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UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the quarterly period ended September 30, 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
  Class
    
    Number of Shares Outstanding:Common Stock

    2,186,632,422
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TABLE OF CONTENTS  Part I  Financial InformationItem 1. Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 4. Controls and ProceduresPART II   Other InformationItem 1. Legal ProceedingsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 6. ExhibitsSignaturesEXHIBIT INDEXEX-12: COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGESEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION    Table of Contents  
 Part I  Financial Information
 
 Item 1. Financial Statements
  THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
 ($ in millions)Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Sales
    
    $
    5,416.2
    
    
    $
    5,538.1
    
    
    $
    16,246.0
    
    
    $
    17,190.7Costs, Expenses and OtherMaterials and production
    
    
    1,238.8
    
    
    
    1,364.2
    
    
    
    3,670.9
    
    
    
    3,676.2Marketing and administrative
    
    
    1,741.2
    
    
    
    1,752.9
    
    
    
    5,109.8
    
    
    
    4,980.5Research and development
    
    
    942.6
    
    
    
    919.3
    
    
    
    2,736.0
    
    
    
    2,901.6Equity income from affiliates
    
    
    (480.1
    )
    
    
    (307.1
    )
    
    
    (1,130.5
    )
    
    
    (722.3
    )Other (income) expense, net
    
    
    (24.7
    )
    
    
    (4.2
    )
    
    
    15.8
    
    
    
    (240.0
    )3,417.8
    
    
    
    3,725.1
    
    
    
    10,402.0
    
    
    
    10,596.0Income Before Taxes
    
    
    1,998.4
    
    
    
    1,813.0
    
    
    
    5,844.0
    
    
    
    6,594.7Taxes on Income
    
    
    577.5
    
    
    
    487.4
    
    
    
    2,332.4
    
    
    
    1,882.4Net Income
    
    $
    1,420.9
    
    
    $
    1,325.6
    
    
    $
    3,511.6
    
    
    $
    4,712.3Basic Earnings per Common Share
    
    $
    .65
    
    
    $
    .60
    
    
    $
    1.60
    
    
    $
    2.12Earnings per Common Share Assuming Dilution
    
    $
    .65
    
    
    $
    .60
    
    
    $
    1.59
    
    
    $
    2.11Dividends Declared per Common Share
    
    $
    .38
    
    
    $
    .38
    
    
    $
    1.14
    
    
    $
    1.12
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SEPTEMBER 30, 2005 AND DECEMBER 31, 2004
 September 30,
    
    
    December 31,2005
    
    
    2004ASSETSCurrent AssetsCash and cash equivalents
    
    $
    2,918.0
    
    
    $
    2,878.8Short-term investments
    
    
    11,110.0
    
    
    
    4,211.1Accounts receivable
    
    
    3,647.3
    
    
    
    3,627.7Inventories (excludes inventories of $742.5 in 2005 and
$638.7 in 2004 classified in Other assets  see Note 4)
    
    
    1,749.4
    
    
    
    1,898.7Prepaid expenses and taxes
    
    
    640.6
    
    
    
    858.9Total current assets
    
    
    20,065.3
    
    
    
    13,475.2Investments
    
    
    1,236.8
    
    
    
    6,727.1Property, Plant and Equipment, at cost, net of allowance for
depreciation of $8,974.2 in 2005 and $8,094.9 in 2004
    
    
    14,606.2
    
    
    
    14,713.7Goodwill
    
    
    1,085.7
    
    
    
    1,085.7Other Intangibles, net
    
    
    553.9
    
    
    
    679.2Other Assets
    
    
    6,283.1
    
    
    
    5,891.9$
    43,831.0
    
    
    $
    42,572.8LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesLoans payable and current portion of long-term debt
    
    $
    2,192.5
    
    
    $
    2,181.2Trade accounts payable
    
    
    475.2
    
    
    
    421.4Accrued and other current liabilities
    
    
    4,993.2
    
    
    
    5,288.1Income taxes payable
    
    
    3,668.4
    
    
    
    3,012.3Dividends payable
    
    
    833.3
    
    
    
    841.1Total current liabilities
    
    
    12,162.6
    
    
    
    11,744.1Long-Term Debt
    
    
    5,124.7
    
    
    
    4,691.5Deferred Income Taxes and Noncurrent Liabilities
    
    
    6,327.5
    
    
    
    6,442.1Minority Interests
    
    
    2,437.8
    
    
    
    2,406.9Stockholders EquityCommon StockAuthorized
 5,400,000,000 sharesIssued  2,976,230,393 shares
    
    
    29.8
    
    
    
    29.8Other paid-in capital
    
    
    6,832.4
    
    
    
    6,869.8Retained earnings
    
    
    37,629.2
    
    
    
    36,626.3Accumulated other comprehensive income (loss)
    
    
    50.4
    
    
    
    (45.9
    )44,541.8
    
    
    
    43,480.0Less treasury stock, at cost786,554,557 shares  September 30, 2005767,591,491 shares  December 30, 2004
    
    
    26,763.4
    
    
    
    26,191.8Total stockholders equity
    
    
    17,778.4
    
    
    
    17,288.2$
    43,831.0
    
    
    $
    42,572.8
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NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
 Nine Months EndedSeptember 30,2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIESNet Income
    
    $
    3,511.6
    
    
    $
    4,712.3Adjustments to reconcile net income to cash provided from operations:Depreciation and amortization
    
    
    1,202.2
    
    
    
    1,051.3Deferred income taxes
    
    
    183.6
    
    
    
    198.8Other
    
    
    46.3
    
    
    
    552.1Net changes in assets and liabilities
    
    
    400.0
    
    
    
    (83.2
    )NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    5,343.7
    
    
    
    6,431.3CASH FLOWS FROM INVESTING ACTIVITIESCapital expenditures
    
    
    (996.1
    )
    
    
    (1,209.4
    )Purchase of securities, subsidiaries and other investments
    
    
    (88,103.8
    )
    
    
    (52,770.5
    )Proceeds from sale of securities, subsidiaries and other investments
    
    
    86,616.0
    
    
    
    52,218.0Banyu acquisition
    
    
    
    
    
    
    (12.7
    )Other
    
    
    (2.1
    )
    
    
    (5.4
    )NET CASH USED BY INVESTING ACTIVITIES
    
    
    (2,486.0
    )
    
    
    (1,780.0
    )CASH FLOWS FROM FINANCING ACTIVITIESNet change in short-term borrowings
    
    
    523.1
    
    
    
    (558.0
    )Proceeds from issuance of debt
    
    
    1,000.0
    
    
    
    405.1Payments on debt
    
    
    (1,014.2
    )
    
    
    (10.5
    )Purchase of treasury stock
    
    
    (764.0
    )
    
    
    (688.0
    )Dividends paid to stockholders
    
    
    (2,516.5
    )
    
    
    (2,467.7
    )Other
    
    
    81.2
    
    
    
    116.3NET CASH USED BY FINANCING ACTIVITIES
    
    
    (2,690.4
    )
    
    
    (3,202.8
    )EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
    
    
    (128.1
    )
    
    
    17.4NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    39.2
    
    
    
    1,465.9CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    
    
    2,878.8
    
    
    
    1,201.0CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    2,918.0
    
    
    $
    2,666.9
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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). As of the end of the second quarter 2005, the Vioxx
withdrawal process was substantially complete and the costs associated with the withdrawal
were in line with the original amounts estimated by the Company.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 Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income, as reported
    
    $
    1,420.9
    
    
    $
    1,325.6
    
    
    $
    3,511.6
    
    
    $
    4,712.3Compensation expense, net of tax:Reported
    
    
    7.7
    
    
    
    2.2
    
    
    
    21.8
    
    
    
    12.5Fair value method
    
    
    (83.8
    )
    
    
    (125.5
    )
    
    
    (272.6
    )
    
    
    (365.0
    )Pro forma net income
    
    $
    1,344.8
    
    
    $
    1,202.3
    
    
    $
    3,260.8
    
    
    $
    4,359.8Earnings per common share:Basic  as reported
    
    $
    .65
    
    
    $
    .60
    
    
    $
    1.60
    
    
    $
    2.12Basic  pro forma
    
    $
    .61
    
    
    $
    .54
    
    
    $
    1.48
    
    
    $
    1.96Assuming dilution  as reported
    
    $
    .65
    
    
    $
    .60
    
    
    $
    1.59
    
    
    $
    2.11Assuming dilution  pro forma
    
    $
    .61
    
    
    $
    .54
    
    
    $
    1.48
    
    
    $
    1.95
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Notes to Consolidated Financial Statements
 In accordance with the current accounting requirements, the Company recognizes pro-forma
compensation expense for all employees, including retirement-eligible
employees, over the vesting period for employee
stock options. Upon the adoption of Financial Accounting Standard Board No. 123R, Share-Based
Payment (FAS 123R), which is effective for the Company beginning January 1, 2006, compensation
expense will be recognized immediately for awards granted to retirement-eligible employees or
over the period from the grant date to the date retirement eligibility is achieved. This
approach is known as the non-substantive vesting period approach. If the Company had been
applying the non-substantive vesting period approach for stock options granted to
retirement-eligible employees, the effect on pro forma earnings per share assuming dilution
for all periods presented, as provided in the above table, would not have been significant.4.
    
    Inventories consisted of:
 ($ in millions)September
    
    
    December30, 2005
    
    
    31, 2004Finished goods
    
    $
    412.4
    
    
    $
    376.8Raw materials and work in process
    
    
    2,014.8
    
    
    
    2,166.8Supplies
    
    
    85.7
    
    
    
    94.7Total (approximates current cost)
    
    
    2,512.9
    
    
    
    2,638.3Reduction to LIFO cost for domestic inventories
    
    
    (21.0
    )
    
    
    (100.9
    )$
    2,491.9
    
    
    $
    2,537.4Recognized as:Inventories
    
    $
    1,749.4
    
    
    $
    1,898.7Other assets
    
    
    742.5
    
    
    
    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 putative class actions, have been filed against the Company with respect to
Vioxx. As of September 30, 2005, the Company has been served or is aware that it has been
named as a defendant in approximately 6,400 lawsuits, which include approximately 11,700
plaintiff groups, alleging personal injuries resulting from the use of Vioxx. Of these
lawsuits, approximately 2,900 lawsuits representing approximately 6,300 plaintiff groups are
or are slated to be in the federal MDL (discussed below) and approximately 2,750 lawsuits representing
approximately 2,750 plaintiff groups are included in a coordinated proceeding in New Jersey
Superior Court before Judge Carol E. Higbee. 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 160 putative 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, Texas, New Jersey, and Philadelphia,
Pennsylvania, 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.
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Notes to Consolidated Financial Statements
 Judge Fallon has indicated that he intends to try four cases during the period November 2005
through the first half of 2006, one in each of the following categories: (i) heart attack
with short term use; (ii) heart attack with long term use; (iii) stroke; and (iv)
cardiovascular injury involving a prescription written after April 2002 when the labeling for
Vioxxwas revised to include the results of the VIGOR trial. On August 3, 2005, Judge Fallon
issued an order setting the Evelyn Irvin Plunkett vs. Merck case as the first case to be tried
in the MDL. The trial currently is scheduled to begin on
November 29, 2005 in Houston, Texas
and has been brought by Evelyn Irvin Plunkett, on behalf of her late husband Richard Irvin,
Jr., who died from an apparent heart attack. Plaintiff alleges that Mr. Irvin took Vioxxfor
approximately one month and thus, this action falls within the category of heart attack with
short term use. Judge Fallon has also scheduled three additional trials in the MDL which are
currently scheduled to commence in February, March, and April 2006, respectively, although no
determination has been made as to the order in which the second, third or fourth categories
described above will be tried or the specific cases that will be tried after the Plunkett
case. In addition, there are other state court trials currently scheduled in the next six
months and beyond, including Zajicek vs. Merck and Guerra vs. Merck, each in Texas, in March
and April 2006, respectively.As previously disclosed, on August 19, 2005, in a trial in state court in Texas, the jury in
Ernst vs. Merck reached a verdict in favor of the plaintiff and purported to award her a total
of $253 million in compensatory and punitive damages. Under Texas law, the maximum amount
that could be awarded to the plaintiff is capped at approximately $26 million. The Company
intends to appeal this verdict after the completion of post-trial proceedings in the trial
court. The Company believes that it has strong points to raise on appeal and is hopeful that
the appeals process will correct the verdict. Since the Company
believes that the potential for an unfavorable outcome is not
probable, it has not established
a reserve with respect to the verdict.On November 3, 2005, in the case of Frederick and Mary
Jackson Humeston vs. Merck & Co., Inc., Superior Court of New Jersey,
Law Division, Atlantic County, a jury returned a verdict in favor of
Merck on all counts. The case was the second Vioxx personal injury
case to go to trial. Mr. Humeston, a 60-year old United States
Postal employee from Idaho, alleged that he suffered a heart attack
in September 2001 as a result of taking Vioxx. He sought compensatory
and punitive damages. The jury of 6 women and 3 men found, by an
8 to 1 vote, that Merck did not fail to provide an adequate warning
to prescribing physicians of an association between Vioxx and an
increased risk of serious cardiovascular events prior to Mr. Humestons heart attack. The jury also unanimously found that
Merck did not violate the New Jersey Consumer Fraud Act in marketing
the drug to prescribing physicians.Merck has entered into a tolling agreement (the Tolling Agreement) with the MDL Plaintiffs
Steering Committee that establishes a procedure to halt the running of the statute of
limitations (tolling) as to certain categories of claims allegedly arising from the use of
Vioxxby non-New Jersey citizens. The Tolling Agreement applies to individuals who have not
filed lawsuits and may or may not eventually file lawsuits and only to those claimants who
seek to toll claims alleging injuries resulting from a thrombotic cardiovascular event that
results in a myocardial infarction or ischemic stroke. The Tolling Agreement provides counsel
additional time to evaluate potential claims. The Tolling Agreement requires any tolled
claims to be filed in federal court. As of September 30, 2005, approximately 3,000 claimants
had entered into Tolling Agreements.In addition, as previously disclosed, on July 29, 2005, a New Jersey state trial court
certified a nationwide class of third-party payors (such as unions and health insurance plans)
that paid in whole or in part for the Vioxxused by their plan members or insureds. The named
plaintiff in that case seeks recovery of certain Vioxxpurchase costs (plus penalties) based
on allegations that the purported class members paid more for Vioxxthan they would have had
they known of the products alleged risks. Merck believes that the class was improperly
certified. The trial courts ruling is procedural only; it does not address the merits of
plaintiffs allegations, which the Company intends to defend vigorously. The New Jersey state
Superior Court, Appellate Division, has accepted Mercks appeal for a review of the class
certification order on an expedited basis.As previously reported, the Company has also been named as a defendant in separate lawsuits brought by the Attorneys
General of Louisiana, Mississippi, and Texas. These actions allege that the Company
misrepresented the safety of Vioxxand seek (i) recovery of the cost of Vioxxpurchased or
reimbursed by the state and its agencies; (ii) reimbursement of all sums paid by the state and
its agencies for medical services for the treatment of persons injured by Vioxx; (iii) damages
under various common law theories; and/or (iv) remedies under various state statutory
theories, including state consumer fraud and/or fair business practices or Medicaid fraud
statutes, including civil penalties.Shareholder LawsuitsAs previously disclosed, in addition to the VioxxProduct Liability Lawsuits, 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 and former officers and directors of the Company. After the
announcement of the voluntary worldwide withdrawal of Vioxx, the Company was named as a defendant in additional
securities lawsuits filed in (or removed to) various federal courts. On February 23, 2005,
the JPML transferred all of these securities lawsuits (the VioxxSecurities Lawsuits), along
with related lawsuits discussed below, to the United States District Court for the District of
New Jersey before District Judge Stanley R. Chesler for inclusion in a nationwide MDL for
coordinated pretrial proceedings (the Shareholder MDL). Judge Chesler has consolidated the
VioxxSecurities Lawsuits for all purposes. On June 9, 2005, plaintiffs in the Vioxx
Securities Lawsuits filed a Fourth Consolidated and Amended Class Action Complaint superseding
prior complaints
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Notes to Consolidated Financial Statements
 in the various cases (the Complaint). Plaintiffs request certification of a class of
purchasers of Company stock between May 21, 1999 and October 29, 2004. The Complaint, which
names additional current and former officers and directors of the Company, alleges that the
defendants made false and misleading statements regarding Vioxxin violation of Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934, and seeks unspecified compensatory damages
and the costs of suit, including attorneys fees. The Complaint also asserts a claim under
Section 20A of the Securities and Exchange Act against certain defendants relating to their
sales of Merck stock. In addition, the Complaint includes allegations under Sections 11, 12
and 15 of the Securities Act of 1933 that certain defendants made incomplete and misleading
statements in a registration statement and certain prospectuses filed in connection with the
Merck Stock Investment Plan, a dividend reinvestment plan. Defendants have filed a motion to
dismiss the Complaint, which is pending.As previously disclosed, on August 15, 2005, a complaint was filed in Oregon state court by
the State of Oregon through the Oregon state treasurer on behalf of the Oregon Public Employee
Retirement Fund against the Company and certain current and former officers and directors.
The complaint, which was brought under Oregon securities law, alleges that plaintiff has
suffered damages in connection with its purchases of Merck common stock at artificially
inflated prices due to the Companys alleged violations of law related to disclosures about
Vioxx. The Company has removed this lawsuit to the U.S. District Court for the District of
Oregon, and the JPML has conditionally ordered it to be transferred to the Shareholder MDL.
Plaintiff has filed a motion to remand the case to state court, which is pending.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 making similar allegations were filed in the New Jersey Superior Court for
Hunterdon County and in the United States District Court for the District of New Jersey (all
of the actions discussed in this paragraph are collectively referred to as the Vioxx
Derivative Lawsuits). On February 23, 2005, the JPML transferred the VioxxDerivative
Lawsuits pending in federal court to the Shareholder MDL. Judge Chesler has consolidated the
VioxxDerivative Lawsuits for all purposes. On June 20, 2005, the federal derivative
plaintiffs filed a Verified Consolidated Shareholders Derivative Complaint superseding prior
complaints in the various cases. Defendants have filed a motion to dismiss this complaint,
which is pending. In addition, the VioxxDerivative Lawsuits pending in New Jersey Superior
Court have been consolidated and transferred to Judge Higbee in Atlantic County, and on April
29, 2005, state plaintiffs filed a superseding Verified Consolidated Amended Shareholder
Derivative Complaint. Defendants have moved to stay the state court proceedings during the
pendency of the federal VioxxDerivative Lawsuits; that motion is pending.As previously disclosed, on October 29, 2004, two individual shareholders made a demand on the
Board to take legal action against Mr. Raymond Gilmartin, former 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, as previously disclosed, after the announcement of the voluntary worldwide
withdrawal of Vioxx, putative class actions were filed against the Company and certain current
and former officers and directors of 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 and claim that the defendants breached their duties as plan fiduciaries.On February 23, 2005, the JPML transferred all VioxxERISA Lawsuits to the Shareholder MDL.
Judge Chesler has consolidated the VioxxERISA Lawsuits for all purposes. A consolidated and
amended complaint was filed in the VioxxERISA Lawsuits on August 2, 2005. Defendants have
filed a motion to dismiss this complaint, which is pending.International LawsuitsAs previously disclosed, in addition to the lawsuits discussed above, the Company has been
named as a defendant in litigation relating to Vioxxin various countries (collectively, the
VioxxForeign Lawsuits) in Europe, Canada, Brazil, Australia, Turkey, and Israel.
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Notes to Consolidated Financial Statements
 Additional LawsuitsBased 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.InsuranceAs 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.As previously disclosed, the Companys upper level excess insurers (which provide excess
insurance potentially applicable to all of the VioxxLawsuits) have commenced an arbitration
seeking, among other things, to cancel those policies, to void all of their obligations under
those policies and to raise other coverage issues with respect to the VioxxLawsuits. Merck
intends to contest vigorously the insurers claims and will attempt to enforce its rights
under applicable insurance policies. The amounts actually recovered under the policies
discussed in this section may be less than the amounts specified in the preceding paragraph.InvestigationsAs 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, as previously disclosed, 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
European Union (EU) adverse experience reporting requirements in connection with Vioxx. In
addition, the Prosecutors Office in Zurich, Switzerland and Bochum, Germany are each
conducting an investigation in order to determine whether any criminal charges should be
brought concerning Vioxx. The Company is cooperating with these governmental entities in
their respective investigations (the VioxxInvestigations). The Company cannot predict the
outcome of these inquiries; however, they could result in potential civil and/or criminal
dispositions.ReservesThe Company currently anticipates that one additional VioxxProduct Liability Lawsuit
will go to trial in the fourth quarter of 2005 and other VioxxProduct Liability Lawsuits will
be tried in 2006. 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 Vioxx
Litigation).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 was based on certain
assumptions and was the minimum amount that the Company believed that it could reasonably
estimate would be spent over a multi-year period. 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
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Notes to Consolidated Financial Statements
 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. Based on the
progression of cases and the level of spending to date, the Company did not increase the Vioxx
legal defense reserve as of the end of the third quarter. The Company will continue to monitor
its legal defense costs and review the adequacy of the associated reserves. There are events,
such as the scheduled trials discussed above, that are expected to occur in the near term that
may have an impact on the Companys conclusions as to the adequacy of the reserves for legal
defense costs.Unfavorable outcomes in the VioxxLitigation could have a material adverse effect on the
Companys financial position, liquidity and results of operations.Commercial LitigationBeginning 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.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 a number of 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 court dismissed the federal claims in the Minnesota case with prejudice and
the plaintiffs have filed a Notice of Appeal. The state claims in that action were dismissed
without prejudice.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 filed a motion to dismiss the complaint on numerous grounds which was
recently denied by the court.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 State of Louisiana has filed its own amended complaint,
incorporating the allegations contained in the sealed amended complaint. The allegations
contained in the sealed 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
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Notes to Consolidated Financial Statements
 the Medicaid Best Price scheme related to such arrangements. The Company intends to
vigorously defend against this lawsuit.Governmental ProceedingsAs previously disclosed, the Company has received a subpoena from the DOJ in connection with
its investigation of the Companys marketing and selling activities. The Company has also
reported that it has received a Civil Investigative Demand (CID) from the Attorney General
of Texas regarding the Companys marketing and selling activities relating to Texas.
Recently, the Company received another CID from the Attorney General of Texas asking for
additional information regarding the Companys marketing and selling activities related to
Texas, including with respect to certain of its nominal pricing programs. 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. In September 2005, the Company received a subpoena from the Illinois Attorney
General. The subpoena seeks information related to repackaging of prescription drugs.As previously disclosed, 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 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 section. It is not feasible to predict the
outcome of any such inquiries.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, 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 (SPC) which provides the Company certain rights with respect to the
manufacture and sale of Tienamin Italy which expires in January 2006. A hearing before the
Italian Antitrust Authorities was held on May 2, 2005. On June 17, 2005, the Italian
Antitrust Authority (ICA) issued an order imposing interim measures requiring the Company to
grant a license to manufacture Tienamin Italy. Pursuant to the ICAs order, the license
granted to Dobfar will be limited to the right to only manufacture and build supply stock of
Tienamand will not allow Dobfar to export Tienamoutside of Italy or to sell their Tienam
product within Italy prior to the expiry of the SPC. The Company has appealed the ICAs order
and the proceedings before the ICA are ongoing.Vaccine LitigationAs 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 reconsidered the cases of some other claimants and, to date,
funding has been reinstated in approximately 35 non-lead, non-autism cases against the
Company, in most cases to the limited extent necessary to allow solicitors to provide a report
on the individual cases to the LSC. As a result of the judges ruling following a case
management hearing, approximately 530 cases against the Company have been brought to an end.
There are now 45 claimants
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Notes to Consolidated Financial Statements
 proceeding or intending to proceed against the Company. 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 September 30, 2005, there were approximately 285 active thimerosal related
lawsuits with approximately 800 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. All
of these cases have been dismissed. Certain of the dismissals have been appealed. Currently,
one case is set for trial in 2006. 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.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 LitigationFrom 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.The Company and AstraZeneca received notice in
October 2005 that Ranbaxy Laboratories Limited
(Ranbaxy)
has filed an ANDA for esomeprazole magnesium. The ANDA contains Paragraph IV challenges to
patents on Nexium. The Company and AstraZeneca are evaluating Ranbaxys notice. The Company
and AstraZeneca have 45 days within which to commence a patent infringement lawsuit against
Ranbaxy that would automatically stay FDA approval of Ranbaxys ANDA for 30 months or until an
adverse court decision, if any, whichever may occur earlier.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. 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. As
previously reported, on October 17, 2005, Merck was
notified that the U.S. Supreme Court would not review the Court of Appeals decision.
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Notes to Consolidated Financial Statements
 In May 2005, the Federal Court of Canada Trial Division issued a decision refusing to bar the
approval of generic alendronate on the ground that Mercks patent for weekly alendronate was
likely invalid. This decision cannot be appealed and generic alendronate was launched in
Canada in June 2005. In July 2005, Merck was sued in the Federal Court of Canada by Apotex
seeking damages for lost sales of generic weekly alendronate due to the patent proceeding.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 High Court of Justice has affirmed the
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 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.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 once-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. The Company is defending the
alendronate weekly product in other major European markets based on other patents.On October 5, 2004, in an action in Australia challenging the validity of the Companys
Australian patent for the once-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 once-weekly administration of alendronate.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.Environmental MattersAs previously disclosed, in December 2003, the Virginia Department of Environmental Quality
(VADEQ) issued a Notice of Violation of the Companys Elkton, Virginia facility for air
permit limit exceedances reported by the facility as a result of performance testing of a
process train. The Company has settled this matter with VADEQ by agreeing (i) to make $3.1
million in capital improvements at the site, (ii) to pay VADEQ a $200,000 fine, and (iii) to
perform a Supplemental Environmental Project for $300,000.Other LitigationOn July 27, 2005, Merck was served with a further shareholder derivative suit filed in the New
Jersey Superior Court for Hunterdon County against the Company and certain current and former
officers and directors. This lawsuit seeks to recover or cancel compensation awarded to the
Companys executive officers in 2004, and asserts claims for breach of fiduciary duty, waste
and unjust enrichment.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
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Notes to Consolidated Financial Statements
 appealed the decisions. A hearing on those appeals was held on September 29, 2005 and the
Company is awaiting a decision.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. Medco Health and the Company agreed to the proposed settlement in order to
avoid the significant cost and distraction of prolonged litigation. 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. The district court held hearings to hear objections to the fairness of the proposed
settlement and 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 were
filed and the appellate court heard oral argument in May 2005. The appellate court has not
yet decided the appeals. 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.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 incentives for U.S. multinationals to
repatriate accumulated income earned outside the United States as of December 31, 2002. In
accordance with the AJCA, the Company will repatriate $15 billion during 2005. The Company
recorded an income tax charge of $740 million in Taxes on Income in the second quarter
related to this repatriation. This charge was partially offset by a $100 million benefit
associated with a decision to implement certain tax planning strategies.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
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Notes to Consolidated Financial Statements
 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.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 Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Service Cost
    
    $
    81.0
    
    
    $
    73.1
    
    
    $
    242.1
    
    
    $
    225.7Interest Cost
    
    
    77.6
    
    
    
    70.2
    
    
    
    234.8
    
    
    
    214.1Expected return on plan assets
    
    
    (99.2
    )
    
    
    (93.1
    )
    
    
    (300.4
    )
    
    
    (274.8
    )Net amortization
    
    
    37.9
    
    
    
    37.2
    
    
    
    114.5
    
    
    
    97.2Settlements
    
    
    
    
    
    
    17.3
    
    
    
    
    
    
    
    17.3Termination Benefits
    
    
    5.6
    
    
    
    6.4
    
    
    
    10.2
    
    
    
    13.5$
    102.9
    
    
    $
    111.1
    
    
    $
    301.2
    
    
    $
    293.0
 The Company provides medical, dental and life insurance benefits, principally to its eligible
U.S. retirees and similar benefits to their dependents, through its other postretirement
benefits plans. The net cost of such plans consisted of the following components:
 ($ in millions)Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Service Cost
    
    $
    22.1
    
    
    $
    20.8
    
    
    $
    66.2
    
    
    $
    61.6Interest Cost
    
    
    26.3
    
    
    
    25.6
    
    
    
    79.1
    
    
    
    76.1Expected return on plan assets
    
    
    (25.8
    )
    
    
    (22.2
    )
    
    
    (77.5
    )
    
    
    (61.0
    )Net amortization
    
    
    5.4
    
    
    
    6.5
    
    
    
    16.2
    
    
    
    20.9Curtailments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12.3
    )Termination Benefits
    
    
    0.8
    
    
    
    1.0
    
    
    
    1.6
    
    
    
    2.5$
    28.8
    
    
    $
    31.7
    
    
    $
    85.6
    
    
    $
    87.8
 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 changed participant contributions and the service recognized for eligibility for
certain of its other postretirement benefit plans in 2004. These amendments generated
curtailment gains of $12.3 million for the nine month period ended September 30, 2004.The Company expects contributions to its defined benefit pension plans to total $515.0 million
during 2005.The Company recorded termination charges for the three and nine month periods ended September
30, 2005 of $5.6 million and $10.2 million, respectively, on its pension plans and $0.8
million and $1.6 million, respectively, on its other postretirement benefit plans. For the
three and nine month periods ended September 30, 2004 the charges were $6.4 million and $13.5
million, respectively, on its pension plans and $1.0 million and $2.5 million, respectively,
on its other
postretirement benefits plans. These termination charges relate to expanded eligibility for
certain employees associated with ongoing global position eliminations.
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##### Table of Contents



Notes to Consolidated Financial Statements
 In addition, the Company recorded a settlement charge of $17.3 million in the third quarter of
2004 on certain of its domestic pension plans resulting from employees electing to receive
their pension benefits as lump sum payments.
 10.
    
    Other (income) expense, net, consisted of:
 ($ in millions)Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Interest income
    
    $
    (122.3
    )
    
    $
    (75.7
    )
    
    $
    (314.8
    )
    
    $
    (209.8
    )Interest expense
    
    
    99.6
    
    
    
    72.4
    
    
    
    277.2
    
    
    
    216.8Exchange (gains)/losses
    
    
    (7.4
    )
    
    
    2.8
    
    
    
    (16.5
    )
    
    
    9.9Minority interests
    
    
    30.9
    
    
    
    37.6
    
    
    
    91.6
    
    
    
    114.0Other, net
    
    
    (25.5
    )
    
    
    (41.3
    )
    
    
    (21.7
    )
    
    
    (370.9
    )$
    (24.7
    )
    
    $
    (4.2
    )
    
    $
    15.8
    
    
    $
    (240.0
    )
 The change in Other, net for the nine months ended September 30, 2005, reflects the inclusion
in 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 nine months ended September 30, 2005 and 2004 was $288.2 million and
$238.1 million, respectively.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:
 ($ in millions)Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Average common shares outstanding
    
    
    2,194.0
    
    
    
    2,218.5
    
    
    
    2,200.9
    
    
    
    2,220.7Common shares issuable(1)
    
    
    3.0
    
    
    
    7.7
    
    
    
    3.4
    
    
    
    8.8Average common shares outstanding
assuming dilution
    
    
    2,197.0
    
    
    
    2,226.2
    
    
    
    2,204.3
    
    
    
    2,229.5
 
 (1)
    
    Issuable primarily under stock-based compensation plans. For the three and nine months ended September 30, 2005 and 2004, 247.5 million and 222.5
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 September 30, 2005 and 2004, representing
all changes in stockholders equity during the period other than changes resulting from the
Companys stock, was $1,466.0 million and $1,367.5 million, respectively. Comprehensive
income for the nine months ended September 30, 2005 and 2004 was $3,607.9 million and
$4,639.1 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.
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##### Table of Contents



Notes to Consolidated Financial Statements
 Revenues and profits for these segments are as follows:
 ($ in millions)Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Segment revenues:Merck Pharmaceutical
    
    $
    5,054.6
    
    
    $
    5,161.7
    
    
    $
    15,293.1
    
    
    $
    16,201.5Other segment revenues
    
    
    351.8
    
    
    
    318.8
    
    
    
    845.4
    
    
    
    815.7$
    5,406.4
    
    
    $
    5,480.5
    
    
    $
    16,138.5
    
    
    $
    17,017.2Segment profits:Merck Pharmaceutical
    
    $
    3,266.1
    
    
    $
    3,070.7
    
    
    $
    9,663.4
    
    
    $
    10,273.8Other segment profits
    
    
    378.9
    
    
    
    374.4
    
    
    
    883.5
    
    
    
    870.8$
    3,645.0
    
    
    $
    3,445.1
    
    
    $
    10,546.9
    
    
    $
    11,144.6
 A reconciliation of total segment revenues to consolidated sales is as follows:
 ($ in millions)Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Segment revenues
    
    $
    5,406.4
    
    
    $
    5,480.5
    
    
    $
    16,138.5
    
    
    $
    17,017.2Other revenues
    
    
    9.8
    
    
    
    57.6
    
    
    
    107.5
    
    
    
    173.5$
    5,416.2
    
    
    $
    5,538.1
    
    
    $
    16,246.0
    
    
    $
    17,190.7
 Other revenues are primarily comprised of miscellaneous corporate revenues, sales related to
divested products or businesses and other supply sales.
 Net sales by category of the Companys products were as follows:
 ($ in millions)Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Atherosclerosis
    
    $
    1,054.3
    
    
    $
    1,226.4
    
    
    $
    3,320.4
    
    
    $
    3,906.9Hypertension/heart failure
    
    
    919.2
    
    
    
    895.6
    
    
    
    2,806.7
    
    
    
    2,676.6Osteoporosis
    
    
    777.3
    
    
    
    777.7
    
    
    
    2,401.9
    
    
    
    2,328.7Respiratory
    
    
    692.5
    
    
    
    625.7
    
    
    
    2,157.1
    
    
    
    1,891.2Anti-bacterial/anti-fungal
    
    
    360.0
    
    
    
    304.9
    
    
    
    1,089.2
    
    
    
    859.9Vaccines/biologicals
    
    
    338.4
    
    
    
    297.8
    
    
    
    809.5
    
    
    
    750.2Ophthalmologicals
    
    
    192.3
    
    
    
    178.2
    
    
    
    557.0
    
    
    
    525.2Urology
    
    
    185.9
    
    
    
    179.8
    
    
    
    549.1
    
    
    
    539.1Human immunodeficiency virus (HIV)
    
    
    91.2
    
    
    
    64.9
    
    
    
    258.5
    
    
    
    193.4Anti-inflammatory/analgesics
    
    
    63.9
    
    
    
    250.0
    
    
    
    206.7
    
    
    
    1,687.0Other
    
    
    741.2
    
    
    
    737.1
    
    
    
    2,089.9
    
    
    
    1,832.5$
    5,416.2
    
    
    $
    5,538.1
    
    
    $
    16,246.0
    
    
    $
    17,190.7
 - 17 -




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##### Table of Contents



Notes to Consolidated Financial Statements
 Anti-inflammatory/analgesics includes sales of Vioxxprior to its voluntary worldwide
withdrawal 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.
  ($ in millions)Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Segment profits
    
    $
    3,645.0
    
    
    $
    3,445.1
    
    
    $
    10,546.9
    
    
    $
    11,144.6Other profits
    
    
    17.3
    
    
    
    (24.4
    )
    
    
    129.4
    
    
    
    0.2Adjustments
    
    
    170.1
    
    
    
    112.3
    
    
    
    419.9
    
    
    
    346.1Unallocated:Interest income
    
    
    122.3
    
    
    
    75.7
    
    
    
    314.8
    
    
    
    209.8Interest expense
    
    
    (99.6
    )
    
    
    (72.4
    )
    
    
    (277.2
    )
    
    
    (216.8
    )Equity income from affiliates
    
    
    68.0
    
    
    
    21.9
    
    
    
    141.7
    
    
    
    82.0Depreciation and amortization
    
    
    (386.3
    )
    
    
    (312.1
    )
    
    
    (1,086.3
    )
    
    
    (936.1
    )Research and development
    
    
    (942.6
    )
    
    
    (919.3
    )
    
    
    (2,736.0
    )
    
    
    (2,901.6
    )Other expenses, net
    
    
    (595.8
    )
    
    
    (513.8
    )
    
    
    (1,609.2
    )
    
    
    (1,133.5
    )$
    1,998.4
    
    
    $
    1,813.0
    
    
    $
    5,844.0
    
    
    $
    6,594.7
 Other profits are primarily comprised of miscellaneous corporate profits as well as operating
profits related to divested products or businesses and other supply sales. Adjustments
represent the elimination of the effect of double counting certain items of income and
expense. Equity income from affiliates includes taxes paid at the joint venture level and a
portion of equity income that is not reported in segment profits. Other expenses, net,
includes expenses from corporate and manufacturing cost centers and other miscellaneous income
(expense), net.
 - 18 -




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Summary
  Vioxx
 Vioxx
  Vioxx Vioxx
    - 19 -




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##### Table of Contents



Sales
  ($ in millions)Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Atherosclerosis
    
    $
    1,054.3
    
    
    $
    1,226.4
    
    
    $
    3,320.4
    
    
    $
    3,906.9Hypertension/heart failure
    
    
    919.2
    
    
    
    895.6
    
    
    
    2,806.7
    
    
    
    2,676.6Osteoporosis
    
    
    777.3
    
    
    
    777.7
    
    
    
    2,401.9
    
    
    
    2,328.7Respiratory
    
    
    692.5
    
    
    
    625.7
    
    
    
    2,157.1
    
    
    
    1,891.2Anti-bacterial/anti-fungal
    
    
    360.0
    
    
    
    304.9
    
    
    
    1,089.2
    
    
    
    859.9Vaccines/biologicals
    
    
    338.4
    
    
    
    297.8
    
    
    
    809.5
    
    
    
    750.2Ophthalmologicals
    
    
    192.3
    
    
    
    178.2
    
    
    
    557.0
    
    
    
    525.2Urology
    
    
    185.9
    
    
    
    179.8
    
    
    
    549.1
    
    
    
    539.1Human immunodeficiency virus (HIV)
    
    
    91.2
    
    
    
    64.9
    
    
    
    258.5
    
    
    
    193.4Anti-inflammatory/analgesics
    
    
    63.9
    
    
    
    250.0
    
    
    
    206.7
    
    
    
    1,687.0Other
    
    
    741.2
    
    
    
    737.1
    
    
    
    2,089.9
    
    
    
    1,832.5$
    5,416.2
    
    
    $
    5,538.1
    
    
    $
    16,246.0
    
    
    $
    17,190.7
 Vioxx
 Singulair
 Singulair Singulair
 Cozaar Hyzaar
 Cozaar Hyzaar Cozaar Hyzaar Hyzaar Cozaar Hyzaar
 
 * COZAAR and HYZAAR are registered trademarks of E.I. DuPont de Nemours & Company,
Wilmington, Delaware.
 - 20 -




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##### Table of Contents



Fosamax Fosamax Plus D Fosamax Fosavance
 Fosamax Fosamax Fosamax
  Fosamax
 Zocor
  ProQuad ProQuad M-M-R II Varivax
 Vaqta Vaqta
 Zetia Vytorin
 Zetia Ezetrol Zetia
 Vytorin Vytorin Inegy Vytorin
  - 21 -




---



##### Table of Contents



Hexavac Hexavac Hexavac Hexavac Hexavac Hexavac Hexavac
 Research and Development
 RotaTeq Zostavax
 Gardasil Gardasil in situ Gardasil
 Gardasil
 Gardasil, Gardasil Gardasil Gardasil Gardasil
  Gardasil Gardasil
 st
 Pargluva Pargluva Pargluva
 - 22 -




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##### Table of Contents



Liquidity and Capital Resources
 ($ in millions)
    
    September 30, 2005
    
    December 31, 2004Cash and Investments
    
    $
    15,264.8
    
    
    $
    13,817.0Working Capital
    
    $
    7,902.7
    
    
    $
    1,731.1Total debt to total liabilities and equity
    
    
    16.7
    %
    
    
    16.1
    %
      Recently Issued Accounting Standards
  - 23 -




---



##### Table of Contents



Other
  Legal Proceedings
  
 Item 4. Controls and Procedures
  CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
   - 24 -




---



##### Table of Contents



PART II   Other Information
 
 Item 1. Legal Proceedings
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   ($ in millions)Total Number
    
    Average Price
    
    Approximate Dollar Value of Sharesof Shares
    
    Paid Per
    
    That May Yet Be PurchasedPeriod
    
    Purchased(1)
    
    Share
    
    Under the Plans or Programs(1)July 1 - July 31, 2005
    
    
    2,554,802
    
    
    $
    31.25
    
    
    $
    7,956.5August 1 - August 31, 2005
    
    
    3,099,000
    
    
    $
    29.63
    
    
    $
    7,864.7September 1 - September 30, 2005
    
    
    2,952,500
    
    
    $
    28.34
    
    
    $
    7,781.1Total
    
    
    8,606,302
    
    
    $
    29.67
    
    
    $
    7,781.1
 
 (1)
    
    All shares purchased during the period were made as part of a plan announced in July 2002
to purchase $10 billion in Merck shares. 
 Item 6. Exhibits
 ExhibitNumber
    
    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 May 24, 2005)  Incorporated by
reference to Current Report on Form 8-K dated May 24, 200512
    
    Computation of Ratios of Earnings to Fixed Charges31.1
    
    Rule 13a  14(a)/15d  14(a) Certification of Chief Executive Officer31.2
    
    Rule 13a  14(a)/15d  14(a) Certification of Chief Financial Officer32.1
    
    Section 1350 Certification of Chief Executive Officer32.2
    
    Section 1350 Certification of Chief Financial Officer
 - 25 -




---



##### Table of Contents



Signatures
  MERCK & CO., INC.Date: November 8, 2005
    
    /s/ Kenneth C. FrazierKENNETH C. FRAZIERSenior Vice President and General CounselDate: November 8, 2005
    
    /s/ Richard C. HenriquesRICHARD C. HENRIQUESVice President, Controller
 - 26 -




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##### Table of Contents



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 May 24, 2005)  Incorporated by
reference to Current Report on Form 8-K dated May 24, 200512
    
    Computation of Ratios of Earnings to Fixed Charges31.1
    
    Rule 13a  14(a)/15d  14(a) Certification of Chief Executive Officer31.2
    
    Rule 13a  14(a)/15d  14(a) Certification of Chief Financial Officer32.1
    
    Section 1350 Certification of Chief Executive Officer32.2
    
    Section 1350 Certification of Chief Financial Officer
 - 27 -