of Contents



Six Months EndedJune 30,2007
    
    2006Cash Flows from Operating ActivitiesNet income
    
    $
    3,380.7
    
    
    $
    3,019.3Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    1,000.5
    
    
    
    1,162.1Deferred income taxes
    
    
    (78.0
    )
    
    
    203.7Equity income from affiliates
    
    
    (1,411.7
    )
    
    
    (1,114.7
    )Dividends and distributions from equity affiliates
    
    
    882.6
    
    
    
    997.1Share-based compensation
    
    
    178.2
    
    
    
    182.3Acquired research
    
    
    
    
    
    
    296.3Other
    
    
    (8.3
    )
    
    
    (1.4
    )Taxes paid for IRS settlement
    
    
    (2,788.1
    )
    
    
    Net changes in assets and liabilities
    
    
    469.6
    
    
    
    (1,236.7
    )Net Cash Provided by Operating Activities
    
    
    1,625.5
    
    
    
    3,508.0Cash Flows from Investing ActivitiesCapital expenditures
    
    
    (473.1
    )
    
    
    (460.7
    )Purchases of securities, subsidiaries and other investments
    
    
    (6,508.6
    )
    
    
    (11,905.3
    )Acquisition of Sirna Therapeutics, Inc.
    
    
    (1,135.9
    )
    
    
    Proceeds from sales of securities, subsidiaries and other investments
    
    
    6,228.6
    
    
    
    11,145.6Other
    
    
    (3.0
    )
    
    
    (0.8
    )Net Cash Used by Investing Activities
    
    
    (1,892.0
    )
    
    
    (1,221.2
    )Cash Flows from Financing ActivitiesNet change in short-term borrowings
    
    
    357.6
    
    
    
    (1,606.6
    )Proceeds from issuance of debt
    
    
    
    
    
    
    5.1Payments on debt
    
    
    (856.5
    )
    
    
    (0.8
    )Purchases of treasury stock
    
    
    (491.9
    )
    
    
    (500.0
    )Dividends paid to stockholders
    
    
    (1,651.8
    )
    
    
    (1,663.1
    )Proceeds from exercise of stock options
    
    
    349.3
    
    
    
    311.9Other
    
    
    86.8
    
    
    
    (227.0
    )Net Cash Used by Financing Activities
    
    
    (2,206.5
    )
    
    
    (3,680.5
    )Effect of Exchange Rate Changes on Cash and Cash Equivalents
    
    
    27.8
    
    
    
    21.7Net Decrease in Cash and Cash Equivalents
    
    
    (2,445.2
    )
    
    
    (1,372.0
    )Cash and Cash Equivalents at Beginning of Year
    
    
    5,914.7
    
    
    
    9,585.3Cash and Cash Equivalents at End of Period
    
    $
    3,469.5
    
    
    $
    8,213.3
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Notes to Consolidated Financial Statements (unaudited)
 1.
    
    Basis of PresentationThe 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.In June 2007, the Financial Accounting Standards Board (FASB) ratified the consensus reached
by the Emerging Issues Task Force on Issue No. 07-3, Accounting for Advance Payments for Goods
or Services Received for Use in Future Research and Development Activities(Issue 07-3), which
is effective January 1, 2008 and is applied prospectively for new contracts entered into on or
after the effective date. Issue 07-3 addresses nonrefundable advance payments for goods or
services that will be used or rendered for future research and development activities. Issue
07-3 will require these payments be deferred and capitalized and recognized as an expense as the
related goods are delivered or the related services are performed. The Company is assessing the
effects of adoption of Issue 07-3 on its financial position and results of operations.In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities, including an amendment of FASB Statement No. 115(FAS 159), which
is effective January 1, 2008. FAS 159 permits companies to choose to measure certain financial
assets and financial liabilities at fair value. Unrealized gains and losses on items for which
the fair value option has been elected are reported in earnings at each subsequent reporting
date. The effect of adoption of FAS 159 on the Companys financial position and results of
operations is not expected to be material.In September 2006, the FASB issued Statement No. 157, Fair Value Measurements(FAS 157), which
will be effective January 1, 2008. FAS 157 clarifies the definition of fair value, establishes
a framework for measuring fair value, and expands the disclosures on fair value measurements.
The effect of adoption of FAS 157 on the Companys financial position and results of operations
is not expected to be material.2.
    
    RestructuringIn November 2005, the Company announced the initial phase of its global restructuring program
designed to reduce the Companys cost structure, increase efficiency and enhance
competitiveness. As part of this program, the Company announced plans to sell or close five
manufacturing sites and two preclinical sites by the end of 2008 and eliminate approximately
7,000 positions company-wide. Through the end of the second quarter of 2007, four of the
manufacturing facilities had been closed, sold or had ceased operations and the two preclinical
sites were closed. The Company has also sold or closed certain other facilities and related
assets in connection with the restructuring program. Through the end of 2008, when the initial
phase of the global restructuring program is expected to be substantially complete, the
cumulative pre-tax costs of the program are expected to range from $1.9 billion to $2.2 billion.
Approximately 70% of the cumulative pre-tax costs are estimated as non-cash, relating primarily
to accelerated depreciation for those facilities scheduled for closure. Since the inception of
the global restructuring program through June 30, 2007, the Company has recorded total pre-tax
accumulated costs of $1.7 billion and eliminated approximately 5,700 positions which are
comprised of employee separations and the elimination of contractors and vacant positions.
However, the Company continues to hire new employees as the Companys business requires it. For
segment reporting purposes, restructuring charges are unallocated expenses.
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Notes
to Consolidated Financial Statements (unaudited)
 The following tables summarize the charges related to restructuring activities by type of cost:
 Three Months Ended June 30,2007
    
    2006Separation
    
    Accelerated
    
    
    
    
    
    
    
    
    
    Separation
    
    Accelerated($ in millions)
    
    Costs
    
    Depreciation
    
    Other
    
    Total
    
    Costs
    
    Depreciation
    
    Other
    
    TotalMaterials and production
    
    $
    
    
    
    $
    118.2
    
    
    $
    0.5
    
    
    $
    118.7
    
    
    $
    
    
    
    $
    163.0
    
    
    $
    4.5
    
    
    $
    167.5Research and development
    
    
    
    
    
    
    (2.3
    )
    
    
    
    
    
    
    (2.3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restructuring costs
    
    
    38.1
    
    
    
    
    
    
    
    17.7
    
    
    
    55.8
    
    
    
    21.9
    
    
    
    
    
    
    
    (28.8
    )
    
    
    (6.9
    )$
    38.1
    
    
    $
    115.9
    
    
    $
    18.2
    
    
    $
    172.2
    
    
    $
    21.9
    
    
    $
    163.0
    
    
    $
    (24.3
    )
    
    $
    160.6
 Six Months Ended June 30,2007
    
    2006Separation
    
    Accelerated
    
    
    
    
    
    
    
    
    
    Separation
    
    Accelerated($ in millions)
    
    Costs
    
    Depreciation
    
    Other
    
    Total
    
    Costs
    
    Depreciation
    
    Other
    
    TotalMaterials and production
    
    $
    
    
    
    $
    236.3
    
    
    $
    0.5
    
    
    $
    236.8
    
    
    $
    
    
    
    $
    361.6
    
    
    $
    10.9
    
    
    $
    372.5Research and development
    
    
    
    
    
    
    
    
    
    
    (0.1
    )
    
    
    (0.1
    )
    
    
    
    
    
    
    55.4
    
    
    
    
    
    
    
    55.4Restructuring costs
    
    
    85.0
    
    
    
    
    
    
    
    36.6
    
    
    
    121.6
    
    
    
    49.7
    
    
    
    
    
    
    
    (12.9
    )
    
    
    36.8$
    85.0
    
    
    $
    236.3
    
    
    $
    37.0
    
    
    $
    358.3
    
    
    $
    49.7
    
    
    $
    417.0
    
    
    $
    (2.0
    )
    
    $
    464.7
 Separation costs are associated with actual headcount reductions, as well as those headcount
reductions that were probable and could be reasonably estimated. In the second quarter of 2007,
approximately 625 positions were eliminated and in the second quarter of 2006 approximately 500
positions were eliminated. In the first half of 2007, approximately 855 positions were
eliminated compared with approximately 2,300 positions in the first half of 2006.Accelerated depreciation costs primarily relate to the manufacturing and preclinical facilities
expected to be sold or closed by the end of 2008.Other activity reflects $18.2 million and $15.2 million for the second quarter of 2007 and 2006,
respectively, and $37.0 million and $37.5 million for the first six months of 2007 and 2006,
respectively, of costs that include termination charges associated with the Companys pension
and other postretirement benefit plans (see Note 9), shut-down and other related costs, as well
as asset impairments. Additionally, other activity in 2006 includes pre-tax gains of $39.5
million resulting from the second quarter sales of facilities.The following table summarizes the charges and spending relating to restructuring activities for
the six months ended June 30, 2007:
 Separation
    
    Accelerated($ in millions)
    
    Costs
    
    Depreciation
    
    Other
    
    TotalRestructuring reserves as of January 1, 2007
    
    $
    177.7
    
    
    $
    
    
    
    $
    
    
    
    $
    177.7Expense
    
    
    85.0
    
    
    
    236.3
    
    
    
    37.0
    
    
    
    358.3(Payments) receipts, net
    
    
    (94.0
    )
    
    
    
    
    
    
    (34.7
    )
    
    
    (128.7
    )Non-cash activity
    
    
    
    
    
    
    (236.3
    )
    
    
    (2.3
    )
    
    
    (238.6
    )Restructuring reserves as of June 30, 2007
    
    $
    168.7
    
    
    $
    
    
    
    $
    
    
    
    $
    168.7
 3.
    
    Acquisitions and Research CollaborationsOn July 25, 2007, Merck and NovaCardia, Inc. (NovaCardia), a privately held clinical-stage
pharmaceutical company focused on cardiovascular diseases, announced they had entered into a
definitive agreement under which Merck will acquire NovaCardia. Under the agreement, Merck will
acquire all of the outstanding equity of NovaCardia for $350 million plus the amount of cash on
hand at the time of closing, all of which will be paid in Merck stock based on the average
closing stock price on the five days prior to closing of the acquisition. NovaCardias lead
product candidate
KW-3902, an adenosine A1 receptor antagonist, is being studied in Phase III clinical
trials in patients with acute congestive heart failure. KW-3902 is believed to block
adenosine-mediated constriction of blood flow to the kidneys
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Notes
to Consolidated Financial Statements (unaudited)
 and inhibit reabsorption of salt
and water by the kidney, thereby increasing urine volume and maintaining renal function in
patients with acute congestive heart failure. The acquisition is subject to clearance under the
Hart-Scott-Rodino Antitrust Improvements Act and other customary conditions. The two companies
expect to close the acquisition within 45 days of the announcement.Also in July 2007, Merck and ARIAD Pharmaceuticals, Inc. (ARIAD) announced that they had
entered into a global collaboration to jointly develop and commercialize AP23573, ARIADs novel
mTOR inhibitor, for use in cancer. Each party will fund 50 percent of the cost of global
development of AP23573, except that Merck will fund 100 percent of the cost of ex-U.S.
development that is specific to the development or commercialization of AP23573 outside the U.S.
that is not currently part of the global development plan. It is expected that AP23573 will
enter into Phase III clinical development for the treatment of metastatic sarcomas beginning in
the third quarter of 2007. The agreement provides for an initial payment of $75 million to
ARIAD, which the Company will record as Research and development expense, up to $452 million
more in milestone payments to ARIAD based on the successful development of AP23573 in multiple
cancer indications (including $13.5 million for the initiation of the Phase III clinical trial
in metastatic sarcomas and $114.5 million for the initiation of other Phase II and Phase III
clinical trials), up to $200 million more based on achievement of significant sales thresholds,
at least $200 million in estimated contributions by Merck to global development, up to $200
million in interest-bearing repayable development-cost advances from Merck to cover a portion of
ARIADs share of global-development costs (after ARIAD has paid $150 million in global
development costs), and potential commercial returns from profit sharing in the U.S. or
royalties paid by Merck outside the U.S. In the U.S., ARIAD will distribute and sell AP23573
for all cancer indications, and ARIAD and Merck will co-promote and will each receive 50 percent
of the income from such sales. Outside the U.S., Merck will distribute, sell and promote
AP23573; Merck will pay ARIAD tiered double-digit royalties on such end-market sales of AP23573.In June 2006, the Company acquired all of the outstanding equity of GlycoFi, Inc. (GlycoFi)
for approximately $373 million in cash. In connection with the acquisition, the Company
recorded a charge of $296.3 million for acquired research associated with GlycoFis technology
platform to be used in the research and development process, for which, at the acquisition date,
technological feasibility had not been established and no alternative future use existed. This
charge was not deductible for tax purposes. The charge was recorded in Research and development
expense and was determined based upon the present value of expected future cash flows of new
product candidates resulting from this technology adjusted for the probability of its technical
and marketing success utilizing an income approach reflecting the appropriate risk-adjusted
discount rate. The Company also recorded a $99.4 million intangible asset ($57.6 million net of
deferred taxes) related to GlycoFis developed technology that can be used immediately in the
research and development process and has alternative future uses. This intangible asset is
being amortized to Research and development expense on a straight-line basis over a five year
useful life. The remaining net assets acquired in this transaction were not material. Because
GlycoFi 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. GlycoFis results of operations have
been included with the Companys consolidated financial results since the acquisition date.4.
    
    InventoriesInventories consisted of:
 June 30,
    
    December 31,($ in millions)
    
    2007
    
    2006Finished goods
    
    $
    434.4
    
    
    $
    403.8Raw materials and work in process
    
    
    1,638.5
    
    
    
    1,688.9Supplies
    
    
    99.9
    
    
    
    92.8Total (approximates current cost)
    
    
    2,172.8
    
    
    
    2,185.5Reduction to LIFO cost for domestic inventories
    
    
    
    
    
    
    $
    2,172.8
    
    
    $
    2,185.5Recognized as:Inventories
    
    $
    1,759.5
    
    
    $
    1,769.4Other assets
    
    $
    413.3
    
    
    $
    416.1
 Amounts recognized as Other assets are comprised entirely of raw materials and work in process
inventories, which include inventories for products not expected to be sold within one year,
principally vaccines.
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Notes
to Consolidated Financial Statements (unaudited)
 5.
    
    Joint Ventures and Other Equity Method AffiliatesEquity income from affiliates reflects the performance of the Companys joint ventures and other
equity method affiliates and was comprised of the following:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,($ in millions)
    
    2007
    
    2006
    
    2007
    
    2006Merck/Schering-Plough
    
    $
    465.1
    
    
    $
    320.0
    
    
    $
    812.2
    
    
    $
    508.0AstraZeneca LP
    
    
    215.1
    
    
    
    215.4
    
    
    
    427.1
    
    
    
    428.9Other (1)
    
    
    78.9
    
    
    
    75.9
    
    
    
    172.4
    
    
    
    177.8$
    759.1
    
    
    $
    611.3
    
    
    $
    1,411.7
    
    
    $
    1,114.7
 (1)
    
    Primarily reflects results from Merial Limited, and joint ventures with
Sanofi Pasteur and Johnson & Johnson.
 As previously disclosed, the 1999 AstraZeneca merger triggers a partial redemption of
Mercks limited partnership interest in AZLP in 2008. Upon this redemption, Merck will
receive from AZLP an amount based primarily on a multiple of Mercks average annual variable
returns derived from sales of the former Astra USA, Inc. products for the three years prior
to the redemption (the Limited Partner Share of Agreed Value).Also, as a result of the merger, in exchange for Mercks relinquishment of rights to future Astra
products with no existing or pending U.S. patents at the time of the merger, Astra paid
$967.4 million (the Advance Payment), which is subject to a true-up calculation (the
True-Up Amount) in 2008 that may require repayment of all or a portion of this amount.
The True-Up Amount is directly dependent on the fair market value in 2008 of the Astra
product rights retained by the Company. Accordingly, recognition of this contingent income
has been deferred until the realizable amount, if any, is determinable, which is not
anticipated prior to 2008. In the second quarter of 2007, the Company reclassified this
amount to Accrued and other current liabilities from non-current liabilities as this true-up
calculation will occur within the next twelve months.In 1998, Astra purchased an option (the Asset Option) to buy Mercks interest in the KBI
products, excluding the gastrointestinal medicines Nexiumand Prilosec(the Non-PPI
Products), for a payment of $443.0 million, which was deferred. The Asset Option is
exercisable in 2010 at an exercise price equal to the net present value as of March 31, 2008
of projected future pre-tax revenue to be received by the Company from the Non-PPI Products
(the Appraised Value). Merck also has the right to require Astra to purchase such
interest in 2008 at the Appraised Value.The sum of the Limited Partner Share of Agreed Value, the Appraised Value and the True-Up
Amount is guaranteed to be a minimum of $4.7 billion. Distribution of the Limited Partner
Share of Agreed Value and payment of the True-Up Amount will occur in 2008. AstraZenecas
purchase of Mercks interest in the Non-PPI Products is contingent upon the exercise of
either Mercks option in 2008 or AstraZenecas option in 2010 and, therefore, payment of the
Appraised Value may or may not occur.6.
    
    Debt and Financial InstrumentsDuring the second quarter of 2007, the Company reclassified the $1.38 billion Astra Note due in
2008 from Long-term debt to Loans payable and current portion of long-term debt.In June 2007, the Company entered into a pay-floating, receive-fixed interest rate swap contract
effectively converting $250 million of its $1.0 billion, 4.75% fixed-rate notes into floating
rate instruments. The interest rate swap is designated as a hedge of the fair value change in
the notes attributable to changes in the benchmark London Interbank Offered Rate (LIBOR) swap
rate and will mature in 2015. The fair value change in the notes is fully offset in interest
expense by the fair value change in the swap contract.In April 2007, the Company extended the maturity date of its $1.5 billion, 5-year revolving
credit facility from 2011 to 2012. The facility provides backup liquidity for the Companys
commercial paper borrowing facility and is to be used for general corporate purposes. The
Company has not drawn funding from this facility.In March 2007, $350 million of 2.5% notes, along with an associated pay-floating, receive-fixed
interest rate swap, matured and were retired.
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Notes
to Consolidated Financial Statements (unaudited)
 In February 2007, the Company redeemed $500 million of notes that were subject to annual
interest rate resets upon notification from the remarketing agent that, due to an overall rise
in interest rates, it would not exercise its annual option to remarket the notes.7.
    
    ContingenciesThe 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.VioxxLitigationProduct Liability LawsuitsAs previously disclosed, individual and putative class actions have been filed against the
Company in state and federal courts alleging personal injury and/or economic loss with respect
to the purchase or use of Vioxx. All such actions filed in federal court are coordinated in a
multidistrict litigation in the U.S. District Court for the Eastern District of Louisiana (the
MDL) before District Judge Eldon E. Fallon. A number of such actions filed in state court are
coordinated in separate coordinated proceedings in state courts in New Jersey, California and
Texas, and the counties of Philadelphia, Pennsylvania and Washoe and Clark Counties, Nevada. As
of June 30, 2007, the Company had been served or was aware that it had been named as a defendant
in approximately 26,950 lawsuits, which include approximately 45,225 plaintiff groups, alleging
personal injuries resulting from the use of Vioxx, and in approximately 266 putative class
actions alleging personal injuries and/or economic loss. (All of the actions discussed in this
paragraph are collectively referred to as the VioxxProduct Liability Lawsuits.) Of these
lawsuits, approximately 8,575 lawsuits representing approximately 23,450 plaintiff groups are or
are slated to be in the federal MDL and approximately 16,400 lawsuits representing approximately
16,400 plaintiff groups are included in a coordinated proceeding in New Jersey Superior Court
before Judge Carol E. Higbee.In addition to the VioxxProduct Liability Lawsuits discussed above, the claims of over 4,620
plaintiff groups had been dismissed as of June 30, 2007. Of these, there have been over 1,170
plaintiff groups whose claims were dismissed with prejudice (i.e., they cannot be brought again)
either by plaintiffs themselves or by the courts. Over 3,450 additional plaintiff groups have
had their claims dismissed without prejudice (i.e., they can be brought again).Merck has entered into a tolling agreement (the Tolling Agreement) with the MDL Plaintiffs
Steering Committee that establishes a procedure to halt the running of the statute of
limitations (tolling) as to certain categories of claims allegedly arising from the use of Vioxx
by non-New Jersey citizens. The Tolling Agreement applies to individuals who have not filed
lawsuits and may or may not eventually file lawsuits and only to those claimants who seek to
toll claims alleging injuries resulting from a thrombotic cardiovascular event that results in a
myocardial infarction or ischemic stroke. The Tolling Agreement provides counsel additional
time to evaluate potential claims. The Tolling Agreement requires any tolled claims to be filed
in federal court. As of June 30, 2007, approximately 14,450 claimants had entered into Tolling
Agreements. The parties agreed that April 9, 2007 was the deadline for filing Tolling
Agreements and no additional Tolling Agreements are being accepted.The following sets forth the results of trials and certain significant rulings that occurred in
or after the second quarter of 2007 with respect to the VioxxProduct Liability Lawsuits.In August 2006, in Barnett v. Merck, a jury in New Orleans, Louisiana returned a plaintiff
verdict in the second federal Vioxxcase to go to trial. The jury awarded the plaintiff $50
million in compensatory damages and $1 million in punitive damages. On June 5, 2007, Judge
Fallon denied Mercks motion for judgment as a matter of law and denied in part Mercks motion
for a new trial on all issues. The Court allowed the plaintiff to choose whether to accept a
reduced damages award of $1.6 million ($600,000 in compensatory damages and $1 million in
punitive damages) or to have a re-trial. On June 20, 2007, the plaintiff accepted the Courts
reduced damage award of $1.6 million, and on June 28, 2007, Judge Fallon entered judgment in
that amount. The Company intends to appeal this judgment.On May 29, 2007, in the case of Plunkett v. Merck, Judge Fallon granted plaintiffs motion for a
new trial, vacating the February 23, 2006 judgment in favor of Merck.On July 3, 2007, Judge Fallon denied Mercks motion for summary judgment on federal preemption
grounds in two individual cases, Arnold v. Merck and Gomez v. Merck.
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Notes
to Consolidated Financial Statements (unaudited)
 On January 18, 2007, Judge Victoria Chaney declared a mistrial in a consolidated trial of two
cases, Appell v. Merck and Arrigale v. Merck, which had commenced on October 31, 2006 in
California state court in Los Angeles, after the jury indicated that it could not reach a
verdict. On July 9, 2007, Judge Chaney scheduled the retrial of the combined trial of Appell
and Arrigale for September 17, 2007. Judge Chaney was set to try Berwick v. Merck on April 12,
2007. On the eve of trial, plaintiff dismissed the case with prejudice, citing health issues.A consolidated trial, Hermans v. Merck and the retrial of Humeston v. Merck, began on January
17, 2007, in the coordinated proceeding in New Jersey Superior Court before Judge Higbee.
Humeston v. Merck was first tried in 2005, resulting in a jury verdict in favor of Merck on
November 3, 2005. However, on August 17, 2006, Judge Higbee set aside the November 2005 jury
verdict and ordered a new trial on the grounds of newly discovered evidence.The Hermans/Humeston trial was separated into two phases: a general phase regarding Mercks
conduct and a plaintiff-specific phase. On March 2, 2007, the jury found for Merck in the
general phase on the Hermans failure to warn claim, and the consumer fraud claim was
subsequently submitted to Judge Higbee for decision, which is still pending. On March 12, 2007,
the jury found for plaintiffs in the Humeston case, awarding compensatory damages to Mr.
Humeston in the amount of $18 million and to Mrs. Humeston in the amount of $2 million. The
jury also awarded $27.5 million in punitive damages. Merck has moved for a judgment
notwithstanding the verdict, a new trial, or reduction of the award. These and other post-trial
motions are currently pending.In April 2006, in a trial involving two plaintiffs, Thomas Cona and John McDarby, in Superior
Court of New Jersey, Law Division, Atlantic County, the jury returned a split verdict. The jury
determined that Vioxxdid not substantially contribute to the heart attack of Mr. Cona, but did
substantially contribute to the heart attack of Mr. McDarby. The jury also concluded that, in
each case, Merck violated New Jerseys consumer fraud statute, which allows plaintiffs to
receive their expenses for purchasing the drug, trebled, as well as reasonable attorneys fees.
The jury awarded $4.5 million in compensatory damages to Mr. McDarby and his wife, who also was
a plaintiff in that case, as well as punitive damages of $9 million. On June 8, 2007, Judge
Higbee denied Mercks motion for a new trial. On June 15, 2007, Judge Higbee awarded
approximately $4 million in the aggregate in attorneys fees and costs. The Company intends to
appeal this verdict after the completion of post-trial proceedings in the trial court.On March 27, 2007, a jury found for Merck on all counts in Schwaller v. Merck, which was tried
in state court in Madison County, Illinois. The plaintiff moved for a new trial on May 25,
2007.On September 28, 2006, the New Jersey Superior Court, Appellate Division, heard argument on
plaintiffs appeal of Judge Higbees dismissal of the Sinclair v. Merck case. This putative
class action was originally filed in December 2004 and sought the creation of a medical
monitoring fund. Judge Higbee had granted the Companys motion to dismiss in May 2005. On
January 16, 2007, the Appellate Division reversed the decision and remanded the case back to
Judge Higbee for further factual inquiry. On April 4, 2007, the New Jersey Supreme Court
granted the Companys petition for review of the Appellate Divisions decision.In July 2006, in Doherty v. Merck, in the Superior Court of Atlantic County, Law Division, New
Jersey, a jury returned a verdict in favor of the Company on all counts. The jury rejected a
claim by the plaintiff that her nearly three years of Vioxxuse caused her heart attack. The
jury also found in favor of Merck on the plaintiffs consumer fraud claim. Plaintiffs motion
for a new trial was argued on May 1, 2007. Judge Higbee took the matter under advisement.In December 2006, a New Orleans, Louisiana jury returned a verdict in favor of the Company in
Dedrick v. Merck. On May 29, 2007, Judge Fallon denied plaintiffs motion for a new trial.On April 19, 2007, Judge Randy Wilson, who presides over the Texas Vioxx coordinated
proceeding,
dismissed the failure to warn claim of plaintiff Ruby Ledbetter, whose case was scheduled to be
tried on May 14. Judge Wilson relied on a Texas statute enacted in 2003 that provides that
there can be no failure to warn regarding a prescription medicine if the medicine is distributed
with U.S. Food and Drug Administration (FDA)-approved labeling. There is an exception in the
statute if required, material, and relevant information was withheld from the FDA that would
have led to a different decision regarding the approved labeling, but Judge Wilson found that
the exception is preempted by
federal law unless the FDA finds that such information was withheld. Judge Wilson is currently
presiding over approximately 1,000 Vioxxsuits in Texas in which a principal allegation is
failure to warn. Judge Wilson certified the decision for an expedited appeal to the Texas Court
of Civil Appeals.On July 31, 2007, the New Jersey Appellate Division unanimously upheld Judge Higbees dismissal
of VioxxProduct Liability Lawsuits brought by residents of the United Kingdom.
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Notes
to Consolidated Financial Statements (unaudited)
 Juries have now found in favor of Merck 10 times and in favor of plaintiffs five times. As
noted above, Judge Fallon has set aside the verdict in the Plunkett case, which is one of the 10
defense verdicts, and ordered a new trial. There are two unresolved mistrials as a result of
hung juries after plaintiffs failed to prove their claims. In addition, another 20 cases
scheduled for trial were either dismissed or withdrawn from the trial calendar by plaintiffs
before a jury could be selected.Merck voluntarily withdrew Vioxxfrom the market on September 30, 2004. Most states have
statutes of limitations for product liability claims of no more than three years, which require
that claims must be filed within no more than three years after the plaintiffs learned or could
have learned of their potential cause of action. As a result, some may view September 30, 2007
as a significant deadline for filing Vioxxcases. It is important to note, however, that the
law regarding statutes of limitations can be complex and variable, depending on the facts and
applicable law. Some states have longer statutes of limitations. There are also arguments that
the statutes of limitations began running before September 30, 2004. Merck expects that there
will be legal arguments concerning the proper application of these statutes, and the decisions
will be up to the judges presiding in individual cases in state and federal proceedings. As
previously disclosed, in the federal MDL, Judge Fallon denied the Companys motion for summary
judgment on statute of limitations grounds in three individual cases on the basis that there
were factual issues precluding summary judgment. To the extent that September 30, 2007 is a
deadline, it would not apply to claimants with whom Merck has entered into agreements to toll
the statute of limitations, as referred to above.Other LawsuitsAs previously disclosed, on July 29, 2005, a New Jersey state trial court certified a nationwide
class of third-party payors (such as unions and health insurance plans) that paid in whole or in
part for the Vioxxused by their plan members or insureds. The named plaintiff in that case
seeks recovery of certain Vioxxpurchase costs (plus penalties) based on allegations that the
purported class members paid more for Vioxxthan they would have had they known of the products
alleged risks. Merck believes that the class was improperly certified. The trial courts
ruling is procedural only; it does not address the merits of plaintiffs allegations, which the
Company intends to defend vigorously. On March 31, 2006, the New Jersey Superior Court,
Appellate Division, affirmed the class certification order. On July 19, 2006, the New Jersey
Supreme Court decided to exercise its discretion to hear the Companys appeal of the Appellate
Divisions decision. On August 24, 2006, the Appellate Division ordered a stay of the
proceedings in Superior Court pending a ruling by the Supreme Court. Oral argument before the
New Jersey Supreme Court took place in March 2007.As previously reported, the Company has also been named as a defendant in separate lawsuits
brought by the Attorneys General of Alaska, Louisiana, Mississippi, Montana, Texas and Utah.
These actions allege that the Company misrepresented the safety of Vioxxand seek (i) recovery
of the cost of Vioxxpurchased or reimbursed by the state and its agencies; (ii) reimbursement
of all sums paid by the state and its agencies for medical services for the treatment of persons
injured by Vioxx; (iii) damages under various common law theories; and/or (iv) remedies under
various state statutory theories, including state consumer fraud and/or fair business practices
or Medicaid fraud statutes, including civil penalties.Shareholder LawsuitsAs previously disclosed, in addition to the VioxxProduct Liability Lawsuits, the Company and
various current and former officers and directors are defendants in various putative class
actions and individual lawsuits under the federal securities laws and state securities laws (the
VioxxSecurities Lawsuits). All of the VioxxSecurities Lawsuits pending in federal court
have been transferred by the Judicial Panel on Multidistrict Litigation (the JPML) to the
United States District Court for the District of New Jersey before District Judge Stanley R.
Chesler for inclusion in a nationwide MDL (the Shareholder MDL). Judge Chesler has
consolidated the VioxxSecurities Lawsuits for all purposes. Plaintiffs requested certification
of a class of purchasers of Company stock between May 21, 1999 and October 29, 2004. The
complaint alleged that the defendants made false and misleading statements regarding Vioxxin
violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and sought
unspecified compensatory damages and the costs of suit, including attorneys fees. The
complaint also asserts a claim under Section 20A of the Securities and Exchange Act against
certain defendants relating to their sales of Merck stock. In addition, the complaint included
allegations under Sections 11, 12 and 15 of the Securities Act of 1933 that certain defendants
made incomplete and misleading statements in a registration statement and certain prospectuses
filed in connection with the Merck Stock Investment Plan, a dividend reinvestment plan. On
April 12, 2007, Judge Chesler granted defendants motion to dismiss, and dismissed the complaint
with prejudice. Plaintiffs have appealed Judge Cheslers decision to the United States Court of
Appeals for the Third Circuit.In October 2005, a Dutch pension fund filed a complaint in the District of New Jersey alleging
violations of federal securities laws as well as violations of state law against the Company and
certain officers. Pursuant to the Case
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Notes
to Consolidated Financial Statements (unaudited)
 Management Order governing the Shareholder MDL, the
case, which is based on the same allegations as the VioxxSecurities Lawsuits, was consolidated
with the VioxxSecurities Lawsuits. Defendants motion to dismiss the pension funds complaint
was filed on August 3, 2007.As previously disclosed, on August 15, 2005, a complaint was filed in Oregon state court by the
State of Oregon through the Oregon state treasurer on behalf of the Oregon Public Employee
Retirement Fund against the Company and certain current and former officers and directors. The
complaint, which was brought under Oregon securities law, is pending.As previously disclosed, various shareholder derivative actions filed in federal court were
transferred to the Shareholder MDL and consolidated for all purposes by Judge Chesler (the
VioxxDerivative Lawsuits). On May 5, 2006, Judge Chesler granted defendants motion to
dismiss and denied plaintiffs request for leave to amend their complaint. Plaintiffs
appealed, arguing that Judge Chesler erred in denying plaintiffs leave to amend their complaint
with materials acquired during discovery. On July 18, 2007, the United States Court of Appeals
for the Third Circuit reversed the District Courts decision on the grounds that Judge Chesler
should have allowed plaintiffs to make use of the discovery material to try to establish demand
futility, and remanded the case for the District Courts consideration of whether, even with the
additional materials, plaintiffs request to amend their complaint would still be futile.In addition, as previously disclosed, various putative class actions filed in federal court
under the Employee Retirement Income Security Act (ERISA) against the Company and certain
current and former officers and directors (the VioxxERISA Lawsuits and, together with the
VioxxSecurities Lawsuits and the VioxxDerivative Lawsuits, the VioxxShareholder Lawsuits)
have been transferred to the Shareholder MDL and consolidated for all purposes. The
consolidated complaint asserts claims on behalf of certain of the Companys current and former
employees who are participants in certain of the Companys retirement plans for breach of
fiduciary duty. The lawsuits make similar allegations to the allegations contained in the Vioxx
Securities Lawsuits. On July 11, 2006, Judge Chesler granted in part and denied in part
defendants motion to dismiss the ERISA Complaint.International LawsuitsAs previously disclosed, in addition to the lawsuits discussed above, the Company has been named
as a defendant in litigation relating to Vioxxin various countries (collectively, the Vioxx
Foreign Lawsuits) in Europe, as well as Canada, Brazil, Argentina, Australia, Turkey, and
Israel.Additional LawsuitsBased on media reports and other sources, the Company anticipates that additional VioxxProduct
Liability Lawsuits, VioxxShareholder Lawsuits and VioxxForeign Lawsuits (collectively, the
VioxxLawsuits) will be filed against it and/or certain of its current and former officers and
directors in the future.InsuranceAs previously disclosed, the Company had product liability insurance for claims brought in the
VioxxProduct Liability Lawsuits with stated upper limits of 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 VioxxProduct
Liability Lawsuits. The Company believes that this insurance coverage extends to additional
VioxxProduct Liability Lawsuits that may be filed in the future. The Company has Directors and
Officers insurance coverage applicable to the VioxxSecurities Lawsuits and VioxxDerivative
Lawsuits with stated upper limits of approximately $190 million. The Company has fiduciary and
other insurance for the VioxxERISA Lawsuits with stated upper limits of approximately $275
million. Additional insurance coverage for these claims may also be available under upper-level
excess policies that provide coverage for a variety of risks. There are disputes with certain
insurers about the availability of some or all of this insurance coverage and there are likely
to be additional disputes. The Companys insurance coverage with respect to the VioxxLawsuits
will not be adequate to cover its defense costs and any losses.As previously disclosed, the Companys upper level excess insurers (which provide excess
insurance potentially applicable to all of the VioxxLawsuits) have commenced an arbitration
seeking, among other things, to cancel those
policies, to void all of their obligations under those policies and to raise other coverage
issues with respect to the VioxxLawsuits. Merck intends to contest vigorously the insurers
claims and will attempt to enforce its rights under applicable insurance policies. The amounts
actually recovered under the policies discussed in this section may be less than the amounts
specified in the preceding paragraph. Pursuant to negotiated agreements, two of the Companys
insurers, which represent approximately 23% of the product liability insurance, have committed
to pay approximately $100 million in the aggregate with respect to such insurance. Most of the
funds have been received. The amounts recovered from the two insurers substantially offset
previously established receivables and therefore
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Notes
to Consolidated Financial Statements (unaudited)
 have not and will not impact Net Income in
periods received. Remaining receivables for product liability insurance, including amounts
subject to the arbitration, are immaterial.InvestigationsAs previously disclosed, in November 2004, the Company was advised by the staff of the
Securities and Exchange Commission (SEC) that it was commencing an informal inquiry concerning
Vioxx.On January 28, 2005, the Company announced that it received notice that the SEC issued a
formal notice of investigation. Also, the Company has received subpoenas from the U.S.
Department of Justice (the DOJ) requesting information related to the Companys research,
marketing and selling activities with respect to Vioxxin a federal health care investigation
under criminal statutes. In addition, as previously disclosed, investigations are being
conducted by local authorities in certain cities in Europe in order to determine whether any
criminal charges should be brought concerning Vioxx. The Company is cooperating with these
governmental entities in their respective investigations (the VioxxInvestigations). The
Company cannot predict the outcome of these inquiries; however, they could result in potential
civil and/or criminal dispositions.As previously disclosed, the Company has received a number of Civil Investigative Demands
(CID) from a group of Attorneys General from 31 states and the District of Columbia who are
investigating whether the Company violated state consumer protection laws when marketing Vioxx.
The Company is cooperating with the Attorneys General in responding to the CIDs.In addition, the Company received a subpoena in September 2006 from the State of California
Attorney General seeking documents and information related to the placement of Vioxxon
Californias Medi-Cal formulary. The Company is cooperating with the Attorney General in
responding to the subpoena.ReservesThe Company currently anticipates that a number of VioxxProduct Liability Lawsuits will be
tried throughout 2007 and 2008. At this time, the Company cannot predict the timing of any
trials in the VioxxShareholder 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 or the VioxxInvestigations, including for
those cases in which verdicts or judgments have been entered against the Company, and are now in
post-verdict proceedings or on appeal. In each of those cases the Company believes it has
strong points to raise on appeal and therefore that unfavorable outcomes in such cases are not
probable. Unfavorable outcomes in the VioxxLitigation (as defined below) could have a material
adverse effect on the Companys financial position, liquidity and results of operations.Legal defense costs expected to be incurred in connection with a loss contingency are accrued
when probable and reasonably estimable. As of December 31, 2006, the Company had a reserve of
$858 million solely for its future legal defense costs related to the VioxxLitigation.During the first six months of 2007, the Company spent approximately $258 million in the
aggregate in legal defense costs worldwide, including $137 million in the second quarter,
related to (i) the VioxxProduct Liability Lawsuits, (ii) the VioxxShareholder Lawsuits, (iii)
the VioxxForeign Lawsuits, and (iv) the VioxxInvestigations (collectively, the Vioxx
Litigation). In the second quarter of 2007, the Company recorded a charge of $210 million, to
increase the reserve solely for its future legal defense costs related to the VioxxLitigation
to $810 million at June 30, 2007.Some of the significant factors considered in the establishment and ongoing review of the
reserve for the Vioxxlegal defense costs were as follows: the actual costs incurred by the
Company; the development of the Companys legal defense strategy and structure in light of the
scope of the VioxxLitigation; the number of cases being brought against the Company; the costs
and outcomes of completed trials and the most current information regarding anticipated timing,
progression, and related costs of pre-trial activities and trials in the VioxxProduct Liability
Lawsuits. Events
such as scheduled trials, that are expected to occur throughout 2007 and 2008, and the inherent
inability to predict the ultimate outcomes of such trials, limit the Companys ability to
reasonably estimate its legal costs beyond the end of 2008. While the Company does not
anticipate that it will need to increase the reserve every quarter, the Company will continue to
monitor its legal defense costs and review the adequacy of the associated reserves and may
determine to increase its reserves for legal defense costs at any time in the future if, based
upon the factors set forth, it believes it would be appropriate to do so.
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Notes
to Consolidated Financial Statements (unaudited)
 Other Product Liability LitigationAs previously disclosed, the Company is a defendant in product liability lawsuits in the United
States involving Fosamax(the FosamaxLitigation). As of June 30, 2007, 225 cases, which
include approximately 700 plaintiff groups, had been filed against Merck in either federal or
state court, including 5 cases which seek class action certification, as well as damages and
medical monitoring. In these actions, plaintiffs allege, among other things, that they have
suffered osteonecrosis of the jaw, generally subsequent to invasive dental procedures such as
tooth extraction or dental implants, and/or delayed healing, in association with the use of
Fosamax. On August 16, 2006, the JPML ordered that the Fosamaxproduct liability cases pending
in federal courts nationwide should be transferred and consolidated into one multidistrict
litigation (the FosamaxMDL) for coordinated pre-trial proceedings. The FosamaxMDL has been
transferred to Judge John Keenan in the United States District Court for the Southern District
of New York. As a result of the JPML order, over 190 of the cases are before Judge Keenan.
Judge Keenan has issued a Case Management Order setting forth a schedule governing the
proceedings which focuses primarily upon resolving the class action certification motions in
2007. The Company intends to defend against these lawsuits.As of December 31, 2006, the Company established a reserve of approximately $48 million solely
for its future legal defense costs for the FosamaxLitigation through 2008. Spending in the
first six months of 2007 was not significant. Some of the significant factors considered in the
establishment of the reserve for the FosamaxLitigation legal defense costs were as follows: the
actual costs incurred by the Company thus far; the development of the Companys legal defense
strategy and structure in light of the creation of the FosamaxMDL; the number of cases being
brought against the Company; and the anticipated timing, progression, and related costs of
pre-trial activities in the FosamaxLitigation. The Company will continue to monitor its legal
defense costs and review the adequacy of the associated reserves and may determine to increase
its reserves for legal defense costs at any time in the future if, based upon the factors set
forth, it believes it would be appropriate to do so. Due to the uncertain nature of litigation,
the Company is unable to estimate its costs beyond the end of 2008. The Company has not
established any reserves for any potential liability relating to the FosamaxLitigation.
Unfavorable outcomes in the FosamaxLitigation could have a material adverse effect on the
Companys financial position, liquidity and results of operations.Governmental ProceedingsAs previously disclosed, the Company has received a subpoena from the DOJ in connection with its
investigation of the Companys marketing and selling activities, including nominal pricing
programs and samples. The Company has also reported that it has received a CID from the
Attorney General of Texas regarding the Companys marketing and selling activities relating to
Texas. As previously disclosed, the Company received another CID from the Attorney General of
Texas asking for additional information regarding the Companys marketing and selling activities
related to Texas, including with respect to certain of its nominal pricing programs and samples.
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. In November 2004, the Company
received a letter request from the DOJ in connection with its investigation of the Companys
pricing of Pepcid.The Company is cooperating with all of these investigations. The Company cannot predict the
outcome of these investigations; however, it is possible that 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, state or foreign regulators or
authorities may seek information about practices in the pharmaceutical industry or the Companys
business practices in inquiries other than the investigations discussed in this section. It is
not feasible to predict the outcome of any such inquiries.Other LitigationAs previously disclosed, on August 20, 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 shareholder derivative action 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. Plaintiffs appealed the decision. On December 15,
2005, the U.S. Court of Appeals for the Third Circuit upheld most of the District Courts
decision dismissing the suit, and sent the issue of
whether the Companys Board of Directors properly refused the shareholder demand relating to the
Companys treatment of retail co-payments back to the District Court for reconsideration under a
different legal standard. Plaintiffs moved to remand their action to state court on August 18,
2006, and the District Court granted that motion on February 1, 2007. On July 30, 2007, the
Superior Court of New Jersey, Chancery Division, Hunterdon County, granted a motion by the
Company, Medco Health, and certain officers and directors for dismissal and summary judgment.
The entire complaint was dismissed with prejudice.
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Notes
to Consolidated Financial Statements (unaudited)
 8.
    
    Share-Based CompensationThe Company has share-based compensation plans under which employees, non-employee directors and
employees of certain of the Companys equity method investees may be granted options to purchase
shares of Company common stock at the fair market value at the time of grant. In addition to
stock options, the Company grants performance share units (PSUs) and restricted stock units
(RSUs) to certain management-level employees. The Company recognizes the fair value of
share-based compensation in net income on a straight-line basis over the requisite service
period.The following table provides amounts of share-based compensation cost recorded in the
Consolidated Statement of Income:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,($ in millions)
    
    2007
    
    2006
    
    2007
    
    2006Pre-tax share-based compensation expense
    
    $
    81.2
    
    
    $
    61.0
    
    
    $
    178.2
    
    
    $
    182.3Income tax benefits
    
    
    (25.9
    )
    
    
    (19.0
    )
    
    
    (56.3
    )
    
    
    (56.3
    )Total share-based compensation expense, net of tax
    
    $
    55.3
    
    
    $
    42.0
    
    
    $
    121.9
    
    
    $
    126.0
 During the first half of 2007 and 2006, the Company granted 32.0 million options and 29.6
million options, respectively, related to its annual grant and other grants. The weighted
average fair value of options granted for the first half of 2007 and 2006 was $9.12 and $7.09
per option, respectively, and was determined using the following assumptions:
 Six Months EndedJune 30,2007
    
    2006Expected dividend yield
    
    
    3.4
    %
    
    
    4.5
    %Risk-free interest rate
    
    
    4.4
    %
    
    
    5.0
    %Expected volatility
    
    
    24.4
    %
    
    
    27.1
    %Expected life (years)
    
    
    5.7
    
    
    
    5.9
 At June 30, 2007, there was $485.6 million of total pre-tax unrecognized compensation expense
related to nonvested stock options, RSU and PSU awards which will be recognized over a weighted
average period of 2.3 years. For segment reporting, share-based compensation costs are
unallocated expenses.
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##### Table of Contents



Notes
to Consolidated Financial Statements (unaudited)
 
 9.
    
    Pension and Other Postretirement Benefit PlansThe 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:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,($ in millions)
    
    2007
    
    2006
    
    2007
    
    2006Service cost
    
    $
    92.9
    
    
    $
    90.3
    
    
    $
    185.0
    
    
    $
    180.3Interest cost
    
    
    92.6
    
    
    
    85.3
    
    
    
    184.6
    
    
    
    170.1Expected return on plan assets
    
    
    (122.2
    )
    
    
    (109.3
    )
    
    
    (243.6
    )
    
    
    (217.3
    )Net amortization
    
    
    34.3
    
    
    
    42.5
    
    
    
    68.5
    
    
    
    84.9Termination benefits
    
    
    8.9
    
    
    
    2.7
    
    
    
    16.0
    
    
    
    16.2Curtailments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.2$
    106.5
    
    
    $
    111.5
    
    
    $
    210.5
    
    
    $
    234.4
 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 benefit
plans. The net cost of such plans consisted of the following components:
 Three Months Ended
    

Six Months EndedJune 30,
    
    June 30,($ in millions)
    
    2007
    
    2006
    
    2007
    
    2006Service cost
    
    $
    21.2
    
    
    $
    20.7
    
    
    $
    42.3
    
    
    $
    41.9Interest cost
    
    
    26.0
    
    
    
    24.8
    
    
    
    51.9
    
    
    
    50.2Expected return on plan assets
    
    
    (30.3
    )
    
    
    (28.2
    )
    
    
    (60.6
    )
    
    
    (56.4
    )Net amortization
    
    
    (2.5
    )
    
    
    0.8
    
    
    
    (5.0
    )
    
    
    1.8Termination benefits
    
    
    2.6
    
    
    
    0.8
    
    
    
    3.5
    
    
    
    2.2Curtailments
    
    
    (3.9
    )
    
    
    
    
    
    
    (3.9
    )
    
    
    $
    13.1
    
    
    $
    18.9
    
    
    $
    28.2
    
    
    $
    39.7
 In connection with restructuring actions (see Note 2), the Company recorded termination charges
for the three and six months ended June 30, 2007 and 2006 on its pension and other
postretirement benefit plans related to expanded eligibility for certain employees exiting the
Company. Also, in connection with these restructuring actions, the Company recorded curtailment
gains on its other postretirement benefit plans for the three and six months ended June 30,
2007, and curtailment losses on its pension plans for the six months ended June 30, 2006.10.
    
    Other (Income) Expense, NetOther (income) expense, net, consisted of:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,($ in millions)
    
    2007
    
    2006
    
    2007
    
    2006Interest income
    
    $
    (172.3
    )
    
    $
    (187.9
    )
    
    $
    (354.0
    )
    
    $
    (369.6
    )Interest expense
    
    
    103.3
    
    
    
    91.9
    
    
    
    205.7
    
    
    
    190.1Exchange (gains) losses
    
    
    (12.0
    )
    
    
    7.4
    
    
    
    (31.6
    )
    
    
    7.0Minority interests
    
    
    30.8
    
    
    
    30.0
    
    
    
    61.4
    
    
    
    59.9Other, net
    
    
    (33.8
    )
    
    
    (11.5
    )
    
    
    (221.7
    )
    
    
    (58.1
    )$
    (84.0
    )
    
    $
    (70.1
    )
    
    $
    (340.2
    )
    
    $
    (170.7
    )
 The increase in Other, net for the six months ended June 30, 2007, primarily reflects the
favorable impact of gains on sales of assets and product divestitures. Interest paid for the
six months ended June 30, 2007 and 2006 was $223.6 million and $220.3 million, respectively.
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##### Table of Contents



Notes
to Consolidated Financial Statements (unaudited)
 11.
    
    Taxes on IncomeOn January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109,(FIN 48). FIN
48 prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return.
FIN 48 requires that the Company determine whether the benefits of tax positions are more likely
than not of being sustained upon audit based on the technical merits of the tax position. For
tax positions that are more likely than not of being sustained upon audit, the Company
recognizes the largest amount of the benefit that is greater than 50% likely of being realized
upon ultimate settlement in the financial statements. For tax positions that are not more
likely than not of being sustained upon audit, the Company does not recognize any portion of the
benefit in the financial statements. As a result of the implementation of FIN 48, the Company
recognized an $81 million decrease in its existing liability for unrecognized tax benefits, with
a corresponding increase to the January 1, 2007 Retained earnings balance.As of January 1, 2007, after the implementation of FIN 48, the Companys liability for
unrecognized tax benefits was $5.01 billion, excluding liabilities for interest and penalties.
If the Company were to recognize these benefits, the effective tax rate would reflect a
favorable net impact of $3.95 billion. In addition, at January 1, 2007, liabilities for accrued
interest and penalties relating to the unrecognized tax benefits totaled $2.40 billion. As of
June 30, 2007, the Companys Consolidated Balance Sheet reflects a liability for unrecognized
tax benefits of $3.50 billion. If the Company were to recognize these benefits, the effective
tax rate would reflect a favorable net impact of $2.45 billion. Accrued interest and penalties
included in the Consolidated Balance Sheet were $1.61 billion as of June 30, 2007. The declines
from January 1, 2007 were primarily due to the settlement with the Internal Revenue Service
(IRS) discussed below.The Company recognizes interest and penalties associated with uncertain tax positions as a
component of Taxes on Income in the Consolidated Statement of Income.As previously disclosed, the IRS has examined the Companys tax returns for the years 1993 to
2001 and issued notices of deficiency with respect to a partnership transaction entered into in
1993, and two minority interest equity financings entered into in 1995 and 2000, respectively.
On February 13, 2007, the Company entered into closing agreements with the IRS covering several
specific items, including the 1993 partnership transaction and the minority interest financings.
The closing agreements effectively closed the examination of the Companys tax returns for the
period 1993 through 2001 resulting in a settlement of all open tax matters for these years.
Under the terms of the settlement, the Company made an aggregate payment of $2.79 billion in
February 2007. This payment will be offset during 2007 by (i) a tax refund of $165 million for
amounts previously paid for these matters and (ii) a federal tax benefit of approximately $360
million related to interest included in the payment, resulting in a net cash cost to the Company
of approximately $2.3 billion. The impact for years subsequent to 2001 of the partnership
transaction and the minority interest equity financings was included in the settlement although
those years remain open in all other respects. The settlement with the IRS did not have a
material impact on the Companys results of operations in 2007 as these amounts had been
previously provided for.The Company must report the results of the IRS adjustments for the years 1993 through 2001 to
various state tax authorities. It is estimated that this will result in additional tax and
interest payments of $80 million and $120 million, respectively, over the remainder of 2007, and
an equivalent reduction in the balances of unrecognized tax benefits and accrued interest
reflected in the Consolidated Balance Sheet at June 30, 2007.It is anticipated that the amount of unrecognized tax benefits will change in the next 12 months
for items in addition to the state reporting of the IRS settlement; however these changes are
not expected to have a significant impact on the results of operations, cash flows or the
financial position of the Company.As previously disclosed, Mercks Canadian tax returns for the year 1998 through 2004 are being
examined by the Canada Revenue Agency (CRA). In October 2006, the CRA issued the Company a
notice of reassessment containing adjustments related to certain intercompany pricing matters,
which result in additional Canadian and provincial tax due of approximately $1.5 billion (U.S.
dollars) plus interest of approximately $585 million (U.S. dollars). The Company disagrees with
the positions taken by the CRA and believes they are without merit. The Company
intends to contest the assessment through the CRA appeals process and the courts if necessary.
In connection with the appeals process, during January 2007, the Company pledged collateral to a
financial institution which provided a Letter of Guarantee to the CRA representing a portion of
the tax and interest assessed. In May 2007, in connection with the same matters, the Company
pledged collateral to another financial institution which provided a financial guarantee to the
Quebec Ministry of Revenue. The collateral is included in Other Assets in the Consolidated
Balance
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##### Table of Contents



Notes
to Consolidated Financial Statements (unaudited)
 Sheet and totaled $1.2 billion at June 30, 2007. The Company has previously established
reserves for these matters. While the resolution of these matters may result in liabilities
higher or lower than the reserves, management believes that resolution of these matters 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 tax is due.In July 2007, the CRA notified the Company that it is in the process of proposing a penalty of
$160 million (U.S. dollars) in connection with this matter. The penalty is for failing to
provide information on a timely basis. The Company vigorously disagrees with the penalty and
feels it is inapplicable and that appropriate information was
provided on a timely basis. The Company is
pursuing all appropriate remedies to avoid having the penalty
assessed and was notified in early August 2007 that the CRA is
holding the imposition of a penalty in abeyance pending a review of the
Companys submissions as to the inapplicability of a penalty.In addition, in July 2007, the CRA proposed additional adjustments for 1999 relating to
another intercompany pricing matter. The adjustments would increase Canadian tax due by
another $20 million (U.S. dollars) plus $17 million (U.S.
dollars) of interest. It is possible that the CRA will propose
similar adjustments for later years. The Company
disagrees with the positions taken by CRA and believes they are without merit. The Company
intends to pursue all appropriate remedies to resolve this matter.The IRS will begin its examination of the Companys 2002 to 2004 federal income tax returns
shortly. In addition, various state and foreign tax examinations are in progress. Tax years
that remain subject to examination by major tax jurisdictions include Germany from 1999, Italy
and Japan from 2000 and the United Kingdom from 2002.12.
    
    Earnings Per ShareThe 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 Ended
    
    Six Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Average common shares outstanding
    
    
    2,167.0
    
    
    
    2,181.3
    
    
    
    2,166.9
    
    
    
    2,182.5Common shares issuable(1)
    
    
    22.2
    
    
    
    6.4
    
    
    
    16.5
    
    
    
    6.7Average common shares outstanding assuming dilution
    
    
    2,189.2
    
    
    
    2,187.7
    
    
    
    2,183.4
    
    
    
    2,189.2
 (1)
    
    Issuable primarily under share-based compensation plans.
 For the three and six months ended June 30, 2007, 151.5 million and 199.1 million,
respectively, and for both the three and six month periods ended June 30, 2006, 227.6 million of
common shares issuable under the Companys share-based compensation plans were excluded from the
computation of earnings per common share assuming dilution because the effect would have been
antidilutive.13.
    
    Comprehensive IncomeComprehensive income was $1,656.4 million and $3,432.4 million for the three and six months
ended June 30, 2007, respectively, and was $1,470.9 million and $2,986.3 million for the three
and six months ended June 30, 2006, respectively.14.
    
    Segment ReportingThe Companys operations are principally managed on a products basis and are comprised of two
reportable segments: the Pharmaceutical segment and the Vaccines segment.The Pharmaceutical segment includes human health pharmaceutical 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. Merck sells these human
health pharmaceutical products primarily to drug wholesalers and retailers, hospitals,
government agencies and managed health care providers such as health maintenance organizations
and other institutions. The Vaccines segment includes human health vaccine products marketed
either directly or through a joint venture. These products consist of preventive pediatric,
adolescent and adult vaccines, primarily administered at physician offices. Merck sells these
human health vaccines primarily to physicians,
 - 18 -




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##### Table of Contents



Notes
to Consolidated Financial Statements (unaudited)
 wholesalers, physician distributors and
government entities. The Vaccines segment includes the vast majority of the Companys vaccine
sales, but excludes certain sales of vaccines by non-U.S. subsidiaries managed by and included
in the Pharmaceutical segment. A large component of pediatric and adolescent vaccines is sold
to the U.S. Centers for Disease Control and Prevention Vaccines for Children program, which is
funded by the U.S. government.Other segments include other non-reportable human and animal health segments.Revenues and profits for these segments are as follows:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,($ in millions)
    
    2007
    
    2006
    
    2007
    
    2006Segment revenues:Pharmaceutical segment (1)
    
    $
    5,116.4
    
    
    $
    5,338.3
    
    
    $
    10,018.1
    
    
    $
    10,409.5Vaccines segment(1)
    
    
    929.0
    
    
    
    319.0
    
    
    
    1,732.9
    
    
    
    549.5Other segment revenues
    
    
    44.0
    
    
    
    42.9
    
    
    
    80.7
    
    
    
    77.0$
    6,089.4
    
    
    $
    5,700.2
    
    
    $
    11,831.7
    
    
    $
    11,036.0Segment profits:(2)Pharmaceutical segment
    
    $
    3,596.9
    
    
    $
    3,759.9
    
    
    $
    7,015.3
    
    
    $
    7,257.6Vaccines segment
    
    
    609.9
    
    
    
    149.7
    
    
    
    1,101.5
    
    
    
    265.3Other segment profits
    
    
    128.4
    
    
    
    106.9
    
    
    
    282.5
    
    
    
    240.2$
    4,335.2
    
    
    $
    4,016.5
    
    
    $
    8,399.3
    
    
    $
    7,763.1
 (1)
    
    In accordance with segment reporting requirements, Vaccines segment
revenues exclude $113.4 million and $30.1 million for the second quarter of 2007 and 2006,
respectively, and $212.4 million and $71.1 million for the first six months of 2007 and
2006, respectively, of vaccines sales by certain non-U.S. subsidiaries managed by and
included in the Pharmaceutical segment.(2)
    
    Includes the majority of Equity income from affiliates.
 A reconciliation of total segment revenues to consolidated sales is as follows:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,($ in millions)
    
    2007
    
    2006
    
    2007
    
    2006Segment revenues
    
    $
    6,089.4
    
    
    $
    5,700.2
    
    
    $
    11,831.7
    
    
    $
    11,036.0Other revenues
    
    
    22.0
    
    
    
    71.5
    
    
    
    49.0
    
    
    
    145.5$
    6,111.4
    
    
    $
    5,771.7
    
    
    $
    11,880.7
    
    
    $
    11,181.5
 Other revenues are primarily comprised of miscellaneous corporate revenues, sales related to
divested products or businesses and other supply sales not included in segment results.
 - 19 -




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##### Table of Contents



Notes
to Consolidated Financial Statements (unaudited)
 Sales (1) of the Companys products were as follows:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,($ in millions)
    
    2007
    
    2006
    
    2007
    
    2006Pharmaceutical:Singulair
    
    $
    1,091.8
    
    
    $
    949.8
    
    
    $
    2,093.8
    
    
    $
    1,751.2Cozaar/Hyzaar
    
    
    847.2
    
    
    
    783.7
    
    
    
    1,645.2
    
    
    
    1,484.8Fosamax
    
    
    785.6
    
    
    
    820.9
    
    
    
    1,527.8
    
    
    
    1,574.4Zocor
    
    
    178.0
    
    
    
    989.6
    
    
    
    436.4
    
    
    
    2,053.1Primaxin
    
    
    185.7
    
    
    
    172.1
    
    
    
    382.8
    
    
    
    341.7Cosopt/Trusopt
    
    
    192.0
    
    
    
    175.4
    
    
    
    378.1
    
    
    
    327.0Cancidas
    
    
    134.0
    
    
    
    123.8
    
    
    
    268.0
    
    
    
    270.0Vasotec/Vaseretic
    
    
    127.5
    
    
    
    140.2
    
    
    
    249.1
    
    
    
    276.3Proscar
    
    
    113.1
    
    
    
    183.0
    
    
    
    238.4
    
    
    
    371.2Januvia
    
    
    143.6
    
    
    
    
    
    
    
    230.7
    
    
    
    Maxalt
    
    
    109.0
    
    
    
    97.2
    
    
    
    216.4
    
    
    
    190.1Propecia
    
    
    98.3
    
    
    
    84.8
    
    
    
    193.6
    
    
    
    160.1Arcoxia
    
    
    88.7
    
    
    
    66.1
    
    
    
    169.1
    
    
    
    125.5Crixivan/Stocrin
    
    
    75.3
    
    
    
    74.1
    
    
    
    157.6
    
    
    
    155.7Janumet
    
    
    24.3
    
    
    
    
    
    
    
    24.3
    
    
    
    Other pharmaceutical(2)
    
    
    808.8
    
    
    
    647.4
    
    
    
    1,594.4
    
    
    
    1,257.25,002.9
    
    
    
    5,308.1
    
    
    
    9,805.7
    
    
    
    10,338.3Vaccines:(3)Gardasil
    
    
    357.5
    
    
    
    9.6
    
    
    
    723.0
    
    
    
    9.6RotaTeq
    
    
    119.1
    
    
    
    30.7
    
    
    
    204.1
    
    
    
    33.0Zostavax
    
    
    46.8
    
    
    
    1.2
    
    
    
    89.5
    
    
    
    1.2ProQuad/M-M-R II/Varivax
    
    
    343.5
    
    
    
    181.8
    
    
    
    589.6
    
    
    
    341.1Hepatitis vaccines
    
    
    79.6
    
    
    
    59.1
    
    
    
    151.1
    
    
    
    112.6Other vaccines
    
    
    95.9
    
    
    
    66.7
    
    
    
    188.0
    
    
    
    123.11,042.4
    
    
    
    349.1
    
    
    
    1,945.3
    
    
    
    620.6Other (4)
    
    
    66.1
    
    
    
    114.5
    
    
    
    129.7
    
    
    
    222.6$
    6,111.4
    
    
    $
    5,771.7
    
    
    $
    11,880.7
    
    
    $
    11,181.5
 (1)
    
    Presented net of discounts and returns.(2)
    
    Other pharmaceutical primarily includes sales of other human
pharmaceutical products and revenue from the Companys relationship with AstraZeneca LP
primarily relating to sales ofNexium andPrilosec. Revenue from AstraZeneca LP was $524.4
million and $417.9 million for the second quarter of 2007 and 2006, respectively, and was
$1,021.9 million and $798.0 million for the first six months of 2007 and 2006,
respectively.(3)
    
    These amounts do not reflect sales of vaccines sold in most major
European markets through the Companys joint venture, Sanofi Pasteur MSD, the results of
which are reflected in Equity income from affiliates. These amounts do reflect supply
sales to Sanofi Pasteur MSD.(4)
    
    Other primarily includes other pharmaceutical and animal health joint
venture supply sales and other miscellaneous revenues.
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##### Table of Contents



Notes
to Consolidated Financial Statements (unaudited)
 A reconciliation of segment profits to Income Before Taxes is as follows:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,($ in millions)
    
    2007
    
    2006
    
    2007
    
    2006Segment profits
    
    $
    4,335.2
    
    
    $
    4,016.5
    
    
    $
    8,399.3
    
    
    $
    7,763.1Other profits
    
    
    29.8
    
    
    
    47.9
    
    
    
    30.0
    
    
    
    106.1Adjustments
    
    
    89.3
    
    
    
    109.2
    
    
    
    172.2
    
    
    
    265.2Unallocated:Interest income
    
    
    172.3
    
    
    
    187.9
    
    
    
    354.0
    
    
    
    369.6Interest expense
    
    
    (103.3
    )
    
    
    (91.9
    )
    
    
    (205.7
    )
    
    
    (190.1
    )Equity income from affiliates
    
    
    85.0
    
    
    
    68.4
    
    
    
    132.7
    
    
    
    137.9Depreciation and amortization
    
    
    (464.1
    )
    
    
    (495.6
    )
    
    
    (930.5
    )
    
    
    (1,078.4
    )Research and development
    
    
    (1,030.5
    )
    
    
    (1,172.5
    )
    
    
    (2,060.6
    )
    
    
    (2,114.5
    )Other expenses, net
    
    
    (881.5
    )
    
    
    (561.6
    )
    
    
    (1,404.8
    )
    
    
    (1,180.2
    )$
    2,232.2
    
    
    $
    2,108.3
    
    
    $
    4,486.6
    
    
    $
    4,078.7
 Segment profits are comprised of segment revenues less certain elements of materials and
production costs and operating expenses, including the majority of equity income from affiliates
and components of 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.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, includes expenses
from corporate and manufacturing cost centers and other miscellaneous income (expense), net.
 - 21 -




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Management
    Operating Results
 Sales
 Gardasil RotaTeq Varivax Singulair Januvia Nexium Cozaar/Hyzaar* Zocor Proscar Zocor Proscar
 
 *
    
    Cozaarand Hyzaarare registered trademarks of E.I. DuPont de Nemours & Company,
Wilmington, Delaware.
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##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,($ in millions)
    
    2007
    
    2006
    
    2007
    
    2006Pharmaceutical:Singulair
    
    $
    1,091.8
    
    
    $
    949.8
    
    
    $
    2,093.8
    
    
    $
    1,751.2Cozaar/Hyzaar
    
    
    847.2
    
    
    
    783.7
    
    
    
    1,645.2
    
    
    
    1,484.8Fosamax
    
    
    785.6
    
    
    
    820.9
    
    
    
    1,527.8
    
    
    
    1,574.4Zocor
    
    
    178.0
    
    
    
    989.6
    
    
    
    436.4
    
    
    
    2,053.1Primaxin
    
    
    185.7
    
    
    
    172.1
    
    
    
    382.8
    
    
    
    341.7Cosopt/Trusopt
    
    
    192.0
    
    
    
    175.4
    
    
    
    378.1
    
    
    
    327.0Cancidas
    
    
    134.0
    
    
    
    123.8
    
    
    
    268.0
    
    
    
    270.0Vasotec/Vaseretic
    
    
    127.5
    
    
    
    140.2
    
    
    
    249.1
    
    
    
    276.3Proscar
    
    
    113.1
    
    
    
    183.0
    
    
    
    238.4
    
    
    
    371.2Januvia
    
    
    143.6
    
    
    
    
    
    
    
    230.7
    
    
    
    Maxalt
    
    
    109.0
    
    
    
    97.2
    
    
    
    216.4
    
    
    
    190.1Propecia
    
    
    98.3
    
    
    
    84.8
    
    
    
    193.6
    
    
    
    160.1Arcoxia
    
    
    88.7
    
    
    
    66.1
    
    
    
    169.1
    
    
    
    125.5Crixivan/Stocrin
    
    
    75.3
    
    
    
    74.1
    
    
    
    157.6
    
    
    
    155.7Janumet
    
    
    24.3
    
    
    
    
    
    
    
    24.3
    
    
    
    Other pharmaceutical(1)
    
    
    808.8
    
    
    
    647.4
    
    
    
    1,594.4
    
    
    
    1,257.25,002.9
    
    
    
    5,308.1
    
    
    
    9,805.7
    
    
    
    10,338.3Vaccines:(2)Gardasil
    
    
    357.5
    
    
    
    9.6
    
    
    
    723.0
    
    
    
    9.6RotaTeq
    
    
    119.1
    
    
    
    30.7
    
    
    
    204.1
    
    
    
    33.0Zostavax
    
    
    46.8
    
    
    
    1.2
    
    
    
    89.5
    
    
    
    1.2ProQuad/M-M-R II/Varivax
    
    
    343.5
    
    
    
    181.8
    
    
    
    589.6
    
    
    
    341.1Hepatitis
    
    
    79.6
    
    
    
    59.1
    
    
    
    151.1
    
    
    
    112.6Other vaccines
    
    
    95.9
    
    
    
    66.7
    
    
    
    188.0
    
    
    
    123.11,042.4
    
    
    
    349.1
    
    
    
    1,945.3
    
    
    
    620.6Other (3)
    
    
    66.1
    
    
    
    114.5
    
    
    
    129.7
    
    
    
    222.6$
    6,111.4
    
    
    $
    5,771.7
    
    
    $
    11,880.7
    
    
    $
    11,181.5
 (1)
    
    Other pharmaceutical primarily includes sales of other human pharmaceutical
products and revenue from the Companys relationship with AZLP primarily relating to sales of
Nexium andPrilosec. Revenue from AZLP was $524.4 million and $417.9 million for the second
quarter of 2007 and 2006, respectively, and was $1,021.9 million and $798.0 million for the
first six months of 2007 and 2006, respectively.(2)
    
    These amounts do not reflect sales of vaccines sold in most major
European markets through the Companys joint venture, Sanofi Pasteur MSD, the results of which
are reflected in Equity income from affiliates. These amounts do reflect supply sales to
Sanofi Pasteur MSD.(3)
    
    Other primarily includes other pharmaceutical and animal health joint
venture supply sales and other miscellaneous revenues.
 Zocor
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##### Table of Contents



Segment Revenues
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,($ in millions)
    
    2007
    
    2006
    
    2007
    
    2006Pharmaceutical segment (1)
    
    $
    5,116.4
    
    
    $
    5,338.3
    
    
    $
    10,018.1
    
    
    $
    10,409.5Vaccines segment (1)
    
    
    929.0
    
    
    
    319.0
    
    
    
    1,732.9
    
    
    
    549.5Other segment (2)
    
    
    44.0
    
    
    
    42.9
    
    
    
    80.7
    
    
    
    77.0Other (3)
    
    
    22.0
    
    
    
    71.5
    
    
    
    49.0
    
    
    
    145.5Total revenues
    
    $
    6,111.4
    
    
    $
    5,771.7
    
    
    $
    11,880.7
    
    
    $
    11,181.5
 (1)
    
    In accordance with segment reporting requirements, Vaccines segment
revenues exclude $113.4 million and $30.1 million for the second quarter of 2007 and 2006,
respectively, and $212.4 million and $71.1 million for the first six months of 2007 and 2006,
respectively, of vaccines sales by certain non-U.S. subsidiaries managed by and included in
the Pharmaceutical segment.(2)
    
    Includes other non-reportable human and animal health segments.(3)
    
    Other revenues are primarily comprised of miscellaneous corporate revenues, sales
related to divested products or businesses and other supply sales not included in segment
results.
 Pharmaceutical Segment Revenues
 Zocor Proscar Singulair Januvia Cozaar/Hyzaar, Nexium .
 Singulair Singulair
 Singulair Singulair
 Cozaar Hyzaar Cozaar Hyzaar
 Fosamax Fosamax Plus D Fosavance Fosamac Fosamax Fosamax Plus D Fosamax Fosamax Plus D Fosamax Fosamax Plus D Fosamax Fosamax Plus D
 Zocor Zocor
 Januvia Januvia Januvia
 th Januvia
 - 24 -




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##### Table of Contents



Januvia Januvia
 Januvia Januvia Januvia
 Janumet Januvia Janumet Janumet
 Cosopt Arcoxia Primaxin, , Propecia Maxalt
 Arcoxia Arcoxia Arcoxia Arcoxia Arcoxia
 Stocrin Stocrin Stocrin Stocrin Stocrin Stocrin
 Vaccines Segment Revenues
    - 25 -




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##### Table of Contents



Gardasil, RotaTeq Varivax ProQuad
 Gardasil Gardasil Gardasil
 Gardasil
 RotaTeq RotaTeq RotaTeq
 Gardasil RotaTeq
 ProQuad Varivax M-M-R II ProQuad Varivax Varivax
 Zostavax Zostavax
 Costs, Expenses and Other
  - 26 -




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##### Table of Contents



Zocor
 Vioxx
  Emend Emend Emend
  Isentress
 - 27 -




---



##### Table of Contents



Isentress Isentress Isentress Isentress Isentress Isentress
 Isentress Isentress Isentress Isentress Isentress
  1
 ex-U.S.
 - 28 -




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##### Table of Contents



Phase I

Alzheimers Disease
V950
Atherosclerosis
MK-6213
Cancer
MK-0429
MK-0646*
MK-0752
MK-2461
MK-4721*
V930
Cardiovascular
MK-0448
MK-2323*
MK-8141*
Diabetes
MK-0941
MK-1642

Phase I

Infectious Disease
MK-0608
MK-4965
MK-7009
MK-8122*
V710**
V512
Insomnia
MK-8998
Ophthalmic
MK-0140
Osteoporosis
MK-0773
Parkinsons Disease
MK-0657
Psychiatric Disease
MK-0249
MK-2637
MK-5757 Phase II

Alzheimers Disease
MK-0249
Atherosclerosis
MK-0859
MK-0633
Cancer
MK-0457*
MK-0822
Diabetes
MK-0533
MK-0893
HIV
V520(1)
HPV
V502***
Infectious Disease
V419*
Ophthalmic
SIRNA-027(2)
Osteoporosis
MK-0822
Overactive Bladder
MK-0634
Pain
MK-2295*(3)
Respiratory Disease
MK-0633
Stroke
MK-0724*
 Phase III
 Atherosclerosis
MK-0524A
(ER niacin/
laropiprant)
MK-0524B
Obesity
MK-0364
(taranabant)
Migraine
MK-0974
Cancer
MK-8669*(4)
(AP23573) Under FDA Review
 HIV
Isentress Approvable

CINV
Emend For Injection
2007 U.S. Approvals

Diabetes
Janumet *
    
    Licensed, alliance, or acquisition**
    
    Antigen licensed from Intercell AG***
    
    Multiple licenses, including CSL, Ltd.(1)
    
    V# correction; no change in program(2)
    
    Clinical development program conducted by Allergan, Inc.(3)
    
    Proof-of-Concept Molecule(4)
    
    It is expected that AP23573 will enter into Phase III clinical development for
the treatment of metastatic sarcomas beginning in third quarter 2007. Arcoxia
  Vytorin Zetia Selected Joint Venture and Affiliate
Information
  - 29 -




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##### Table of Contents



Segment Profits
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,($ in millions)
    
    2007
    
    2006
    
    2007
    
    2006Pharmaceutical segment
    
    $
    3,596.9
    
    
    $
    3,759.9
    
    
    $
    7,015.3
    
    
    $
    7,257.6Vaccines segment
    
    
    609.9
    
    
    
    149.7
    
    
    
    1,101.5
    
    
    
    265.3Other segment
    
    
    128.4
    
    
    
    106.9
    
    
    
    282.5
    
    
    
    240.2Other
    
    
    (2,103.0
    )
    
    
    (1,908.2
    )
    
    
    (3,912.7
    )
    
    
    (3,684.4
    )Income before income taxes
    
    $
    2,232.2
    
    
    $
    2,108.3
    
    
    $
    4,486.6
    
    
    $
    4,078.7
  Zocor Proscar,
   Vioxx
 Selected Joint Venture and Affiliate Information
 Zetia Vytorin Zetia Ezetrol Vytorin Inegy
 - 30 -




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##### Table of Contents



Vytorin
 Gardasil
  Liquidity and Capital Resources
 June 30,
    
    December 31,($ in millions)
    
    2007
    
    2006Cash and investments
    
    $
    13,147.0
    
    
    $
    16,501.2Working capital
    
    $
    2,154.7
    
    
    $
    2,507.5Total debt to total liabilities and equity
    
    
    14.3
    %
    
    
    15.3
    %
   Accounting for Uncertainty in Income Taxes  an interpretation of
FASB Statement No. 109
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Critical Accounting Policies
  - 32 -




---



##### Table of Contents



Recently Issued Accounting Standards
 Accounting for Advance Payments for Goods or Services Received for Use in Future Research
and Development Activities
 The Fair Value Option for Financial Assets and
Financial Liabilities, including an amendment of FASB Statement No. 115
 Fair Value Measurements
 Legal Proceedings
  Vioxx Litigation
 Product Liability Lawsuits
 Vioxx Vioxx Vioxx
 Vioxx
 Vioxx www.merck.com
 - 33 -




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##### Table of Contents



Vioxx
 Vioxx
 Vioxx
      Vioxx
  - 34 -




---



##### Table of Contents



Vioxx
  Vioxx Vioxx
 Vioxx
  Vioxx Vioxx
 Other Lawsuits
 Vioxx Vioxx Vioxx
 Vioxx Vioxx
 - 35 -




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##### Table of Contents



Vioxx
 Shareholder Lawsuits
 Vioxx Vioxx Vioxx Vioxx Vioxx
 Vioxx Vioxx
  Vioxx
 Vioxx Vioxx Vioxx Vioxx Vioxx
 International Lawsuits
 Vioxx Vioxx
 Additional Lawsuits
 Vioxx Vioxx Vioxx Vioxx
 - 36 -




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##### Table of Contents



Insurance
 Vioxx Vioxx Vioxx Vioxx Vioxx Vioxx Vioxx
 Vioxx Vioxx
 Investigations
 Vioxx. Vioxx Vioxx Vioxx
 Vioxx
 Vioxx
 Reserves
 Vioxx Vioxx Vioxx Vioxx Vioxx Vioxx Vioxx
 - 37 -




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##### Table of Contents



Vioxx
 Vioxx Vioxx Vioxx Vioxx Vioxx Vioxx
 Vioxx Vioxx Vioxx
 Other Product Liability Litigation
 Fosamax Fosamax Fosamax Fosamax Fosamax Fosamax
 Fosamax Fosamax Fosamax Fosamax Fosamax Fosamax
 Governmental Proceedings
 Pepcid.
 - 38 -




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##### Table of Contents



Vaccine Litigation
 M-M-R M-M-R M-M-R II
 Patent Litigation
 Fosamax, Prilosec, Propecia, Zetia, Singulair, Primaxin, Trusopt Cosopt Zetia Prilosec Nexium Prilosec. Fosamax Trusopt Cosopt Primaxin Prilosec Nexium
 Zetia Zetia Zetia
 Singulair
 Primaxin
  - 39 -




---



##### Table of Contents



Trusopt Cosopt Trusopt Cosopt Cosopt Trusopt Cosopt
  Other Litigation
   - 40 -




---



##### Table of Contents



Item 4. Controls and Procedures
   CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
   - 41 -




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##### Table of Contents



PART II   Other Information
 
 Item 1. Legal Proceedings
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   ($ in millions)Total Number
    
    Average Price
    
    Approximate Dollar Value of Sharesof Shares
    
    Paid Per
    
    That May Yet Be PurchasedPeriod
    
    Purchased(1)
    
    Share
    
    Under the Plans or Programs(1)April 1 - April 30, 2007
    
    
    1,633,000
    
    
    $
    48.69
    
    
    $
    6,203.5May 1 - May 31, 2007
    
    
    1,671,950
    
    
    $
    52.59
    
    
    $
    6,115.6June 1 - June 30, 2007
    
    
    1,591,488
    
    
    $
    50.35
    
    
    $
    6,035.5Total
    
    
    4,896,438
    
    
    $
    50.56
    
    
    $
    6,035.5
 (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 4. Submission of Matters to a Vote of Security Holders
  1.
    
    All of the following persons nominated were elected to serve as directors and received the
number of votes set opposite their respective names:
 Names
    
    For
    
    WithheldRichard T. Clark
    
    
    1,789,623,123
    
    
    
    52,231,140Johnnetta B. Cole
    
    
    1,698,078,553
    
    
    
    143,775,710William B. Harrison, Jr.
    
    
    1,797,656,560
    
    
    
    44,197,703William N. Kelley
    
    
    1,783,151,392
    
    
    
    58,702,871Rochelle B. Lazarus
    
    
    1,707,379,969
    
    
    
    134,474,294Thomas E. Shenk
    
    
    1,804,450,221
    
    
    
    37,404,042Anne M. Tatlock
    
    
    1,801,591,994
    
    
    
    40,262,269Samuel O. Thier
    
    
    1,790,032,685
    
    
    
    51,821,578Wendell P. Weeks
    
    
    1,709,335,630
    
    
    
    132,518,633Peter C. Wendell
    
    
    1,802,865,833
    
    
    
    38,988,430
 2.
    
    A proposal to ratify the appointment of independent registered public accounting firm for
2007 received 1,809,323,305 votes FOR and 13,551,558 votes AGAINST, with 18,979,401
abstentions.
 - 42 -




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##### Table of Contents



3.
    
    A proposal to amend the Restated Certificate of Incorporation to eliminate supermajority
voting requirements contained in the Restated Certificate of Incorporation received
1,805,276,612 votes FOR and 14,723,112 votes AGAINST, with 21,853,869 abstentions.4.
    
    A proposal to amend the Restated Certificate of Incorporation to eliminate supermajority
voting requirements imposed under New Jersey law on corporations organized before 1969
received 1,805,367,159 votes FOR and 14,398,675 votes AGAINST, with 22,088,275 abstentions.5.
    
    A proposal to amend the Restated Certificate of Incorporation to limit the size of the Board
to no more than 18 directors received 1,479,024,119 votes FOR and 33,321,800 votes AGAINST,
with 19,052,074 abstentions. This proposal did not pass because it required the affirmative
vote of at least 80% of the outstanding shares for approval.6.
    
    A proposal to amend the Restated Certificate of Incorporation to replace its cumulative
voting feature with a majority vote standard for the election of directors received
1,338,688,845 votes FOR and 172,362,447 votes AGAINST, with 20,346,512 abstentions.7.
    
    A stockholder proposal concerning publication of political contributions received 48,423,239
votes FOR and 1,203,651,055 votes AGAINST, with 279,323,306 abstentions and 310,456,663 broker
non-votes.8.
    
    A stockholder proposal concerning an advisory vote on executive compensation received
680,433,778 votes FOR and 702,305,124 votes AGAINST, with 148,622,580 abstentions and
310,492,780 broker non-votes.
 
 Item 6. Exhibits
 Number
    
    Description3.1
    
    Restated Certificate of Incorporation of Merck & Co., Inc. (May 17, 2007) 
Incorporated by reference to Current Report on Form 8-K dated May 17, 20073.2
    
    By-Laws of Merck & Co., Inc. (as amended effective May 31, 2007) 
Incorporated by reference to Current Report on Form 8-K dated May 31, 200710.1
    
    Offer Letter between Merck & Co., Inc. and Peter N. Kellogg, dated June 18, 2007
 Incorporated by reference to Current Report on Form 8-K dated June 28, 200712
    
    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
 - 43 -




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##### Table of Contents



Signatures
  MERCK & CO., INC.Date: August 8, 2007
    /s/ Bruce N. KuhlikBRUCE N. KUHLIKSenior Vice President and General CounselDate: August 8, 2007
    /s/ John CananJOHN CANANVice President, Controller - 44 -




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EXHIBIT INDEX
 Number
    
    Description3.1
    
    Restated Certificate of Incorporation of Merck & Co., Inc. (May 17, 2007) 
Incorporated by reference to Current Report on Form 8-K dated May 17, 20073.2
    
    By-Laws of Merck & Co., Inc. (as amended effective May 31, 2007) 
Incorporated by reference to Current Report on Form 8-K dated May 31, 200710.1
    
    Offer Letter between Merck & Co., Inc. and Peter N. Kellogg, dated June 18, 2007
 Incorporated by reference to Current Report on Form 8-K dated June 28, 200712
    
    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
 - 45 -