##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2005 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
 The number of shares of common stock outstanding as of the close of business on April 29, 2005: Class
    
    Number of Shares OutstandingCommon Stock
    
    2,203,128,785
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days. Yesþ   No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yesþ   No o




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Part I  Financial Information Item 1. Financial Statements MERCK & CO., INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENT OF INCOMETHREE MONTHS ENDED MARCH 31, 2005 AND 2004
(Unaudited, $ in millions except per share amounts) Three MonthsEnded March 312005
    
    
    2004Sales
    
    $
    5,362.2
    
    
    $
    5,630.8Costs, Expenses and OtherMaterials and production
    
    
    1,271.4
    
    
    
    1,148.2Marketing and administrative
    
    
    1,613.3
    
    
    
    1,611.4Research and development
    
    
    846.6
    
    
    
    996.3Equity income from affiliates
    
    
    (316.3
    )
    
    
    (194.7
    )Other (income) expense, net
    
    
    26.5
    
    
    
    (273.3
    )3,441.5
    
    
    
    3,287.9Income Before Taxes
    
    
    1,920.7
    
    
    
    2,342.9Taxes on Income
    
    
    550.6
    
    
    
    724.3Net Income
    
    $
    1,370.1
    
    
    $
    1,618.6Basic Earnings per Common Share
    
    $
    .62
    
    
    $
    .73Earnings per Common Share Assuming Dilution
    
    $
    .62
    
    
    $
    .73Dividends Declared per Common Share
    
    $
    .38
    
    
    $
    .37
 The accompanying notes are an integral part of this consolidated financial statement. - 1 -




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MERCK & CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETMARCH 31, 2005 AND DECEMBER 31, 2004
(Unaudited, $ in millions) March 31
    
    
    December 312005
    
    
    2004ASSETSCurrent AssetsCash and cash equivalents
    
    $
    2,389.6
    
    
    $
    2,878.8Short-term investments
    
    
    7,048.8
    
    
    
    4,211.1Accounts receivable
    
    
    3,798.1
    
    
    
    3,627.7Inventories
    
    
    1,756.6
    
    
    
    1,898.7Prepaid expenses and taxes
    
    
    766.9
    
    
    
    858.9Total current assets
    
    
    15,760.0
    
    
    
    13,475.2Investments
    
    
    4,811.6
    
    
    
    6,727.1Property, Plant and Equipment, at cost,
net of allowance for depreciation of
$8,370.1 in 2005 and $8,094.9 in 2004
    
    
    14,705.6
    
    
    
    14,713.7Goodwill
    
    
    1,085.7
    
    
    
    1,085.7Other Intangibles, net
    
    
    632.2
    
    
    
    679.2Other Assets
    
    
    6,122.0
    
    
    
    5,891.9$
    43,117.1
    
    
    $
    42,572.8LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesLoans payable and current portion of long-term debt
    
    $
    1,614.8
    
    
    $
    2,181.2Trade accounts payable
    
    
    570.7
    
    
    
    421.4Accrued and other current liabilities
    
    
    5,076.6
    
    
    
    5,288.1Income taxes payable
    
    
    2,801.5
    
    
    
    3,012.3Dividends payable
    
    
    839.1
    
    
    
    841.1Total current liabilities
    
    
    10,902.7
    
    
    
    11,744.1Long-Term Debt
    
    
    5,655.6
    
    
    
    4,691.5Deferred Income Taxes and Noncurrent Liabilities
    
    
    6,473.8
    
    
    
    6,442.1Minority Interests
    
    
    2,436.0
    
    
    
    2,406.9Stockholders EquityCommon stockAuthorized- 5,400,000,000 sharesIssued- 2,976,230,393 shares
    
    
    29.8
    
    
    
    29.8Other paid-in capital
    
    
    6,809.7
    
    
    
    6,869.8Retained earnings
    
    
    37,157.3
    
    
    
    36,626.3Accumulated other comprehensive (loss) income
    
    
    (72.9
    )
    
    
    (45.9
    )43,923.9
    
    
    
    43,480.0Less treasury stock, at cost770,826,493 shares  March 31, 2005767,591,491 shares  December 31, 2004
    
    
    26,274.9
    
    
    
    26,191.8Total stockholders equity
    
    
    17,649.0
    
    
    
    17,288.2$
    43,117.1
    
    
    $
    42,572.8
 The accompanying notes are an integral part of this consolidated financial statement. - 2 -




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MERCK & CO., INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENT OF CASH FLOWSTHREE MONTHS ENDED MARCH 31, 2005 AND 2004
(Unaudited, $ in millions) Three MonthsEnded March 312005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIESNet Income
    
    $
    1,370.1
    
    
    $
    1,618.6Adjustments to reconcile net income to cash provided from operations:Depreciation and amortization
    
    
    379.8
    
    
    
    348.2Deferred income taxes
    
    
    4.2
    
    
    
    (3.2
    )Other
    
    
    (7.0
    )
    
    
    (144.9
    )Net changes in assets and liabilities
    
    
    (407.7
    )
    
    
    (4.7
    )NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    1,339.4
    
    
    
    1,814.0CASH FLOWS FROM INVESTING ACTIVITIESCapital expenditures
    
    
    (343.2
    )
    
    
    (322.8
    )Purchase of securities, subsidiaries and other investments
    
    
    (20,334.5
    )
    
    
    (15,633.4
    )Proceeds from sale of securities, subsidiaries and other investments
    
    
    19,469.1
    
    
    
    15,590.4Other
    
    
    (0.3
    )
    
    
    (1.3
    )NET CASH USED BY INVESTING ACTIVITIES
    
    
    (1,208.9
    )
    
    
    (367.1
    )CASH FLOWS FROM FINANCING ACTIVITIESNet change in short-term borrowings
    
    
    (49.7
    )
    
    
    (314.9
    )Proceeds from issuance of debt
    
    
    1,000.0
    
    
    
    400.0Payments on debt
    
    
    (515.6
    )
    
    
    (3.9
    )Purchase of treasury stock
    
    
    (253.2
    )
    
    
    (227.9
    )Dividends paid to stockholders
    
    
    (841.1
    )
    
    
    (822.4
    )Other
    
    
    97.9
    
    
    
    85.9NET CASH USED BY FINANCING ACTIVITIES
    
    
    (561.7
    )
    
    
    (883.2
    )EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
    
    
    (58.0
    )
    
    
    (2.6
    )NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (489.2
    )
    
    
    561.1CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    
    
    2,878.8
    
    
    
    1,201.0CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    2,389.6
    
    
    $
    1,762.1
 The accompanying notes are an integral part of this consolidated financial statement. - 3 -




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Notes to Consolidated Financial Statements  1.
    The accompanying unaudited interim consolidated financial statements have been prepared
pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain
information and disclosures required by accounting principles generally accepted in the
United States for complete consolidated financial statements are not included herein. The
interim statements should be read in conjunction with the financial statements and notes
thereto included in the Companys latest Annual Report on Form 10-K.The results of operations of any interim period are not necessarily indicative of the results
of operations for the full year. In the Companys opinion, all adjustments necessary for a
fair presentation of these interim statements have been included and are of a normal and
recurring nature.Certain reclassifications have been made to prior year amounts to conform with current year
presentation.2.
    In September 2004, the Company announced a voluntary worldwide withdrawal of Vioxx, its
arthritis and acute pain medication. The Companys decision, which was effective
immediately, was based on new three-year data from a prospective, randomized,
placebo-controlled clinical trial, APPROVe (Adenomatous Polyp Prevention on Vioxx).In connection with the withdrawal, the Company recorded an unfavorable adjustment to net
income of $552.6 million, or $.25 per share, in the third quarter 2004. The adjustment to
pre-tax income was $726.2 million. Of this amount, $491.6 million related to estimated
customer returns of product previously sold and was recorded as a reduction of Sales, $93.2
million related to write-offs of inventory held by the Company and was recorded in Materials
and production expense, and $141.4 million related to estimated costs to undertake the
withdrawal of the product and was recorded in Marketing and administrative expense. The tax
benefit of this adjustment was $173.6 million, which reflects the geographical mix of Vioxx
returns and the cost of the withdrawal. The adjustment did not include charges for future
legal defense costs. (See Note 6). At March 31, 2005, $113.5 million of the remaining accrued
balance was reported in Accrued and other current liabilities and $103.4 million was reported
as a reduction to Accounts receivable.3.
    The Company grants performance share units (PSUs) and restricted stock units (RSUs), in
addition to stock options, to certain management level employees. Both PSU and RSU payouts
will be in shares of Company stock after the end of a three-year period, subject to the
terms applicable to such awards. Additionally, PSU payouts will be contingent on the
Companys performance against a pre-set objective or set of objectives.Employee stock-based compensation is recognized using the intrinsic value method. Generally,
employee stock options are granted to purchase shares of Company stock at the fair market
value at the time of grant. Accordingly, no compensation expense is recognized for the
Companys stock-based compensation plans other than for its employee performance-based awards
(including PSUs), RSUs and options granted to employees of certain equity method investees.The effect on net income and earnings per common share if the Company had applied the fair
value method for recognizing employee stock-based compensation is as follows: ($ in millions)Three MonthsEnded March 312005
    
    
    2004Net income, as reported
    
    $
    1,370.1
    
    
    $
    1,618.6Compensation expense, net of tax:Reported
    
    
    6.3
    
    
    
    4.4Fair value method
    
    
    (108.4
    )
    
    
    (117.0
    )Pro forma net income
    
    $
    1,268.0
    
    
    $
    1,506.0Earnings per common share:Basic  as reported
    
    $
    .62
    
    
    $
    .73Basic  pro forma
    
    $
    .57
    
    
    $
    .68Assuming dilution  as reported
    
    $
    .62
    
    
    $
    .73Assuming dilution  pro forma
    
    $
    .57
    
    
    $
    .67
 - 4 -




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Notes to Consolidated Financial Statements (continued)  4.
    Inventories consisted of: ($ in millions)March 31
    
    
    December 312005
    
    
    2004Finished goods
    
    $
    328.4
    
    
    $
    376.8Raw materials and work in process
    
    
    2,130.1
    
    
    
    2,166.8Supplies
    
    
    88.2
    
    
    
    94.7Total (approximates current cost)
    
    
    2,546.7
    
    
    
    2,638.3Reduction to LIFO cost for domestic inventories
    
    
    (62.9
    )
    
    
    (100.9
    )$
    2,483.8
    
    
    $
    2,537.4Recognized as:Inventories
    
    $
    1,756.6
    
    
    $
    1,898.7Other assets
    
    
    727.2
    
    
    
    638.7
  Amounts recognized as Other assets are comprised entirely of raw materials and work in process
inventories, which include vaccine inventories produced in preparation for product launches,
and inventories for other products, principally vaccines and Arcoxia, not expected to be sold
within one year.5.
    In February 2005, the Company issued $1.0 billion of 4.75% ten-year notes. In addition,
the Company established a $1.5 billion, 5-year revolving credit facility to provide backup
liquidity for its commercial paper borrowing facility and for general corporate purposes.
The Company has not drawn funding from this facility.6.
    The Company is involved in various claims and legal proceedings of a nature considered
normal to its business, including product liability, intellectual property and commercial
litigation, as well as additional matters such as antitrust actions. The following updates
previous disclosures.Vioxx LitigationProduct Liability LawsuitsAs previously disclosed, federal and state product liability lawsuits involving individual
claims, as well as several putative class actions have been filed against the Company with
respect to Vioxx. As of March 31, 2005 the Company has been served or is aware that it has
been named as a defendant in approximately 2,300 lawsuits, which include approximately 4,600
plaintiff groups alleging personal injuries resulting from the use of Vioxx. Certain of these
lawsuits include allegations regarding gastrointestinal bleeding, cardiovascular events,
thrombotic events or kidney damage. The Company has also been named as a defendant in
approximately 110 putative class actions (due to a clerical error, the Company previously
mistakenly reported that there were approximately 225 class actions) alleging personal
injuries or seeking (i) medical monitoring as a result of the putative class members use of
Vioxx, (ii) disgorgement of certain profits under common law unjust enrichment theories,
and/or (iii) various remedies under state consumer fraud and fair business practice statutes,
including recovering the cost of Vioxxpurchased by individuals and third-party payors such as
union health plans (all of the actions discussed in this paragraph are collectively referred
to as the VioxxProduct Liability Lawsuits). The actions filed in the state courts of
California and New Jersey, respectively, have been transferred to a single judge in each state
for coordinated proceedings. In addition, on February 16, 2005, the Judicial Panel on
Multidistrict Litigation (the JPML) transferred all VioxxProduct Liability Lawsuits pending
in federal courts nationwide into one Multidistrict Litigation (MDL) for coordinated
pre-trial proceedings. The MDL has been transferred to the United States District Court for
the Eastern District of Louisiana before District Judge Eldon E. Fallon.Shareholder LawsuitsAs previously disclosed, in addition to the VioxxProduct Liability Lawsuits, a number of
putative class action lawsuits were filed in late 2003 and early 2004 by several shareholders
in the United States District Court for the Eastern District of Louisiana naming as defendants
the Company and several current or former officers and directors of the Company. These cases
have been consolidated. After the announcement of the withdrawal of Vioxx, the Company was
named as a defendant in additional putative securities class action lawsuits filed in (or
removed to) federal courts in New Jersey, Pennsylvania, Louisiana, and Illinois. These
actions allege 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, including with
respect to the withdrawal of Vioxx, and seek unspecified compensatory damages and the costs of
suit, including attorneys fees. Plaintiffs request certification of a class of purchasers of
Company stock during various periods between May 21, 1999 and October 29, 2004. In addition,
two shareholders filed an individual securities action in the United States District Court for
the Central District of Illinois seeking compensatory damages and costs. Certain complaints
include allegations under Sections 11, 12 and 15 of - 5 -




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Notes to Consolidated Financial Statements (continued) the Securities Act of 1933 that certain officers and directors 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 (all of the actions discussed in
this paragraph are collectively referred to as the VioxxSecurities Lawsuits). As previously disclosed, in March 2004, two shareholder derivative actions were filed in the
United States District Court for the Eastern District of Louisiana naming the Company as a
nominal defendant and certain members of the Board (past and present), together with certain
executive officers, as defendants. The complaints arise out of substantially the same factual
allegations that are made in the VioxxSecurities Lawsuits. The derivative suits, which are
purportedly brought to assert rights of the Company, assert claims against the Board members
and officers for breach of fiduciary duty, waste of corporate assets, unjust enrichment, abuse
of control and gross mismanagement. After the withdrawal of Vioxx, additional shareholder
derivative actions were filed in the New Jersey Superior Court for Hunterdon County and in the
United States District Court for the District of New Jersey against the Company and certain
officers and members of the Board (past and present) (all of the actions discussed in this
paragraph are collectively referred to as the VioxxDerivative Lawsuits). Two of the Vioxx
Derivative Lawsuits include allegations that certain directors made false and misleading
statements in connection with certain Proxy Statements filed with the SEC in violation of
Section 14(a) of the Securities Act of 1933. As previously disclosed, on October 29, 2004, two individual shareholders made a demand on the
Board to take legal action against Mr. Raymond Gilmartin,
formerly Chairman, President and Chief
Executive Officer and other individuals for allegedly causing damage to the Company with
respect to the allegedly improper marketing of Vioxx. In response to that demand letter, the
Board of Directors determined at its November 23, 2004 meeting that the Board would take the
shareholders request under consideration and it remains under consideration. In addition to these shareholder actions, since the announcement of the withdrawal of Vioxx,
putative class actions have been filed against the Company in the United States District Court
for the Eastern District of Louisiana and in the United States District Court for the District
of New Jersey (the VioxxERISA Lawsuits and, together with the VioxxSecurities Lawsuits and
the VioxxDerivative Lawsuits, the VioxxShareholder Lawsuits) on behalf of certain of the
Companys current and former employees who are participants in certain of the Companys
retirement plans asserting claims under the Employee Retirement Income Security Act (ERISA).
The lawsuits make similar allegations to the allegations contained in the VioxxSecurities
Lawsuits. On February 23, 2005, the JPML transferred all VioxxShareholder Lawsuits pending in federal
courts nationwide into one MDL for coordinated pre-trial proceedings. The MDL has been
transferred to the United States District Court for the District of New Jersey before District
Judge Stanley R. Chesler. Judge Chesler has ordered (upon consent of all parties) that the
VioxxSecurities Lawsuits, the federal VioxxDerivative Lawsuits and the VioxxERISA Lawsuits,
respectively, be consolidated for all purposes. International Lawsuits As 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
VioxxForeign Lawsuits) in Europe, Canada, Brazil, Australia, Turkey and Israel. Additional Lawsuits Based on media reports and other sources, the Company anticipates that additional Vioxx
Product 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. Insurance Also as previously disclosed, the Company has 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 Vioxx
Product 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. At this time, the Company
believes it is reasonably possible that its insurance coverage with respect to the Vioxx
Lawsuits will not be adequate to cover its defense costs and any losses. - 6 -




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Notes to Consolidated Financial Statements (continued) Recently, as
previously disclosed, Merck received notice that the Companys upper level excess insurers (which provide

excess insurance potentially applicable to all of the VioxxLawsuits) 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. Investigations As previously disclosed, in November 2004, the Company was advised by the staff of the
Securities and Exchange Commission (the 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 received a subpoena 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. There are also ongoing investigations by certain
Congressional committees. Also, the District Attorneys Office in Munich, Germany notified
the Companys subsidiary in Germany that it received complaints and commenced an investigation
in order to determine whether any criminal charges should be brought in Germany concerning
Vioxx.As previously disclosed, the Companys U.K. subsidiary has been notified by the
Medicines and Healthcare Products Regulatory Agency in the United Kingdom (the
MHRA) of an investigation by the MHRA of compliance by the Company with EU adverse
experience reporting requirements in connection with 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. Reserves There are two
Vioxx Product Liability Lawsuits currently scheduled for trial
in Texas state court in the first half of 2005; however, in both
cases the parties have agreed to request that the trials be
rescheduled to the second half of 2005. The Courts have not yet ruled
on the requests. The Company currently anticipates that one or more
of the Vioxx Product Liability Lawsuits may go to trial in the
second half of 2005. The Company cannot
predict the timing of any trials with respect to the VioxxShareholder Lawsuits. The Company
believes that it has meritorious defenses to the 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 (collectively the VioxxLitigation). As of December 31, 2004, the
Company had established a reserve of $675 million solely for its future legal defense costs
related to the VioxxLitigation. This reserve is based on certain assumptions and is the
minimum amount that the Company believes at this time it can reasonably estimate will be spent
over a multi-year period. In the fourth quarter of 2004, the Company significantly increased
the reserve when it had the ability to reasonably estimate its future legal defense costs for
the VioxxLitigation. Some of the significant factors that were considered in the
establishment of the reserve for the VioxxLitigation were as follows: the actual costs
incurred by the Company up to that time; the development of the Companys legal defense
strategy and structure in light of the expanded scope of the VioxxLitigation; the number of
cases being brought against the Company; and the anticipated timing, progression, and related
costs of pre-trial activities and trials in the VioxxProduct Liability Lawsuits. In the
first quarter, the Company did not adjust the Vioxxlegal defense reserve. The Company will
continue to monitor its legal defense costs and review the adequacy of the associated
reserves. Unfavorable outcomes in the VioxxLitigation could have a material adverse effect
on the Companys financial position, liquidity and results of operations. Commercial Litigation Beginning in 1993, the Company was named in a number of antitrust suits, certain of which were
certified as class actions, instituted by most of the nations retail pharmacies and consumers
in several states. In 1994, these actions, except for those pending in state courts, were
consolidated for pre-trial purposes in the federal court in Chicago, Illinois. In 1996, the
Company and several other defendants settled the federal class action, which represented the
single largest group of claims. Since that time, the Company has settled substantially all of
the remaining cases on satisfactory terms; the few remaining cases have been inactive for
several years. The Company has not engaged in any conspiracy and no admission of wrongdoing
was made nor was included in any settlement agreements. - 7 -




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Notes to Consolidated Financial Statements (continued) As previously disclosed, the Company was joined in ongoing litigation alleging manipulation by
pharmaceutical manufacturers of Average Wholesale Prices
(AWP), which are sometimes used in
calculations that determine public and private sector reimbursement levels. In 2002, the JPML
ordered the transfer and consolidation of all pending federal AWP cases to federal court in
Boston, Massachusetts. Plaintiffs filed one consolidated class action complaint, which
aggregated the claims previously filed in various federal district court actions and also
expanded the number of manufacturers to include some which, like the Company, had not been
defendants in any prior pending case. In May 2003, the court granted the Companys motion to
dismiss the consolidated class action and dismissed the Company from the class action case.
Subsequent to the Companys dismissal, the plaintiffs filed an amended consolidated class
action complaint, which did not name the Company as a defendant. The Company and many other
pharmaceutical manufacturers are defendants in similar complaints pending in federal and state
court brought individually by 15 counties in the State of New York. The Company and the other
defendants are awaiting the final ruling on their motion to dismiss in the Suffolk County
case, which was the first of the New York county cases to be filed. In addition, the Company
is a defendant in four cases pending in Kentucky, Illinois, Alabama and Wisconsin which are
being vigorously defended. As previously disclosed, the Company has been named as a defendant in antitrust cases in
federal court in Minnesota and in state court in California, each alleging an unlawful
conspiracy among different sets of pharmaceutical manufacturers to protect high prices in the
United States by impeding importation into the United States of lower-priced pharmaceuticals
from Canada. The Company and the other defendants are awaiting a final decision on their
motion to dismiss. As previously disclosed, a suit in federal court in Alabama by two providers of health
services to needy patients alleges that 15 pharmaceutical companies overcharged the plaintiffs
and a class of those similarly situated, for pharmaceuticals purchased by the plaintiffs under
the program established by Section 340B of the Public Health Service Act. The Company and the
other defendants have filed a motion to dismiss the complaint on numerous grounds. As previously disclosed, in January 2003, the DOJ notified the federal court in New Orleans,
Louisiana that it was not going to intervene at that time in a pending Federal False Claims
Act case that was filed under seal in December 1999 against the Company. The court issued an
order unsealing the complaint, which was filed by a physician in Louisiana, and ordered that
the complaint be served. The complaint, which alleged that the Companys discounting of
Pepcidin certain Louisiana hospitals led to increases in costs to Medicaid, was dismissed.
An amended complaint was filed under seal and the case has been administratively closed by the
Court until the seal is lifted. The allegations contained in the amended complaint are
unknown. In April 2005, the Company was named in a qui tam lawsuit under the Nevada False Claims Act.
The suit, in which the Nevada Attorney General has intervened, alleges that the Company
inappropriately offered nominal pricing and other marketing and pricing inducements to certain
customers and also failed to comply with its obligations under the Medicaid Best Price scheme
related to such arrangements. The Company intends to vigorously defend against this lawsuit. Governmental Proceedings As previously disclosed, the Company has received a subpoena from the DOJ in connection with its
investigation of the Companys marketing and selling activities. The Company has also reported
that it has received a Civil Investigative Demand from the Attorney General of Texas regarding
the Companys marketing and selling activities relating to Texas. In April 2004, the Company
received a subpoena from the office of the Inspector General for the District of Columbia in
connection with an investigation of the Companys interactions with physicians in the District
of Columbia, Maryland, and Virginia. 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 has received a letter from the DOJ advising it of the existence of a qui tam
complaint alleging that the Company violated certain rules related to its calculations of best
price and other federal pricing benchmark calculations, certain of which may affect the
Companys Medicaid rebate obligation. The Company is cooperating with the DOJs requests for
information. On February 23, 2004, the Italian Antitrust Authorities adopted a measure commencing a formal
investigation of Merck Sharp & Dohme (Italia) S.p.A. (MSD Italy) and the Company under Article
14 of the Italian Competition Law and Article 82 EC to ascertain whether the Company and MSD
Italy committed an abuse of a dominant position by virtue of the Companys refusal to grant to
ACS Dobfar S.p.A. (Dobfar), an Italian company, a voluntary license, - 8 -




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##### 



Notes to Consolidated Financial Statements (continued) pursuant to
domestic legislation passed in 2002, to permit Dobfar to manufacture
Tienam
(imipenem and cilastatin) in Italy for sale outside Italy, in countries where patent
protection under the applicable domestic rules has expired or never existed. The Company has a
Supplementary Protection Certificate which provides the Company certain rights with respect to
the manufacture and sale of Tienam in Italy which expires in
January 2006. A hearing was held on May 2, 2005. As a
result of that hearing, if it is determined that a violation is likely to have occurred, interim measures, including a requirement that Merck grant Dobfar the
requested license may be imposed. 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 in inquiries
other than the investigations discussed in this paragraph. It is not feasible to predict the
outcome of any such inquiries. Vaccine Litigation As previously disclosed, the Company is a party in claims brought under the Consumer
Protection Act of 1987 in the United Kingdom, which allege that certain children suffer from a
variety of conditions as a result of being vaccinated with various bivalent vaccines for
measles and rubella and/or trivalent vaccines for measles, mumps and rubella, including the
Companys M-M-RII. The conditions include autism, with or without inflammatory bowel
disease, epilepsy, diabetes, encephalitis, encephalopathy, deafness, chronic fatigue syndrome
and transverse myelitis. In early September 2003, the Legal Services Commission (the LSC)
announced its decision to withdraw public funding of the litigation brought by the claimants.
This decision was confirmed on appeal by the Funding Review Committee (FRC) on September 30,
2003. The claimants application for judicial review of the decision to withdraw public
funding was dismissed in February 2004 and the April 2004 trial date was vacated. The lead
claimants have decided not to apply to the Court of Appeal for permission to appeal the
decision. As a result, legal aid for all lead claimants has now been discharged. The
non-lead claimants were subject to a show cause procedure to withdraw legal aid unless the
claimants could show cause as to why it should not be withdrawn. The FRC heard 37 of the
show cause appeals by the non-lead claimants in October 2004. The appeals involving autism
(26) were unsuccessful, but funding was reinstated for 11 appeals involving other non-autism
conditions, such as epilepsy, deafness, encephalitis and transverse myelitis. In light of the
11 successful appeals, the LSC has reconsidered the cases of some other claimants and, to
date, funding has been reinstated in approximately 85 non-lead, non-autism cases, in most
cases to the limited extent necessary to allow solicitors to provide a report on the
individual cases to the LSC. The LSC is still considering reinstating funding for
approximately 30 additional cases. It is not yet known how many of the cases involve
claimants suing the Company. All claimants for all conditions had until February 28, 2005 to
give notice of their intention to continue or discontinue with their claims, irrespective of
whether or not they have secured legal aid funding. Directions for further conduct of the
litigation were made at a case management hearing on March 17, 2005. As a result of the
judges ruling following the case management hearing, approximately 500 cases against the
Company have been brought to an end leaving approximately 100 active cases. Claimants whose
cases have ended can apply to the court to have their discontinuance set aside. A further
case management hearing is expected to take place in October 2005. The Company will
vigorously defend against these lawsuits. As previously disclosed, the Company is also a party to individual and class action product
liability lawsuits and claims in the United States involving pediatric vaccines (e.g.,
hepatitis B vaccine ) that contained thimerosal, a preservative used in vaccines. Merck has
not distributed thimerosal-containing pediatric vaccines in the United States since the fall
of 2001. As of March 31, 2005, there were approximately 300 active thimerosal related
lawsuits with approximately 820 plaintiffs. Other defendants include vaccine manufacturers
who produced pediatric vaccines containing thimerosal as well as manufacturers of thimerosal.
In these actions, the plaintiffs allege, among other things, that they have suffered
neurological injuries as a result of exposure to thimerosal from pediatric vaccines. Two
state court cases and two Federal District Court cases were scheduled for trial in 2005. Of
these cases, two have been dismissed, one is scheduled for trial on July 5, 2005 and the other
is scheduled for trial in February of 2006. The case scheduled for trial on July 5, 2005 also
makes allegations concerning Mercks M-M-RII vaccine. The Company will vigorously defend
against these lawsuits; however, it is possible that unfavorable outcomes could have a
material adverse effect on the Companys financial position, liquidity and results of
operations. - 9 -




---



##### 



Notes to Consolidated Financial Statements (continued) The Company has been successful in having cases of this type either dismissed or stayed on the
ground that the action is prohibited under the National Childhood Vaccine Injury Act (the
Vaccine Act). The Vaccine Act prohibits any person from filing or maintaining a civil
action (in state or federal court) seeking damages against a vaccine manufacturer for
vaccine-related injuries unless a petition is first filed in the United States Court of
Federal Claims (hereinafter the Vaccine Court). Under the Vaccine Act, before filing a
civil action against a vaccine manufacturer, the petitioner must either (a) pursue his or her
petition to conclusion in Vaccine Court and then timely file an election to proceed with a
civil action in lieu of accepting the Vaccine Courts adjudication of the petition or (b)
timely exercise a right to withdraw the petition prior to Vaccine Court adjudication in
accordance with certain statutorily prescribed time periods. The Company is aware that there
are numerous cases pending in Vaccine Court involving allegations that thimerosal-containing
vaccines and/or the M-M-RII vaccine cause autism spectrum disorders. All of the cases
referred to in the preceding paragraph as having been dismissed or being scheduled for trial
have been brought by plaintiffs who claim to have made a timely withdrawal of their Vaccine
Court petition. The Company is not a party to these Vaccine Court proceedings because the
petitions are brought against the Department of Health and Human Services. Patent Litigation From time to time, generic manufacturers of pharmaceutical products file Abbreviated New Drug
Applications (ANDAs) with the FDA seeking to market generic forms of the Companys products
prior to the expiration of relevant patents owned by the Company. Generic pharmaceutical
manufacturers have submitted ANDAs to the FDA seeking to market in the United States a generic
form of Fosamax, Prilosecand Propeciaprior to the expiration of the Companys (and
AstraZenecas in the case of Prilosec) patents concerning these products. The generic
companies ANDAs generally include allegations of non-infringement, invalidity and
unenforceability of the patents. Generic manufacturers have received FDA approval to market a
generic form of Prilosec. The Company has filed patent infringement suits in federal court
against companies filing ANDAs for generic alendronate and finasteride, and AstraZeneca and
the Company have filed patent infringement suits in federal court against companies filing
ANDAs for generic omeprazole. Similar patent challenges exist in certain foreign
jurisdictions. The Company intends to vigorously defend its patents, which it believes are
valid, against infringement by generic companies attempting to market products prior to the
expiration dates of such patents. As with any litigation, there can be no assurance of the
outcomes, which, if adverse, could result in significantly shortened periods of exclusivity
for these products. A trial in the United States with respect to the alendronate daily product concluded in
November 2001. In November 2002, a decision was issued by the U.S. District Court in Delaware
finding the Companys patent valid and infringed. On October 30, 2003, the U.S. Court of
Appeals for the Federal Circuit affirmed the validity and infringement of the Companys basic
U.S. patent covering the use of alendronate in any form. A request for rehearing was denied.
A trial in the United States involving the alendronate weekly product was held in March 2003.
On August 28, 2003, the U.S. District Court in Delaware, upheld the validity of the Companys
U.S. patent covering the weekly administration of alendronate. However, on January 28, 2005,
the U.S. Court of Appeals for the Federal Circuit in Washington, D.C. found the Companys
patent claims for once-weekly administration of Fosamaxto be invalid. Based on the Court of
Appeals decision, Fosamaxwill lose its market exclusivity in the United States in February
2008 and the Company expects a decline in U.S. Fosamaxsales at that time. Prior to the
decision, Mercks patent for once-weekly administration of Fosamaxwas set to expire in July
2018. On April 21, 2005, the full U.S. Court of Appeals for the Federal Circuit in
Washington, D.C. denied the Companys request to reconsider the previous decision made by that
court holding that the Companys patent for once weekly administration of Fosamaxwas invalid.
The Company intends to appeal this decision to the United States Supreme Court. In January 2003, the High Court of Justice for England and Wales held that patents of the
Company protecting the alendronate daily and weekly products were invalid in the United
Kingdom. On November 6, 2003, the Court of Appeals of England and Wales affirmed the ruling
by the High Court of Justice for England and Wales. European countries permit companies
seeking approval of a generic product to reference data of the innovative product in certain
circumstances under data exclusivity regulations. The Company has been granted leave to
appeal a decision of the UK regulatory authority that its data for weekly alendronate may be
referenced by companies seeking approval of generic weekly alendronate products. The Company
has also filed an appeal of a grant by the Swedish regulatory authority of approval of generic
weekly alendronate products which referenced the Companys data on weekly alendronate for
their approval. - 10 -




---



##### 



Notes to Consolidated Financial Statements (continued) As previously announced by the Company, on July 20, 2004, the Opposition Division (the
Opposition Division) of the European Patent Office (the EPO) rendered an oral decision to
revoke the Companys patent in Europe that covers the weekly administration of alendronate.
On August 19, 2004, the written opinion was issued confirming the oral decision revoking the
Companys patent. On September 16, 2004, the Company filed an appeal of this decision. A
decision on this appeal is expected in 2006. Based on other patents, the alendronate weekly
product is protected in most major European markets until at least 2007. On October 5, 2004, in an action in Australia challenging the validity of the Companys
Australian patent for the weekly administration of alendronate, the patent was found to be
invalid. The Company has appealed the decision. In addition,
as previously disclosed, in Japan a proceeding has been filed challenging the validity of the Companys
Japanese patent for the weekly administration of alendronate. Proceedings have been filed in Canada challenging the validity of the Companys patent for
once weekly administration of alendronate. In April 2005, the first of these proceedings went
to hearing. The Company is awaiting a decision. In the case of omeprazole, the trial court in the United States rendered an opinion in October
2002 upholding the validity of the Companys and AstraZenecas patents covering the stabilized
formulation of omeprazole and ruling that one defendants omeprazole product did not infringe
those patents. The other three defendants products were found to infringe the formulation
patents. In December 2003, the U.S. Court of Appeals for the Federal Circuit affirmed the
decision of the trial court. With respect to certain other generic manufacturers omeprazole
products, no trial date has yet been set. In the case of finasteride, an ANDA has been filed seeking approval of a generic version of
Propeciaand alleging invalidity of the Companys patents. The Company filed a patent
infringement lawsuit in the District Court of Delaware in September 2004. A trial is not
anticipated before 2006. Other Litigation As previously disclosed, on July 6, 2004, the United States District Court for the District of
New Jersey granted a motion by the Company, Medco Health Solutions, Inc. (Medco Health) and
certain officers and directors to dismiss a purported class action complaint involving claims
related to the Companys revenue recognition practice for retail co-payments paid by
individuals to whom Medco Health provides pharmaceutical benefits as well as other
allegations. The complaint was dismissed with prejudice. On August 20, 2004 the same court
granted the Companys motion to dismiss with prejudice a related shareholder derivative
action. Plaintiffs in both actions have appealed the decisions. As previously
disclosed, prior to the spin-off of Medco Health, the Company and Medco Health agreed to settle, on a
class action basis, a series of lawsuits asserting violations of
ERISA (the Gruer Cases). The
Company, Medco Health and certain plaintiffs counsel filed the settlement agreement with the
federal district court in New York, where cases commenced by a number of plaintiffs, including
participants in a number of pharmaceutical benefit plans for which Medco Health is the
pharmacy benefit manager, as well as trustees of such plans, have been consolidated. The
proposed class settlement has been agreed to by plaintiffs in five of the cases filed against
Medco Health and the Company. Under the proposed settlement, the Company and Medco Health
have agreed to pay a total of $42.5 million, and Medco Health has agreed to modify certain
business practices or to continue certain specified business practices for a period of five
years. The financial compensation is intended to benefit members of the settlement class,
which includes ERISA plans for which Medco Health administered a pharmacy benefit at any time
since December 17, 1994. In 2003, the district court preliminarily approved the settlement
and held hearings to hear objections to the fairness of the proposed settlement. The district
court approved the settlement in 2004, but has not yet determined the number of class member
plans that have properly elected not to participate in the
settlement. The settlement becomes final only if and when all appeals have been resolved. Three notices
of appeal have been filed and the appellate court is expected to hear arguments regarding the
appeals in March 2005 and decide the appeals thereafter. Currently, certain class member
plans have indicated that they will not participate in the settlement. Cases initiated by
three such plans and two individuals remain pending in the Southern District of New York.
Plaintiffs in these cases have asserted claims based on ERISA as well as other federal and
state laws that are the same as or similar to the claims that had been asserted by settling
class members in the Gruer Cases. The Company and Medco Health are named as defendants in
these cases. Medco Health and the Company agreed to the proposed settlement in order to avoid
the significant cost and distraction of prolonged litigation. - 11 -




---



##### 



Notes to Consolidated Financial Statements (continued)  After the spin-off of Medco Health, Medco Health assumed substantially all of the liability
exposure for the matters discussed in the foregoing paragraph. These cases are being defended
by Medco Health.There are various other legal proceedings, principally product liability and intellectual
property suits involving the Company, which are pending. While it is not feasible to predict
the outcome of such proceedings or the proceedings discussed in this Note, in the opinion of
the Company, all such proceedings, are either adequately covered by insurance or, if not so
covered, should not ultimately result in any liability that would have a material adverse
effect on the financial position, liquidity or results of operations of the Company, other
than proceedings for which a separate assessment is provided in this Note.7.
    As previously disclosed, in October 2004, the American Jobs Creation Act of 2004 (the AJCA)
was signed into law. The AJCA creates temporary incentive for U.S. multinationals to
repatriate accumulated income earned outside the United States as of December 31, 2002. In
December 2004, the Financial Accounting Standards Board (FASB) issued FASB Staff Position,
Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within
the American Jobs Creation Act of 2004 (FSP No. 109-2). FSP No. 109-2 allows companies
additional time to evaluate the effect of the law. Through March 31, 2005, the Company has
not provided deferred taxes on foreign earnings because such earnings were intended to be
indefinitely reinvested outside the United States. Whether the Company will ultimately take
advantage of the temporary incentive depends on a number of factors including analyzing U.S.
Internal Revenue Service (IRS) guidance before a decision is made. The Company expects to
be in a position to finalize its decisions regarding the temporary incentive during 2005.
Until a decision is made, the Company will make no change in its current intention to
indefinitely reinvest accumulated earnings of its foreign subsidiaries. If it becomes
apparent that the Company will repatriate all or any of these earnings in an amount up to
$15 billion, a one-time tax charge to the Companys consolidated results of operations of up
to approximately $1 billion could occur. The ultimate tax charge is dependent on a number
of factors currently under consideration, including the passage of pending legislation,
which contains certain technical corrections to the AJCA. The Company has not changed its
intention to indefinitely reinvest accumulated earnings earned subsequent to December 31,
2002. No provision will be made for income taxes that would be payable upon the
distributions of such earnings and it is not practicable to determine the amount of the
related unrecognized deferred income tax liability.8.
    As previously disclosed, the IRS has substantially completed its examination of the
Companys tax returns for the years 1993 to 1996 and on April 28, 2004 issued a preliminary
notice of deficiency with respect to a partnership transaction entered into in 1993.
Specifically, the IRS is proposing to disallow certain royalty and other expenses claimed as
deductions on the 1993-1996 tax returns of the Company. The Company anticipates receiving a
similar notice for 1997-1999, shortly. If the IRS ultimately prevails in its positions, the
Companys income tax due for the years 1993-1999 would increase by approximately $970
million plus interest of approximately $580 million. The IRS will likely make similar
claims for years subsequent to 1999 in future audits with respect to this transaction. The
potential disallowance for these later years, computed on a similar basis to the 1993-1999
disallowances, would be approximately $540 million plus interest of approximately $60
million. The IRS has proposed penalties on the Company with respect to all periods that
have been examined and the Company anticipates the IRS would seek to impose penalties on all
other periods.The Company vigorously disagrees with the proposed adjustments and intends to aggressively
contest this matter through applicable IRS and judicial procedures, as appropriate. Although
the final resolution of the proposed adjustments is uncertain and involves unsettled areas of
the law, based on currently available information, the Company has provided for the best
estimate of the probable tax liability for this matter. While the resolution of the issue may
result in tax liabilities which are significantly higher or lower than the reserves
established for this matter, management currently believes that the resolution will not have a
material effect on the Companys financial position or liquidity. However, an unfavorable
resolution could have a material effect on the Companys results of operations or cash flows
in the quarter in which an adjustment is recorded or the tax is due or paid. - 12 -




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##### 



Notes to Consolidated Financial Statements (continued)  9.
    The Company has defined benefit pension plans covering eligible employees in the United
States and in certain of its international subsidiaries. The net cost of such plans
consisted of the following components: ($ in millions)Three MonthsEnded March 312005
    
    
    2004Service cost
    
    $
    84.9
    
    
    $
    70.5Interest cost
    
    
    79.0
    
    
    
    63.9Expected return on plan assets
    
    
    (101.2
    )
    
    
    (80.9
    )Net amortization
    
    
    38.5
    
    
    
    29.9Termination benefits
    
    
    
    
    
    
    5.5$
    101.2
    
    
    $
    88.9
 The Company provides medical, dental and life insurance benefits, principally to its eligible
U.S. retirees and similar benefits to their dependents, through its other postretirement
benefits plans. The net cost of such plans consisted of the following components: ($ in millions)Three MonthsEnded March 312005
    
    
    2004Service cost
    
    $
    23.3
    
    
    $
    25.9Interest cost
    
    
    26.6
    
    
    
    32.1Expected return on plan assets
    
    
    (25.8
    )
    
    
    (23.5
    )Net amortization
    
    
    5.6
    
    
    
    9.8Termination benefits
    
    
    
    
    
    
    0.7$
    29.7
    
    
    $

    45.0
  While the Company is recognizing the federal subsidy under the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act) in accordance with current accounting
requirements, it will continue to evaluate the Act and regulations that follow to determine
the optimal approach to incorporating the impact of the Act.The Company recorded termination charges for the three month period ended March 31, 2004 of
$5.5 million on its pension plans and $0.7 million on its other postretirement benefit plans
related to expanded eligibility for certain employees under a restructuring action that was
completed at the end of 2004.10.
    Other (income) expense, net, consisted of: ($ in millions)Three MonthsEnded March 312005
    
    
    2004Interest income
    
    $
    (93.8
    )
    
    $
    (65.7
    )Interest expense
    
    
    84.5
    
    
    
    72.8Exchange gains
    
    
    (0.7
    )
    
    
    (7.8
    )Minority interests
    
    
    30.4
    
    
    
    39.6Other, net
    
    
    6.1
    
    
    
    (312.2
    )$
    26.5
    
    
    $
    (273.3
    )
 The change in Other, net reflects the inclusion for the three months ended March 31, 2004 of a
$176.8 million gain on the sale of the Companys 50-percent equity stake in its European joint
venture with Johnson & Johnson as well as realized gains on the Companys investment
portfolios. Interest paid for the three months ended March 31, 2005 and 2004 was $93.1 million and $88.5
million, respectively. - 13 -




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##### 



Notes to Consolidated Financial Statements (continued)  11.
    The weighted average common shares used in the computations of basic earnings per common
share and earnings per common share assuming dilution (shares in millions) are as follows: Three MonthsEnded March 312005
    
    
    2004Average common shares outstanding
    
    
    2,207.2
    
    
    
    2,222.6Common shares issuable(1)
    
    
    3.2
    
    
    
    9.9Average common shares outstanding assuming dilution
    
    
    2,210.4
    
    
    
    2,232.5
   (1)
    
    Issuable primarily under stock-based compensation plans.  For the three months ended March 31, 2005 and 2004, 253.2 million and 206.7 million,
respectively, common shares issuable under the Companys stock-based compensation plans were
excluded from the computation of earnings per common share assuming dilution because the
effect would have been antidilutive.12.
    Comprehensive income for the three months ended March 31, 2005 and 2004, representing all
changes in stockholders equity during the period other than changes resulting from the
Companys stock, was $1,343.1 million and $1,633.5 million, respectively.13.
    The Companys operations are principally managed on a products basis. The Merck
Pharmaceutical segment includes products marketed either directly or through joint ventures.
These products consist of therapeutic and preventive agents, sold by prescription, for the
treatment of human disorders. Other segment revenues include non-reportable human and
animal health segments.Revenues and profits for these segments are as follows: ($ in millions)Three MonthsEnded March 312005
    
    
    2004Segment revenues:Merck Pharmaceutical
    
    $
    5,072.3
    
    
    $
    5,312.1Other segment revenues
    
    
    232.9
    
    
    
    255.7$
    5,305.2
    
    
    $
    5,567.8Segment profits:Merck Pharmaceutical
    
    $
    3,162.5
    
    
    $
    3,416.9Other segment profits
    
    
    240.4
    
    
    
    253.9$
    3,402.9
    
    
    $
    3,670.8
 A reconciliation of total segment revenues to consolidated sales is as follows: ($ in millions)Three MonthsEnded March 312005
    
    
    2004Segment revenues
    
    $
    5,305.2
    
    
    $
    5,567.8Other revenues
    
    
    57.0
    
    
    
    63.0$
    5,362.2
    
    
    $
    5,630.8
 Other revenues are primarily comprised of miscellaneous corporate revenues, sales related to
divested products or businesses and other supply sales. - 14 -




---



##### 



Notes to Consolidated Financial Statements (continued) Net sales by category of the Companys products were as follows: ($ in millions)Three MonthsEnded March 312005
    
    
    2004Atherosclerosis
    
    $
    1,110.5
    
    
    $
    1,304.3Hypertension/heart failure
    
    
    908.0
    
    
    
    827.2Osteoporosis
    
    
    771.8
    
    
    
    759.0Respiratory
    
    
    735.0
    
    
    
    623.0Anti-bacterial/anti-fungal
    
    
    357.4
    
    
    
    268.3Vaccines/biologicals
    
    
    223.8
    
    
    
    228.9Urology
    
    
    175.1
    
    
    
    174.8Ophthalmologicals
    
    
    173.3
    
    
    
    171.9Human immunodeficiency virus (HIV)
    
    
    78.7
    
    
    
    64.2Anti-inflammatory/analgesics
    
    
    70.8
    
    
    
    705.6Other
    
    
    757.8
    
    
    
    503.6$
    5,362.2
    
    
    $
    5,630.8
 Anti-inflammatory/analgesics for the three months ended March 31, 2004 includes sales of
Vioxx,which was voluntarily withdrawn worldwide in September 2004. (See Note 2). Other
primarily includes sales of other human pharmaceuticals, pharmaceutical and animal health
supply sales to the Companys joint ventures and revenue from the Companys relationship with
AstraZeneca LP. Segment profits are comprised of segment revenues less certain elements of materials and
production costs and operating expenses, including components of equity income from affiliates
and depreciation and amortization expenses. For internal management reporting presented to
the chief operating decision maker, the Company does not allocate the vast majority of
indirect production costs, research and development expenses and general and administrative
expenses, as well as the cost of financing these activities. Separate divisions maintain
responsibility for monitoring and managing these costs, including depreciation related to
fixed assets utilized by these divisions and, therefore, they are not included in segment
profits. A reconciliation of segment profits to total income from continuing operations before taxes is as follows: ($ in millions)Three MonthsEnded March 312005
    
    
    2004Segment profits
    
    $
    3,402.9
    
    
    $
    3,670.8Other profits
    
    
    65.5
    
    
    
    39.4Adjustments
    
    
    120.3
    
    
    
    115.9Unallocated:Interest income
    
    
    93.8
    
    
    
    65.7Interest expense
    
    
    (84.5
    )
    
    
    (72.8
    )Equity income from affiliates
    
    
    62.8
    
    
    
    42.5Depreciation and amortization
    
    
    (340.2
    )
    
    
    (309.9
    )Research and development
    
    
    (846.6
    )
    
    
    (996.3
    )Other expenses, net
    
    
    (553.3
    )
    
    
    (212.4
    )$
    1,920.7
    
    
    $
    2,342.9
 Other profits are primarily comprised of miscellaneous corporate profits as well as operating
profits related to divested products or businesses and other supply sales. Adjustments
represent the elimination of the effect of double counting certain items of income and
expense. Equity income from affiliates includes taxes paid at the joint venture level and a
portion of equity income that is not reported in segment profits. Other expenses, net,
include expenses from corporate and manufacturing cost centers and other miscellaneous income
(expense), net. - 15 -




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##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations Management On May 5, 2005, the Board of Directors of the Company announced its election of Richard T. Clark
as the Companys Chief Executive Officer and President and a member of the Merck Board, effective
immediately. Mr. Clark was previously the President of Mercks Manufacturing Division. The Board also announced that Lawrence A. Bossidy, former Chairman & CEO of Honeywell, Inc., will
serve as chairperson of the Boards newly structured Executive Committee, which will work closely
with Mr. Clark to provide support and continuity as he assumes
his new duties. In addition to Mr. Bossidy, the other members of
the Executive Committee are William G. Bowen and Samuel O. Thier. This committee is
expected to be in place for one to two years. Raymond V. Gilmartin is stepping down as Chairman,
President and CEO and as a Director of the Company and will serve as Special Advisor to the
Executive Committee. The Board has not named a new Chairman of the Board. Operating Results Summary Earnings per share (EPS) for the first quarter of 2005 were $.62, compared to $.73 for the first
quarter of 2004. Net income was $1,370.1 million, compared to $1,618.6 million in the first
quarter of last year. Worldwide sales were $5.4 billion for the quarter, compared to $5.6
billion in the first quarter of 2004. Total sales declined 5% for the quarter, which includes a decrease of 13% related to the Vioxx
withdrawal, partially offset by other revenue growth of 8%. This growth reflects a volume
increase of 5%, a 2% favorable effect from foreign exchange and a 1% favorable effect from price
changes. The volume increase of 5% reflects growth in Mercks newer franchises and higher
alliance revenues. The Companys gross margin was 76.3% in the first quarter of 2005 compared to 79.6% in the first
quarter of 2004, reflecting the impact of changes in product mix, including the effect of the
voluntary withdrawal of Vioxx, manufacturing variances and inventory adjustments. Marketing and administrative expenses were at the same level as the first quarter of 2004.
Excluding the impact of $34.1 million recorded in the first quarter of 2004 for restructuring
costs related to position eliminations, marketing and administrative expenses increased 2% for
the quarter. Research and development expenses decreased 15% for the quarter, which reflects the impact of
$125.5 million for acquired research from the acquisition of Aton Pharma, Inc. and $70.0 million
of licensing expense resulting from the collaboration with H. Lundbeck A/S for gabaxadol recorded
in the first quarter of 2004, and a 6% increase in other research and development activities. The change in Other (income) expense, net reflects the inclusion in the first quarter 2004 of a
$176.8 million gain on the sale of the Companys 50-percent equity stake in its European joint
venture with Johnson & Johnson as well as realized gains on the Companys investment portfolios. The effective tax rate of 28.7% reflects an increase in the Companys tax reserve position in the
first quarter of 2005, partially offset by a change in mix of domestic and foreign income. Sales Net sales by category of the Companys products were as follows: ($ in millions)Three MonthsEnded March 312005

    
    
    2004Atherosclerosis
    
    $
    1,110.5
    
    
    $
    1,304.3Hypertension/heart failure
    
    
    908.0
    
    
    
    827.2Osteoporosis
    
    
    771.8
    
    
    
    759.0Respiratory
    
    
    735.0
    
    
    
    623.0Anti-bacterial/anti-fungal
    
    
    357.4
    
    
    
    268.3Vaccines/biologicals
    
    
    223.8
    
    
    
    228.9Urology
    
    
    175.1
    
    
    
    174.8Ophthalmologicals
    
    
    173.3
    
    
    
    171.9Human immunodeficiency virus (HIV)
    
    
    78.7
    
    
    
    64.2Anti-inflammatory/analgesics
    
    
    70.8
    
    
    
    705.6Other
    
    
    757.8
    
    
    
    503.6$
    5,362.2
    
    
    $
    5,630.8
 -16 -




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##### 



Sales by individual therapeutic class are presented net of discounts and returns. The provision
for discounts includes indirect customer discounts that occur when a contracted customer
purchases directly through an intermediary wholesale purchaser, known as chargebacks, as well as
indirectly in the form of rebates owed based upon definitive contractual agreements or legal
requirements with private sector and public sector (Medicaid) benefit providers, after the final
dispensing of the product by a pharmacy to a benefit plan participant. These discounts, in the
aggregate, reduced revenues by $984.0 million and $943.9 million for the three months ended March
31, 2005 and 2004, respectively. In the preceding table, Anti-inflammatory/analgesics includes
sales of Vioxxwhich was voluntarily withdrawn worldwide in September 2004. Other primarily
includes sales of other human pharmaceuticals, pharmaceutical and animal health supply sales to
the Companys joint ventures and revenue from the Companys relationship with AstraZeneca LP
(AZLP). In connection with the distribution program for U.S. wholesalers, implemented in 2003,
inventory levels at key wholesalers for each of the Companys major products are generally less
than a month. Worldwide sales of Singulair, a once-daily oral medicine indicated for the treatment of chronic
asthma and the relief of symptoms of seasonal allergic rhinitis, reached $735.0 million in the
first quarter, representing growth of 18% as compared to the first quarter of 2004. U.S.
mail-order-adjusted prescription levels for Singulairincreased by approximately 12% for the
first quarter, as compared to the first quarter of 2004. Singulaircontinues to be the
most-prescribed product in the overall respiratory market in the United States. A new indication in the European Union for Singulairto treat symptoms of seasonal allergic
rhinitis in asthmatic patients was launched in Germany, France, the United Kingdom, Spain,
Belgium, Portugal, Scandinavia, the Netherlands and Ireland in the first quarter. The U.S. Food
& Drug Administration (FDA) recently accepted the supplemental New Drug Application (NDA) for
Singulairfor use in the prevention of exercise-induced bronchospasm in patients 15 years of age
and older. Global sales of Mercks antihypertensive medicines, Cozaarand Hyzaar*, were strong, reaching
$719.1 million for the first quarter, representing growth of 14% as compared to the first quarter
of 2004. U.S. mail-order-adjusted prescription levels for Cozaarand Hyzaarwere in line with
first-quarter 2004 levels. In April, the FDA approved a new indication for Hyzaar, based on the LIFE trial, for reduction in
the risk of stroke in patients with hypertension and left ventricular hypertrophy (LVH), but
there is evidence that this benefit does not apply to black patients. Cozaarand Hyzaarcompete in the fastest-growing class in the antihypertensive market,
angiotensin II antagonists (AIIA). Cozaarand Hyzaarcontinue to be the second-most-frequently
prescribed AIIAs in the United States and the largest-selling branded AIIAs in Europe. Fosamaxcontinued to be the most-prescribed medicine worldwide for the treatment of
postmenopausal, male and glucocorticoid-induced osteoporosis. Global sales reached $771.8
million during the first quarter, representing growth of 2% as compared to the first quarter of
2004. U.S. mail-order-adjusted prescription levels for Fosamaxincreased by approximately 3% for
the first quarter, as compared to the first quarter of 2004. Fosamaxis available on 97% of
formularies in the United States. In late February, Merck filed a brief with the U.S. Court of Appeals for the Federal Circuit in
Washington, D.C., requesting reconsideration of the Courts decision, which found Mercks patent
claims for once-weekly administration of Fosamaxto be invalid. On April 21, the U.S. Court of
Appeals for the Federal Circuit in Washington, D.C. denied the Companys request for
reconsideration. The Company intends to appeal this decision to the United States Supreme
Court. Mercks basic U.S. patent for the administration of Fosamax, which covers both once-weekly and
once-daily administration of Fosamax, is set to expire in August 2007. Because Merck is entitled
to an additional six months of marketing exclusivity following patent expiration, the earliest
date for marketing of any generic alendronate in the United States is February 2008.   *Cozaar and Hyzaar are registered trademarks of E.I. DuPont de Nemours & Company, Wilmington,
Delaware.
 - 17 -




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##### 



Merck will enhance its osteoporosis franchise with the addition of FosamaxPlus D, a product
which builds on the proven power of Fosamaxto reduce the risk of both hip and spine fractures
with the benefit of a weekly dose of vitamin D. FosamaxPlus D has been approved by the FDA and
became available in late April. FosamaxPlus D was approved and launched in Mexico during the
first quarter. The approval of FosamaxPlus D will not extend the patent for Fosamax. Fosamax
Plus D is an important innovation in osteoporosis treatment that will help satisfy an unmet
medical need. An estimated 70% of women aged 51-70 and almost 90% of women over age 70 are not
getting adequate intake of vitamin D from food and supplements. Vitamin D insufficiency is
associated with reduced calcium absorption, bone loss and increased risk of fracture. Zocor, Mercks statin for modifying cholesterol, achieved worldwide sales of $1.1 billion in the
first quarter, representing a decrease of 15% as compared with the first quarter of 2004 and
reflecting increased competition in the U.S. statin market. U.S. mail-order-adjusted
prescription levels for Zocordeclined by 5% for the first quarter, as compared to the first
quarter of 2004. At the end of the first quarter, approximately 80% of managed care contracts
had been renewed through June 2006. Sales of Mercks other promoted medicines and vaccines were $1.4 billion during the first
quarter, representing growth of 12% as compared to the first quarter of 2004. These products
treat or prevent a broad range of conditions, such as infectious disease, glaucoma, benign
prostate enlargement, migraine, arthritis and pain. An important contributor to the growth of sales of Mercks other promoted medicines was Cancidas,
with worldwide sales of $130.3 million for the first quarter, an increase of 48% as compared to
the first quarter of 2004. Cancidasis now the leading IV antifungal agent worldwide. Strong
performance for Cancidasis being driven by the sequenced launch of the new empirical therapy
indication. Also included in other promoted medicines were global sales of Mercks coxib, Arcoxia, which
reached $56.6 million in the first quarter, compared with $30.3 million in the first quarter of
2004. To date, Arcoxiahas been launched in 54 countries in Europe, Latin America and Asia.
Merck has incorporated revised labeling for Arcoxiato reflect revisions to the prescribing
information, which have been requested by various regulatory agencies in countries where Arcoxia
is currently marketed. Merck continues to work with regulatory agencies in those countries to
revise product labeling for Arcoxiabased on the latest scientific data. In April, the Centers for Medicare & Medicaid Services (CMS) approved reimbursement for Emend
when co-administered with other oral therapies for the prevention of nausea and vomiting in
patients who are receiving specified chemotherapy agents. The availability of Emendfor Medicare
beneficiaries will provide additional treatment options for many of these patients who suffer
from nausea and vomiting as a side effect of chemotherapy. Merck earns ongoing revenue based on sales of current products associated with alliances,
primarily AZLP. In the first quarter, revenue from AZLP was $435.3 million. Global sales of Zetia(marketed as Ezetroloutside the United States), the cholesterol-absorption
inhibitor developed and marketed by the Merck/Schering-Plough partnership, reached $331.6 million
in the first quarter, an increase of 75% compared with the first quarter of 2004. U.S.
prescription levels for Zetiaincreased by approximately 44% for the quarter. In March, Zetia
accounted for approximately 6% of total prescriptions in the U.S. lipid-lowering market and is
now reimbursed for nearly 90% of all patients in managed care plans in the United States. To
date, Ezetrolhas been approved in more than 70 countries outside the United States and continues
to achieve solid sales and market share growth. In January, Ezetrolwas launched in France and
Austria. Global sales of Vytorin(marketed as Inegyin many countries outside the United States), also
developed and marketed by the Merck/Schering-Plough partnership, reached $179.6 million in the
first quarter. Vytorin, approved in the United States in July 2004, accounted for approximately
5% of new prescriptions in the United States lipid-lowering market in March. Vytorinis
currently reimbursed for approximately 96% of all patients in managed care plans in the United
States. In addition to the United States, Vytorin(Inegy) has been approved in more than 30
countries. In a study recently presented at the 54th Annual Scientific Session of the American
College of Cardiology, Vytorinwas shown to be superior to Lipitor at lowering LDL cholesterol.
This superior LDL cholesterol reduction resulted in greater goal attainment for patients taking
Vytorinversus Lipitor at all doses. Vytorinis the only single tablet to provide powerful LDL
cholesterol reduction through dual inhibition of the two sources of cholesterol by inhibiting the
production of cholesterol in the liver and blocking absorption of cholesterol in the intestine,
including cholesterol from food. Four major outcomes studies of Vytorinare now underway. The Company records the
results from its interest in the Merck/Schering-Plough partnership in
Equity income from affiliates. - 18 -




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##### 



Research and Development Mercks efforts to expand its pipeline by entering new therapeutic categories, increasing its
licensing activities and accelerating early- and late-stage development, continue to produce
positive results. Merck continued to make progress on the four investigational vaccines in
late-stage development. These vaccines represent significant new opportunities for Merck in the
pediatric, adolescent and adult vaccine markets. ProQuad, a vaccine against measles, mumps,
rubella and varicella, is under FDA review following submission of a Biologics License
Application (BLA) in August 2004. In early April, Merck submitted a BLA to the FDA for RotaTeq, a
vaccine to protect against rotavirus disease. In late April, Merck submitted a BLA to the FDA
for Zostavax, a vaccine for the prevention of shingles (herpes zoster) and the reduction of
shingles-related pain. The Company is awaiting the FDAs acceptance of the applications for
Zostavaxand RotaTeqfor review as submitted. Merck is also planning to submit a BLA to the FDA
this year for Gardasil, a vaccine to prevent human papillomavirus (HPV) infection and the
associated development of cervical cancer and genital warts. ProQuadis an investigational vaccine for simultaneous vaccination against measles, mumps,
rubella and varicella in children 12 months to 12 years of age. ProQuadcombines two established
Merck vaccines, M-M-R II(Measles, Mumps, Rubella Virus
Vaccine Live) and Varivax
[Varicella Virus Vaccine Live (Oka/Merck)]. In March, the
U.S. Centers for Disease Control (CDC) announced that rubella, or German measles, was no longer a
public health threat in the United States. At this time, Merck is the sole manufacturer of
vaccines that protect against rubella, as well as measles, mumps and varicella, in the United
States. In addition to the FDA submission, Merck plans to submit applications for RotaTeqin Europe and
Latin America in 2005. It is estimated that by age 5, virtually all children worldwide are
infected with rotavirus, a highly contagious virus. Rotavirus causes gastroenteritis and results
in approximately 50,000 hospitalizations and 20 to 40 deaths annually in the United States.
Worldwide, rotavirus is responsible for an estimated 500,000 deaths each year. As discussed above, Merck submitted a BLA for Zostavaxin the second quarter of 2005. Shingles,
the reactivation of the chickenpox virus in adults, affects an estimated 800,000 people in the
United States annually. People over age 50 are most commonly affected. As the population
continues to age, the occurrence of shingles is likely to increase. Merck expects to submit an application for Gardasilto the FDA during the second half of 2005 for
the prevention of HPV infection, related cervical cancer and genital warts. In a Phase II study published
in April in The Lancet Oncology, Gardasilsignificantly reduced the combined incidence of
persistent HPV 6, 11, 16 and 18 infection and related diseases, including new cervical
pre-cancers and genital warts compared to placebo over the two-and-a-half years of follow-up
after vaccination. Almost all cases of cervical cancer are linked to HPV. Cervical cancer, one of the most common
cancers among women worldwide, results in 288,000 deaths worldwide each year. There are an
estimated 86 million women in the United States and the European Union between the ages of 9 and
24, the expected age range for the initial indication of Gardasil. During the first quarter, the
FDA accepted for standard review the NDA filed by Bristol-Myers
Squibb Company (BMS) for muraglitazar, an
investigational dual alpha/gamma PPAR activator for the reduction of glucose in patients with
type 2 diabetes. In April 2004, Merck and BMS entered into a worldwide
collaborative agreement to develop and market muraglitazar. An estimated 18 million people in the
United States suffer from type 2 diabetes. Muraglitazar has the potential to be the first in a new class of drugs called glitazars to be
approved for marketing in the United States. In clinical trials, muraglitazar has reduced blood
glucose levels, decreased triglyceride levels, and increased high-density lipoprotein (HDL)
cholesterol levels in type 2 diabetes patients and has been generally well tolerated. Efficacy
and safety data from pivotal clinical studies with muraglitazar will be presented at medical
meetings during the next few months. Financial Guidance for 2005 Worldwide net sales will be driven by the Companys major products, including the impact of new
studies and indications. Sales forecasts for those products for 2005 are as follows: Zocor$4.2
to $4.5 billion; Fosamax$3.3 to $3.6 billion; Cozaarand Hyzaar$2.9 to $3.2 billion; Singulair
$2.9 to $3.2 billion; and other reported products $5.9 to $6.2 billion. Under an agreement with AZLP, Merck receives revenue at predetermined percentages on the U.S.
sales of certain products by AZLP, most notably Nexium. In 2005, Merck anticipates these
revenues to be approximately $1.4 to $1.6 billion. - 19 -




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##### 



The income contribution related to the Merck/Schering-Plough partnership is expected to be
positive in 2005. Equity income from affiliates includes the results of the
Merck/Schering-Plough partnership combined with the results of Mercks other joint venture
relationships. Equity income from affiliates is expected to be approximately $1.3 billion to
$1.5 billion for 2005. Merck continues to expect that manufacturing productivity will offset inflation on product costs. Product gross margin percentage is estimated to be approximately 77 to 78 percent for the
full-year 2005. Research and development expense (which excludes joint ventures) is estimated to continue at the
same level as the full-year 2004 expense. The full-year 2004 level referred to includes acquired
research expense in that year. Marketing and Administrative expense is anticipated to increase
at a low single-digit percentage growth rate over the full-year 2004 level. The full-year 2004
level referred to excludes the following items: restructuring costs relating to previously
announced position eliminations; costs related to the withdrawal of Vioxxand the charge taken in
the fourth quarter related solely to future legal defense costs of Vioxxlitigation. The Companys current expectation is that the consolidated 2005 tax rate should approximate 27.5
to 28.5 percent. Merck plans to continue its stock buyback program in 2005. As of March 31, 2005 $8.3 billion
remains under the current buyback authorizations approved by Mercks Board of Directors. This guidance does not reflect the possibility of the establishment of any reserves for any
potential liability relating to the Vioxxlitigation or any one time impacts that may result from
the repatriation of permanently reinvested off-shore earnings under the American Jobs Creation
Act. In addition, on April 14, 2005, the Securities and Exchange Commission (SEC) approved a
delay in the effective date of the new Financial Accounting Standards Board (FASB) stock option
accounting rules from the third quarter of 2005 to the first quarter of 2006. Therefore, the
Company does not anticipate that current year results will reflect any impact of the new stock
option accounting rules. Given these guidance elements, Merck anticipates full-year 2005 EPS of $2.44 to $2.52. Merck
anticipates second quarter EPS of $0.60 to $0.64. Liquidity and Capital Resources($ in millions)
    
    March 31, 2005
    
    
    December 31, 2004Cash and Investments
    
    $
    14,250.0
    
    
    $
    13,817.0Working capital
    
    $
    4,857.3
    
    
    $
    1,731.1Total debt to total liabilities and equity
    
    
    16.9
    %
    
    
    16.1
    %
 The increase in working capital primarily reflects a change in the mix of the Companys
investments from long-term to short-term. Cash provided by operations continues to be the Companys primary source of funds to finance
operating needs and capital expenditures. Net cash provided by operating activities totaled $1.3
billion and $1.8 billion for the three months ended March 31, 2005 and 2004, respectively. Capital expenditures totaled $343.2 million and $322.8 million for the first three months of 2005
and 2004, respectively. Capital expenditures for the full year 2005 are expected to approximate
$1.5 billion. Dividends paid to stockholders were $841.1 million and $822.4 million for the first three months
of 2005 and 2004, respectively. In February 2005, the Board of Directors declared a quarterly
dividend of 38 cents per share on the Companys common stock for the second quarter of 2005. During the first quarter, the Company purchased $253.2 million of its Common Stock (8.2 million
shares) for its Treasury. The Company has approximately $8.3 billion remaining under the July
2002 treasury stock purchase authorization. - 20 -




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##### 



Recently Issued Accounting Standards In November 2004, the FASB issued Statement No. 151, Inventory Costs  an amendment of ARB No.
43, Chapter 4 (FAS 151), which is effective beginning January 1, 2006. FAS 151 requires that
abnormal amounts of idle facility expense, freight, handling costs and wasted material be
recognized as current period charges. The Statement also requires that the allocation of fixed
production overhead be based on the normal capacity of the production facilities. The effect of
this Statement on the Companys financial position or results of operations has not yet been
determined. In December 2004, the FASB issued Statement No. 123R, Share-Based Payment (FAS 123R). On April
14, 2005, the SEC issued a new rule which delayed the Companys effective date of FAS 123R
beginning January 1, 2006. FAS 123R requires all share-based payments to employees to be
expensed over the requisite service period based on the grant-date fair value of the awards. The
Statement allows for either prospective or retrospective adoption and requires that the unvested
portion of all outstanding awards upon adoption be recognized using the same fair value and
attribution methodologies previously determined under Statement No. 123, Accounting for
Stock-Based Compensation. The Company is currently evaluating transition alternatives and
valuation methodologies for future grants. As a result, pro forma compensation expense, as
reflected in Note 3, may not be indicative of future expense to be recognized under FAS 123R.
The effect of adoption of FAS 123R on the Companys financial position or results of operations
has not yet been determined. Legal Proceedings The Company is involved in various claims and legal proceedings of a nature considered normal to
its business, including product liability, intellectual property and commercial litigation, as
well as additional matters such as antitrust actions. For a discussion of legal proceedings, see
Note 6 in the Notes to Consolidated Financial Statements contained herein. - 21 -




---



##### 



Item 4. Controls and Procedures Management of the Company, with the participation of its Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the Companys disclosure controls and
procedures. Based on their evaluation, as of the end of the period covered by this Form 10-Q,
the Companys Chief Executive Officer and Chief Financial Officer have concluded that the
Companys disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under
the Securities Exchange Act of 1934, as amended) are effective. There have been no changes in
internal control over financial reporting, for the period covered by this report, that have
materially affected, or are reasonably likely to materially affect, the Companys internal
control over financial reporting, except as indicated below. During the first quarter of 2005, the Company opened a new global data center in North Carolina.
The data center will provide an enhanced computing environment to support the Companys changing
business requirements, increase capacity and reduce the business risk of down time. The
migration of applications to the new data center will occur throughout 2005 and is expected to
further improve internal controls that were previously considered effective. CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS This report and other written reports and oral statements made from time to time by the Company
may contain so-called forward-looking statements, all of which are subject to risks and
uncertainties. One can identify these forward-looking statements by their use of words such as
expects, plans, will, estimates, forecasts, projects and other words of similar
meaning. One can identify them by the fact that they do not relate strictly to historical or
current facts. These statements are likely to address the Companys growth strategy, financial
results, product approvals and development programs. One must carefully consider any such
statement and should understand that many factors could cause actual results to differ from the
Companys forward-looking statements. These factors include inaccurate assumptions and a broad
variety of other risks and uncertainties, including some that are known and some that are not.
No forward-looking statement can be guaranteed and actual future results may vary materially. The Company does not assume the obligation to update any forward-looking statement. One should
carefully evaluate such statements in light of factors described in the Companys filings with
the Securities and Exchange Commission, especially on Forms 10-K, 10-Q and 8-K. In Item 1 of the
Companys Annual Report on Form 10-K for the year ended December 31, 2004, as filed on March 11,
2005, the Company discusses in more detail various important factors that could cause actual
results to differ from expected or historic results. The Company notes these factors for
investors as permitted by the Private Securities Litigation Reform Act of 1995. One should
understand that it is not possible to predict or identify all such factors. Consequently, the
reader should not consider any such list to be a complete statement of all potential risks or
uncertainties. - 22 -




---



##### 



PART II   Other Information Item 1. Legal Proceedings Information with respect to
certain legal proceedings is incorporated by reference to Note 6 in
the Notes to the Consolidated Financial Statements contained herein. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Issuer purchases of equity securities for the three month period ended March 31, 2005 is as
follows: ISSUER PURCHASES OF EQUITY SECURITIES ($ in millions)Number of Shares
    
    
    Approximate Dollar ValueTotal Number
    
    
    
    
    
    
    Purchased as Part of
    
    
    of Shares That May Yetof Shares
    
    
    Average Price
    
    
    Publicly Announced
    
    
    Be Purchased Under thePeriod
    
    Purchased (1)
    
    
    Paid Per Share
    
    
    Plans or Programs (2)
    
    
    Plans or Programs (2)January 1  January 31, 2005
    
    
    2,885,500
    
    
    
    $30.86
    
    
    
    2,885,500
    
    
    
    $8,456.0February 1  February 28,
2005
    
    
    2,574,000
    
    
    
    $29.50
    
    
    
    2,574,000
    
    
    
    $8,380.1March 1  March 31, 2005
    
    
    2,762,607
    
    
    
    $31.92
    
    
    
    2,762,000
    
    
    
    $8,292.0Total
    
    
    8,222,107
    
    
    
    $30.79
    
    
    
    8,221,500
    
    
    
    $8,292.0
   (1)
    
    There were 607 shares purchased to meet the requirements of a restricted stock program,
which was not part of a publicly announced repurchase program.(2)
    
    All shares purchased during the period were made as part of a plan announced in July 2002 to
purchase $10 billion in Merck shares. Item 6. Exhibits Exhibits Number
    
    Description3.1
    
    Restated Certificate of Incorporation of Merck & Co., Inc. (October 1, 2004)
- Incorporated by reference to Form 10-Q Quarterly Report for the period ended
September 30, 20043.2
    
    By-Laws of Merck & Co., Inc. (as amended effective September 28, 2004) -
Incorporated by reference to Current Report on Form 8-K dated September 28, 200412
    
    Computation of Ratios of Earnings to Fixed Charges31.1
    
    Rule 13a  14(a)/15d  14(a) Certification of Chief Executive Officer31.2
    
    Rule 13a  14(a)/15d  14(a) Certification of Chief Financial Officer32.1
    
    Section 1350 Certification of Chief Executive Officer32.2
    
    Section 1350 Certification of Chief Financial Officer
 - 23 -




---



##### 



Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MERCK & CO., INC.Date: May 9, 2005
    
    /s/ Kenneth C. FrazierKENNETH C. FRAZIERSenior Vice President and General CounselDate: May 9, 2005
    
    /s/ Richard C. HenriquesRICHARD C. HENRIQUESVice President, Controller
 - 24 -




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##### 



EXHIBIT INDEX Number
    
    Description3.1
    
    Restated Certificate of Incorporation of Merck & Co., Inc. (October 1, 2004)
- Incorporated by reference to Form 10-Q Quarterly Report for the period ended
September 30, 20043.2
    
    By-Laws of Merck & Co., Inc. (as amended effective September 28, 2004) -
Incorporated by reference to Current Report on Form 8-K dated September 28, 200412
    
    Computation of Ratios of Earnings to Fixed Charges31.1
    
    Rule 13a  14(a)/15d  14(a) Certification of Chief Executive Officer31.2
    
    Rule 13a  14(a)/15d  14(a) Certification of Chief Financial Officer32.1
    
    Section 1350 Certification of Chief Executive Officer32.2
    
    Section 1350 Certification of Chief Financial Officer
 - 25 -