##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the quarterly period ended March 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission
File No. 1-3305
 MERCK
& CO., INC.
     Incorporated in New Jersey
    
    I.R.S. Employer IdentificationNo. 22-1109110
  Class
    
    Number of Shares OutstandingCommon Stock
    
    2,182,507,131
 þ o
  þ o o
 o
 No
þ




---



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-10.1: OFFER LETTEREX-12: COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGESEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION    Table of Contents  
 Part I  Financial Information
 
 Item 1. Financial Statements
 THREE MONTHS ENDED MARCH 31, 2006 AND 2005
 Three MonthsEnded March 31,2006
    
    
    2005Sales
    
    $
    5,409.8
    
    
    $
    5,362.2Costs, Expenses and OtherMaterials and production
    
    
    1,342.7
    
    
    
    1,271.4Marketing and administrative
    
    
    1,715.0
    
    
    
    1,605.5Research and development
    
    
    942.0
    
    
    
    846.6Restructuring costs
    
    
    43.7
    
    
    
    7.8Equity income from affiliates
    
    
    (503.4
    )
    
    
    (316.3
    )Other (income) expense, net
    
    
    (100.6
    )
    
    
    26.53,439.4
    
    
    
    3,441.5Income Before Taxes
    
    
    1,970.4
    
    
    
    1,920.7Taxes on Income
    
    
    450.4
    
    
    
    550.6Net Income
    
    $
    1,520.0
    
    
    $
    1,370.1Basic Earnings per Common Share
    
    $
    .70
    
    
    $
    .62Earnings per Common Share Assuming Dilution
    
    $
    .69
    
    
    $
    .62Dividends Declared per Common Share
    
    $
    .38
    
    
    $
    .38
  2




---



##### Table of Contents



MARCH 31, 2006 AND DECEMBER 31, 2005
 March 31,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent AssetsCash and cash equivalents
    
    $
    10,187.2
    
    
    $
    9,585.3Short-term investments
    
    
    2,214.3
    
    
    
    6,052.3Accounts receivable
    
    
    3,040.7
    
    
    
    2,927.3Inventories (excludes inventories of $734.6 in 2006 and
$753.8 in 2005 classified in Other assets  see Note 5)
    
    
    1,664.3
    
    
    
    1,658.1Prepaid expenses and taxes
    
    
    905.4
    
    
    
    826.3Total current assets
    
    
    18,011.9
    
    
    
    21,049.3Investments
    
    
    3,102.4
    
    
    
    1,107.9Property, Plant and Equipment, at cost, net of allowance for
depreciation of $9,886.3 in 2006 and $9,315.1 in 2005
    
    
    13,979.9
    
    
    
    14,398.2Goodwill
    
    
    1,085.7
    
    
    
    1,085.7Other Intangibles, net
    
    
    483.1
    
    
    
    518.7Other Assets
    
    
    6,755.0
    
    
    
    6,686.0$
    43,418.0
    
    
    $
    44,845.8LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesLoans payable and current portion of long-term debt
    
    $
    1,952.0
    
    
    $
    2,972.0Trade accounts payable
    
    
    457.4
    
    
    
    471.1Accrued and other current liabilities
    
    
    4,953.4
    
    
    
    5,277.8Income taxes payable
    
    
    3,102.9
    
    
    
    3,691.5Dividends payable
    
    
    833.3
    
    
    
    830.0Total current liabilities
    
    
    11,299.0
    
    
    
    13,242.4Long-Term Debt
    
    
    4,762.6
    
    
    
    5,125.6Deferred Income Taxes and Noncurrent Liabilities
    
    
    6,074.5
    
    
    
    6,092.9Minority Interests
    
    
    2,435.7
    
    
    
    2,407.2Stockholders EquityCommon StockAuthorized - 5,400,000,000 sharesIssued       - 2,976,223,337 shares
    
    
    29.8
    
    
    
    29.8Other paid-in capital
    
    
    6,997.6
    
    
    
    6,900.0Retained earnings
    
    
    38,666.8
    
    
    
    37,980.0Accumulated other comprehensive income
    
    
    47.7
    
    
    
    52.345,741.9
    
    
    
    44,962.1Less treasury stock, at cost791,563,622
shares - March 31, 2006794,299,347
shares - December 31, 2005
    
    
    26,895.7
    
    
    
    26,984.4Total stockholders equity
    
    
    18,846.2
    
    
    
    17,977.7$
    43,418.0
    
    
    $
    44,845.8
  3




---



##### Table of Contents



THREE MONTHS ENDED MARCH 31, 2006 AND 2005
 Three Months EndedMarch 31,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIESNet Income
    
    $
    1,520.0
    
    
    $
    1,370.1Adjustments to reconcile net income to cash provided from operations:Depreciation and amortization
    
    
    623.4
    
    
    
    379.8Deferred income taxes
    
    
    (200.2
    )
    
    
    4.2Equity income from affiliates
    
    
    (503.4
    )
    
    
    (316.3
    )Dividends and distributions from equity affiliates
    
    
    473.5
    
    
    
    188.2Share-based compensation
    
    
    121.3
    
    
    
    9.7Other
    
    
    29.6
    
    
    
    111.4Net changes in assets and liabilities
    
    
    (757.4
    )
    
    
    (407.7
    )NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    1,306.8
    
    
    
    1,339.4CASH FLOWS FROM INVESTING ACTIVITIESCapital expenditures
    
    
    (197.6
    )
    
    
    (343.2
    )Purchase of securities, subsidiaries and other investments
    
    
    (5,808.2
    )
    
    
    (20,334.5
    )Proceeds from sale of securities, subsidiaries and other investments
    
    
    7,511.1
    
    
    
    19,469.1Other
    
    
    (0.4
    )
    
    
    (0.3
    )NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES
    
    
    1,504.9
    
    
    
    (1,208.9
    )CASH FLOWS FROM FINANCING ACTIVITIESNet change in short-term borrowings
    
    
    (1,348.5
    )
    
    
    (49.7
    )Proceeds from issuance of debt
    
    
    
    
    
    
    1,000.0Payments on debt
    
    
    (0.8
    )
    
    
    (515.6
    )Purchase of treasury stock
    
    
    (247.2
    )
    
    
    (253.2
    )Dividends paid to stockholders
    
    
    (829.8
    )
    
    
    (841.1
    )Proceeds from exercise of stock options
    
    
    301.2
    
    
    
    99.4Other
    
    
    (96.6
    )
    
    
    (1.5
    )NET CASH USED BY FINANCING ACTIVITIES
    
    
    (2,221.7
    )
    
    
    (561.7
    )EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
    
    
    11.9
    
    
    
    (58.0
    )NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    601.9
    
    
    
    (489.2
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    
    $
    9,585.3
    
    
    $
    2,878.8CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    10,187.2
    
    
    $
    2,389.6
  4




---



##### Table of Contents



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.Effective January 1, 2006, the Company began recognizing revenue from the sale of vaccines to
the Federal government for placement into stockpiles related to the Pediatric Vaccine
Stockpile in accordance with SEC Interpretation, Commission Guidance Regarding Accounting for
Sales of Vaccines and BioTerror Countermeasures to the Federal Government for Placement into
the Pediatric Vaccine Stockpile or the Strategic National Stockpile.The Company
retrospectively applied the impacts of adopting the Interpretation to the Companys
consolidated financial statements by reducing Accrued and other current liabilities by $103.4
million and increasing Income taxes payable by $42.3 million and Retained earnings by $61.1
million, respectively, in its December 31, 2005 consolidated
balance sheet. There was no impact to the Companys results of
operations for the periods ending March 31, 2006 and 2005,
respectively.2.
    
    In November 2005, the Company commenced the initial phase of its global restructuring
program designed to reduce the Companys cost structure, increase efficiency and enhance
competitiveness. As part of this program, the Company plans to sell or close five
manufacturing sites and two preclinical sites by the end of 2008 and eliminate approximately
7,000 positions company-wide. Through the end of 2008, when the initial phase of the global
restructuring program is expected to be substantially complete, the cumulative pre-tax costs
are expected to range from $1.8 billion to $2.2 billion. Approximately 70% of the cumulative
pre-tax costs are estimated as non-cash, relating primarily to accelerated depreciation for
those facilities scheduled for closure.For the three months ended March 31, 2006, the Company recorded pre-tax restructuring costs of
$304.1 million related primarily to the global restructuring program as follows: (1) $254.0
million of these costs pertained to accelerated depreciation related to the five Merck owned
manufacturing facilities worldwide and two preclinical sites, of which $198.6 million was
recorded to Materials and production and $55.4 million was recorded to Research and
development; (2) $27.8 million was recorded to Restructuring costs representing separation
costs associated with the global restructuring program as well as remaining costs associated
with earlier programs. In the first quarter of 2006, approximately 1,800 positions were
eliminated throughout the Company (which is comprised of actual headcount reductions and the
elimination of contractors and vacant positions) and; (3) $22.3 million of these costs
primarily include amounts related to the Companys pension and other postretirement plans,
asset impairments and other exit costs. Of the $22.3 million, $6.4 million was recorded to Materials
and production and $15.9 million was recorded to Restructuring costs. Since the inception of
the global restructuring program through March 31, 2006, the Company has recorded total
pre-tax accumulated costs of $685.3 million.The Company recorded Restructuring costs of $7.8 million for the three months ended March 31,
2005 associated with earlier restructuring programs.The following table summarizes the charges and spending relating to restructuring activities
during the first quarter of 2006.
 ($ in millions)Separation
    
    
    AcceleratedCosts
    
    
    Depreciation
    
    
    Other
    
    
    TotalRestructuring accrual as of January 1, 2006 *
    
    $
    240.3
    
    
    $
    
    
    
    $
    
    
    
    $
    240.3Expense
    
    
    27.8
    
    
    
    254.0
    
    
    
    22.3
    
    
    
    304.1Payments
    
    
    (84.8
    )
    
    
    
    
    
    
    (14.9
    )
    
    
    (99.7
    )Non-cash activity
    
    
    
    
    
    
    (254.0
    )
    
    
    (7.4
    )
    
    
    (261.4
    )Restructuring accrual as of March 31, 2006
    
    $
    183.3
    
    
    $
    
    
    
    $
    
    
    
    $
    183.3
 5




---



##### Table of Contents



Notes to Consolidated Financial Statements
 
 3.
    
    The Company has share-based compensation plans under which employees, non-employee
directors and employees of certain of the Companys equity method investees may be granted
options to purchase shares of Company common stock at the fair market value at the time of
grant. In addition to stock options, the Company grants performance share units (PSUs) and
restricted stock units (RSUs) to certain management level employees. These plans were
approved by the Companys shareholders. At March 31, 2006, 26.8 million shares were
authorized for future grants under the Companys share-based compensation plans. The Company
settles employee share-based compensation awards primarily with treasury shares.Generally, employee stock options are granted to purchase shares of Company stock at the fair
market value at the time of grant. These awards generally vest one-third each year over a
three year period, with a contractual term of 10 years. RSUs are stock awards that are granted
to employees and entitle the holder to shares of common stock as the awards vest, as well as
non-forfeitable dividend equivalents. The fair value of the awards is determined and fixed on
the grant date based on the Companys stock price. PSUs are stock awards where the ultimate
number of shares issued will be contingent on the Companys performance against a pre-set
objective or set of objectives. The fair value of each PSU is determined on the date of grant
based on the Companys stock price. Over the performance period, the number of shares of stock
that are expected to be issued will be adjusted based on the probability of achievement of a
performance target and final compensation expense will be recognized based on the ultimate
number of shares issued. 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.Effective January 1, 2006, the Company adopted Financial Accounting Standards No. 123R,
Share-Based Payments (FAS 123R). Employee share-based compensation expense was previously
recognized using the intrinsic value method which measures share-based compensation expense as
the amount at which the market price of the stock at the date of grant exceeds the exercise
price. FAS 123R requires the recognition of the fair value of share-based compensation in net
income, which the Company will recognize on a straight-line basis over the requisite service
period. Additionally, the Company elected the modified prospective transition method for
adopting FAS 123R, and therefore, prior periods were not restated. Under this method, the
provisions for FAS 123R apply to all awards granted or modified after January 1, 2006. In
addition, the unrecognized expense of awards that have not yet vested at the date of adoption
shall be recognized in net income in the relevant period after the
date of adoption. Also effective January 1, 2006, the Company
adopted
Financial Accounting Standards Board Staff Position 123R-3,
Transition Election Related to Accounting for the Tax Effects of
Share-Based Payment Awards, which provides the Company an optional
short cut method for calculating the historical pool of windfall tax
benefits upon adopting FAS 123R.The Company recognized share-based compensation cost in the amount of $121.3 million and $9.7
million in the first quarter of 2006 and 2005, respectively, as well as tax benefits of $37.3
million and $3.4 million, respectively. Substantially all of the 2005 amount was related to
RSUs. As a result of the adoption of FAS 123R, effective January 1, 2006, the incremental
impact on the Companys share based compensation expense caused Income Before Taxes and Net
Income for the quarter ended March 31, 2006 to be $98.6 million and $68.9 million lower,
respectively, than if the Company had continued to account for its share-based compensation
programs under the intrinsic value method. Additionally, earnings per share assuming dilution
were $.04 per share lower.
 6




---



##### Table of Contents



Notes to Consolidated Financial Statements
 FAS 123R requires the Company to present pro forma information for periods prior to the
adoption as if the Company had accounted for employee share-based compensation under the fair
value method of that Statement. For purposes of pro forma disclosure, the estimated fair value
at the date of grant, including those granted to retirement-eligible employees, is amortized
to expense over the requisite service period. The following table illustrates the effect on
net income and earnings per common share if the Company had applied the fair value method for
recognizing employee share-based compensation in the prior year quarter:
 ($ in millions)Three MonthsEnded March 31,2005Net income, as reported
    
    $
    1,370.1Compensation expense, net of tax:Reported
    
    
    6.3Fair value method
    
    
    (108.4
    )Pro forma net income
    
    $
    1,268.0Earnings per common share:Basic  as reported
    
    $
    .62Basic  pro forma
    
    $
    .57Assuming dilution  as reported
    
    $
    .62Assuming dilution  pro forma
    
    $
    .57
 The pro forma amounts and the fair value of each option grant were estimated on the date of
grant using the Black-Scholes option pricing model. Upon the adoption of FAS 123R,
compensation expense is being 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 this approach for stock options granted to retirement-eligible
employees, the effect on pro forma earnings per share assuming dilution for the three months
ended March 31, 2005, as provided in the above table, would not have been significant.The Company continues to use the Black-Scholes option pricing model for option grants after
adoption of FAS 123R. In applying this model, the Company uses both historical data and
current market data to estimate the fair value of its options. The Black-Scholes model
requires several assumptions including expected term of the options, risk-free rate,
volatility, and dividend yield. The expected term represents the expected amount of time that
options granted are expected to be outstanding, based on historical
and forecasted exercise behavior. The risk-free rate is based on the rate at
grant date of zero-coupon U.S. Treasury Notes with a term equal to the expected term of the
option. Expected volatility is estimated using a blend of historical and implied volatility. The
historical component is based on historical monthly price changes. The implied volatility is
obtained from market data on the Companys traded options.The weighted average fair value of options granted in the first quarter of 2006 were $6.90 per
option, determined using the following assumptions:
 Expected dividend yield
    
    
    4.34
    %Risk-free interest rate
    
    
    4.58
    %Expected volatility
    
    
    26.40
    %Expected life (years)
    
    
    5-6
 7




---



##### Table of Contents



Notes to Consolidated Financial Statements
  WeightedAverage
    
    
    AggregateRemaining
    
    
    IntrinsicNumber
    
    
    Average
    
    
    Contractual
    
    
    Valueof Options
    
    
    Price (1)
    
    
    Term
    
    
    ($000s)Balance at December 31, 2005
    
    
    250,088.0
    
    
    $
    54.52Granted
    
    
    27,785.6
    
    
    
    35.06Exercised
    
    
    (9,864.0
    )
    
    
    30.53Forfeited
    
    
    (5,879.2
    )
    
    
    59.29Outstanding at March 31, 2006
    
    
    262,130.4
    
    
    $
    53.25
    
    
    
    5.74
    
    
    $
    175,341.6Exercisable at March 31, 2006
    
    
    197,363.1
    
    
    $
    58.47
    
    
    
    4.68
    
    
    $
    80,701.3
 (1) Weighted average exercise price
 The total intrinsic values of stock options exercised were
$38.4 million and $50.7 million during the three month
periods ended March 31, 2006 and 2005, respectively. The fair
values of stock options vested were
$801.0 million and $877.3 million during the three month
periods ended March 31, 2006 and 2005, respectively. Cash
received from the exercise of stock options was $301.2 million
and $99.4 million for the periods ended March 31,
2006 and 2005, respectively.A summary of the Companys nonvested RSUs and PSUs (shares in thousands) at March 31, 2006 is as
follows:
 RSUs
    
    
    PSUsWeighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageNumber
    
    
    Grant Date
    
    
    Number
    
    
    Grant Dateof Shares
    
    
    Fair Value
    
    
    of Shares
    
    
    Fair ValueNonvested at December 31, 2005
    
    
    4,765.1
    
    
    $
    35.93
    
    
    
    1,022.2
    
    
    $
    39.73Granted
    
    
    1,408.7
    
    
    
    35.03
    
    
    
    520.7
    
    
    
    35.09Vested
    
    
    (16.1
    )
    
    
    37.12
    
    
    
    
    
    
    
    Forfeited
    
    
    (64.9
    )
    
    
    35.05
    
    
    
    (21.6
    )
    
    
    38.10Nonvested at March 31, 2006
    
    
    6,092.8
    
    
    $
    35.73
    
    
    
    1,521.3
    
    
    $
    38.16
 At March 31, 2006, there was $357.4 million of total pre-tax unrecognized compensation expense
related to nonvested stock option, RSU and PSU awards which will be recognized over a weighted
average period of 2.2 years.4.
    
    Merck continues its strategy of establishing strong external alliances to complement its
substantial internal research capabilities, including research collaborations, licensing
pre-clinical and clinical compounds and technology transfers to drive both near-and
long-term growth.In March 2006, Merck and Paratek Pharmaceuticals, Inc. (Paratek) announced they entered into
an exclusive, worldwide collaborative development and license agreement for PTK 0796, a novel,
broad-spectrum aminomethylcycline (AMC) antibiotic with oral and intravenous (IV) formulations
currently in Phase I clinical testing. Under the terms of the agreement, Merck provided
upfront funding, will assume primary responsibility for clinical development of the IV and
oral formulations of PTK 0796 and has the right to market such products worldwide. Paratek
will participate in clinical development and be eligible to receive payments upon achievement
of certain milestones; these payments could total as much as $127 million once PTK 0796 is
approved for marketing. Paratek will also receive royalties on net sales and have the
opportunity to co-promote the IV formulation of PTK 0796 in the United States.In March 2006, Neuromed Pharmaceuticals Ltd. (Neuromed) and Merck signed a research
collaboration and license agreement to research, develop and commercialize novel compounds for
the treatment of pain and other neurological disorders, including Neuromeds lead compound,
NMED-160, which is currently in Phase II development for the treatment of pain. Under the
terms of the agreement, Neuromed received an upfront payment
 8




---



##### Table of Contents



Notes to Consolidated Financial Statements
 of $25 million which the Company recorded as Research and development expense. The successful
development and launch of NMED-160 for an initial single indication on a worldwide basis would
trigger milestone payments totaling $202 million. Milestones could increase to approximately
$450 million if a further indication for NMED-160 is developed and approved and an additional
compound is developed and approved for two indications. Neuromed would also receive royalties
on worldwide sales of NMED-160 and any additional compounds developed under this agreement.Also in March 2006, Merck signed an agreement with NicOx S.A. (NicOx) to collaborate on the
development of new antihypertensive drugs using NicOxs proprietary nitric oxide-donating
technology. Under the terms of the agreement, NicOx received an upfront payment of
approximately $11.2 million, which the Company recorded as Research and development expense,
and is eligible for potential further milestone payments of approximately $340.2 million.
Merck will also pay NicOx royalties on the sales of all products resulting from the
collaboration.5.
    
    Inventories consisted of:
 ($ in millions)March
    
    
    December31, 2006
    
    
    31, 2005Finished goods
    
    $
    392.8
    
    
    $
    400.0Raw materials and work in process
    
    
    1,919.2
    
    
    
    1,929.8Supplies
    
    
    86.9
    
    
    
    82.1Total (approximates current cost)
    
    
    2,398.9
    
    
    
    2,411.9Reduction to LIFO cost for domestic inventories
    
    
    
    
    
    
    $
    2,398.9
    
    
    $
    2,411.9Recognized as:Inventories
    
    $
    1,664.3
    
    
    $
    1,658.1Other assets
    
    
    734.6
    
    
    
    753.8
 Amounts recognized as Other assets are comprised entirely of raw materials and work in process
inventories, which include inventories produced in preparation for product launches,
principally Gardasiland Januvia, and inventories for other products, principally vaccines and
Arcoxia, not expected to be sold within one year.6.
    
    During the first quarter of 2006, the Company entered into a pay-floating, receive-fixed
interest rate swap contract that effectively converts $250 million of its $1.0 billion,
4.75% fixed-rate notes to floating rate instruments. The interest rate swap is designated
as a hedge of the fair value changes in the notes attributable to changes in the benchmark
London Interbank Offered Rate (LIBOR) swap rate and will mature in 2015. The fair value
changes in the notes are fully offset in interest expense by the fair value changes in the
swap contract.7.
    
    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.VioxxLitigationProduct 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 March 31, 2006, the Company has been served or is aware that it has been named
as a defendant in approximately 11,500 lawsuits, which include approximately 23,350 plaintiff
groups, alleging personal injuries resulting from the use of Vioxx. Of these lawsuits,
approximately 5,175 lawsuits representing approximately 14,850 plaintiff groups are or are
slated to be in the federal MDL (discussed below) and approximately 5,250 lawsuits
representing approximately 5,250 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 190 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,
 9




---



##### Table of Contents



Notes to Consolidated Financial Statements
 Texas, New Jersey, and Philadelphia, Pennsylvania, respectively,
have been transferred to a single judge in each state for coordinated proceedings.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.Judge Fallon has indicated that he intends to try a series of cases during the period November
2005 through 2006, in 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.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 March 31, 2006, approximately 4,450 claimants had
entered into Tolling Agreements.The Company has previously disclosed the outcomes of several VioxxProduct Liability Lawsuits
that were tried prior to March 31, 2006. In April 2006, in
a trial involving two plaintiffs,
Thomas Cona and John McDarby, in Superior Court of New Jersey, Law Division, Atlantic County,
the jury returned a split verdict. The jury determined that Vioxxdid not substantially
contribute to the heart attack of Mr. Cona, but did substantially contribute to the heart
attack of Mr. McDarby. In addition, the jury concluded that, in each case, Merck violated New
Jerseys consumer fraud statute, which allows plaintiffs to receive their expenses for
purchasing the drug, trebled, as well as reasonable attorneys fees. The jury awarded $4.5
million in compensatory damages to Mr. McDarby and his wife, who also was a plaintiff in that
case, as well as punitive damages of $9 million. The Company intends to appeal this verdict
after the completion of post-trial proceedings in the trial court.Also in April 2006, in Garza v. Merck, a jury in state court in Rio Grande City, Texas
returned a verdict in favor of the family of decedent Leonel Garza. The jury awarded a total
of $7 million in compensatory damages to Mr. Garzas
widow and three sons. The jury also
purported to award $25 million in punitive damages. Under Texas law, in this case the
punitive damages are capped at $750,000. The Company intends to appeal this verdict after
completion of post-trial proceedings in the trial court.Other LawsuitsAs previously disclosed, on July 29, 2005, a New Jersey state trial court certified a
nationwide class of third-party payors (such as unions and health insurance plans) that paid
in whole or in part for the Vioxxused by their plan members or insureds. The named plaintiff
in that case seeks recovery of certain Vioxxpurchase costs (plus penalties) based on
allegations that the purported class members paid more for Vioxxthan they would have had they
known of the products alleged risks. Merck believes that the class was improperly certified.
The trial courts ruling is procedural only; it does not address the merits of plaintiffs
allegations, which the Company intends to defend vigorously. On March 31, 2006, the New
Jersey state Superior Court, Appellate Division, affirmed the class certification order.
Merck intends to seek further appellate review in the New Jersey Supreme Court.As previously reported, the Company has also been named as a defendant in separate lawsuits
brought by the Attorneys General of Alaska, Louisiana, Mississippi, and Texas. The Attorney
General of Montana has also recently filed a lawsuit. These actions allege that the Company
misrepresented the safety of Vioxxand seek (i) recovery of the cost of Vioxxpurchased or
reimbursed by the state and its agencies; (ii) reimbursement of all sums paid by the state and
its agencies for medical services for the treatment of persons injured by Vioxx; (iii) damages
under various common law theories; and/or (iv) remedies under various state statutory
theories, including state consumer fraud and/or fair business practices or Medicaid fraud
statutes, including civil penalties.Shareholder LawsuitsAs previously disclosed, in addition to the VioxxProduct Liability Lawsuits, the Company,
along with various current and former officers and directors of the Company, are defendants in
a number of putative class actions and
 10




---



##### Table of Contents



Notes to Consolidated Financial Statements
 individual lawsuits filed in (or removed to) federal
court by shareholders under the federal securities laws (the VioxxSecurities Lawsuits), all
of which have been transferred by the JPML, 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 VioxxSecurities Lawsuits filed a Fourth
Consolidated and Amended Class Action Complaint superseding prior complaints 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 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 moved to dismiss the complaint, which motion is pending.As previously disclosed, a number of shareholder derivative actions have been filed in federal
court and in New Jersey Superior Court 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. All of the actions discussed in this paragraph are collectively referred to as
the VioxxDerivative Lawsuits. The JPML has transferred the VioxxDerivative Lawsuits
pending in federal court to the Shareholder MDL. Judge Chesler consolidated the Vioxx
Derivative 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 filed a motion to dismiss this
complaint. On May 5, 2006, Judge Chesler granted
defendants motion to dismiss and denied plaintiffs
request for leave to amend their complaint.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, a number of putative class actions have been filed
against the Company and certain current and former officers and directors of the Company in
federal court (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. The JPML
has 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 as well as Canada, Brazil, Australia, Turkey, and Israel.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.
 11




---



##### Table of Contents



Notes to Consolidated Financial Statements
 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 that its insurance coverage with respect to the VioxxLawsuits will not be adequate
to cover its defense costs and any losses.As previously disclosed, the Companys upper level excess insurers (which provide excess
insurance potentially applicable to all of the VioxxLawsuits) have commenced an arbitration
seeking, among other things, to cancel those policies, to void all of their obligations under
those policies and to raise other coverage issues with respect to the VioxxLawsuits. A
second arbitration against one of the Companys upper level excess insurers has also been
commenced. 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 SEC
that it was commencing an informal inquiry concerning Vioxx. On January 28, 2005, the Company
announced that it received notice that the SEC issued a formal notice of investigation. Also,
the Company has received subpoenas from the U.S. Department of Justice (the DOJ) requesting
information related to the Companys research, marketing and selling activities with respect
to Vioxxin a federal health care investigation under criminal statutes. 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. Recently, the MHRA advised the Company that its investigation has been completed
and no enforcement action will be taken with respect to the matter. In addition, as
previously disclosed, investigations are being conducted by local authorities in certain
cities in Europe in order to determine whether any criminal charges should be brought
concerning Vioxx. The Company is cooperating with these governmental entities in their
respective investigations (the VioxxInvestigations). The Company cannot predict the
outcome of these inquiries; however, they could result in potential civil and/or criminal
dispositions.As previously disclosed, the Company has received a Civil Investigative Demand (CID) from a
group of Attorneys General from 31 states and the District of Columbia who are investigating
whether the Company violated state consumer protection laws when marketing Vioxx. The Company
is cooperating with the Attorneys General in responding to the initial CID and additional
requests for information.ReservesThe Company currently anticipates that a number of VioxxProduct Liability Lawsuits will be
tried in 2006. The Company cannot predict the timing of any trials with respect to the Vioxx
Shareholder Lawsuits. The Company believes that it has meritorious defenses to the Vioxx
Lawsuits and will vigorously defend against them. In view of the inherent difficulty of
predicting the outcome of litigation, particularly where there are many claimants and the
claimants seek indeterminate damages, the Company is unable to predict the outcome of these
matters, and at this time cannot reasonably estimate the possible loss or range of loss with
respect to the VioxxLawsuits. The Company has not established any reserves for any potential
liability relating to the VioxxLawsuits or the VioxxInvestigations, including for those
cases in which a verdict or judgment has been entered against the Company, and are now in
post-verdict proceedings or on appeal. In each of those cases the Company believes it has
strong points to raise on appeal and therefore that unfavorable outcomes in such cases are not
probable.Legal defense costs expected to be incurred in connection with a loss contingency are accrued
when probable and reasonably estimable. As of December 31, 2004, the Company had established
a reserve of $675 million solely for its future legal defense costs related to the Vioxx
Litigation.During 2005, the Company spent $285 million in the aggregate in legal defense costs worldwide
related to (i) the VioxxProduct Liability Lawsuits, (ii) the VioxxShareholder Lawsuits,
(iii) the VioxxForeign Lawsuits, and (iv) the
 12




---



##### Table of Contents



Notes to Consolidated Financial Statements
 VioxxInvestigations (collectively, the Vioxx
Litigation). In the fourth quarter, the Company recorded a charge of $295 million to
increase the reserve solely for its future legal defense costs related to the VioxxLitigation
to $685 million at December 31, 2005. This reserve is based on certain assumptions and is the
best estimate of the amount that the Company believes, at this time, it can reasonably
estimate will be spent through 2007. Some of the significant factors considered in the
establishment and ongoing review of the reserve for the Vioxxlegal defense costs were as
follows: the actual costs incurred by the Company up to that time; the development of the
Companys legal defense strategy and structure in light of the scope of the VioxxLitigation;
the number of cases being brought against the Company; the costs and outcomes of completed
trials and the anticipated timing, progression, and related costs of pre-trial activities and
trials in the VioxxProduct Liability Lawsuits. Events such as scheduled trials, that are
expected to occur throughout 2006 and into 2007, and the inherent inability to predict the
ultimate outcomes of such trials, limit the Companys ability to reasonably estimate its legal
costs beyond the end of 2007. The Company will continue to monitor its legal defense costs
and review the adequacy of the associated reserves. Unfavorable outcomes in the Vioxx
Litigation could have a material adverse effect on the Companys financial position, liquidity
and results of operations.Governmental ProceedingsAs previously disclosed, the Company has received a subpoena from the DOJ in connection with
its investigation of the Companys marketing and selling activities, including nominal pricing
programs and samples. The Company has been advised that the activities being investigated by
the DOJ are also the subject of a qui tamcomplaint. The Company has also reported that it
has received a CID from the Attorney General of Texas regarding the Companys marketing and
selling activities relating to Texas. As previously disclosed, the Company received another
CID from the Attorney General of Texas asking for additional information regarding the
Companys marketing and selling activities related to Texas; the second CID includes requests
with respect to nominal pricing programs and samples. In April 2004, the Company received a
subpoena from the office of the Inspector General for the District of Columbia in connection
with an investigation of the Companys interactions with physicians in the District of
Columbia, Maryland, and Virginia. In November 2004, the Company received a letter request
from the DOJ in connection with its investigation of the Companys pricing of Pepcid. 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 tamcomplaint 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 or the
Companys business practices in inquiries other than the investigations discussed in this
section. It is not feasible to predict the outcome of any such inquiries.8.
    
    As previously disclosed, in October 2004, the American Jobs Creation Act of 2004 (the AJCA)
was signed into law. The AJCA created 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 repatriated $15.9 billion during 2005. The Company
recorded an income tax charge of $766.5 million in the third and fourth quarters of 2005
related to this repatriation, $185.0 million of which was paid in 2005 and the remainder was
paid in the first quarter of 2006. 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. In addition, the Company has subsidiaries operating in
Puerto Rico and Singapore under tax incentive grants that expire in 2015 and 2026,
respectively.9.
    
    The Companys federal income tax returns have been audited through 1992. As previously
disclosed, the Internal Revenue Service (IRS) has substantially completed its examination of
the Companys tax returns for the years 1993 to 1996 and on April 28, 2004, in connection
with its examination, the IRS issued a preliminary notice of deficiency
 13




---



##### Table of Contents



Notes to Consolidated Financial Statements
 with respect to a
partnership transaction entered into in 1993. On December 13, 2005, the Company received a
final notice of deficiency with respect to the transaction with regard to the 1993 tax
return. Specifically, the IRS disallowed certain royalty and other expenses claimed as
deductions on the 1993 tax return. The preliminary notice proposed disallowing similar type
expenses on the 1994-1996 tax returns. The Company anticipates receiving a similar notice
of deficiency for 1997-1999. If the IRS ultimately prevails in its positions, the Companys
income tax due for year 1993 would increase by approximately $60 million plus interest of
approximately $70 million and penalties of approximately $12 million. For the years
1994-1999, the tax would increase by approximately $910 million plus interest of
approximately $630 million. The IRS will likely make similar claims for years subsequent to
1999 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 $100 million. The IRS has proposed penalties on the
Company with respect to all periods that were the subject of the preliminary notice of
adjustment 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.In January 2006, the IRS issued a summons requesting certain information in connection with a
minority interest equity financing transaction entered into in 1995. Merck has cooperated
with the terms of the summons. In April 2006, certain current executives received summonses in
connection with this matter.10.
    
    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 31,2006
    
    
    2005Service Cost
    
    $
    90.0
    
    
    $
    82.0Interest Cost
    
    
    84.8
    
    
    
    79.0Expected return on plan assets
    
    
    (108.0
    )
    
    
    (101.2
    )Net amortization
    
    
    42.4
    
    
    
    38.5Termination Benefits
    
    
    13.5
    
    
    
    2.9Curtailments
    
    
    0.2
    
    
    
    $
    122.9
    
    
    $
    101.2
 14




---



##### Table of Contents



Notes to Consolidated Financial Statements
 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 31,2006
    
    
    2005Service Cost
    
    $
    21.2
    
    
    $
    22.9Interest Cost
    
    
    25.4
    
    
    
    26.6Expected return on plan assets
    
    
    (28.2
    )
    
    
    (25.8
    )Net amortization
    
    
    1.0
    
    
    
    5.6Termination Benefits
    
    
    1.4
    
    
    
    0.4$
    20.8
    
    
    $
    29.7
 In connection with restructuring actions (see Note 2), the Company recorded termination
charges for the three months ended March 31, 2006 and 2005 of $13.5 million and $2.9 million,
respectively, on its pension plans and $1.4 million and $0.4 million, respectively, on its
other postretirement benefit plans related to expanded eligibility for certain employees
exiting the Company.Also, in connection with these restructuring actions, the Company recorded curtailment losses
of $0.2 million for the three months ended March 31, 2006 on its pension plans.11.
    
    Other (income) expense, net, consisted of:
 ($ in millions)Three MonthsEnded March 31,2006
    
    
    2005Interest income
    
    $
    (181.7
    )
    
    $
    (93.8
    )Interest expense
    
    
    98.2
    
    
    
    84.5Exchange gains
    
    
    (0.4
    )
    
    
    (0.7
    )Minority interests
    
    
    29.9
    
    
    
    30.4Other, net
    
    
    (46.6
    )
    
    
    6.1$
    (100.6
    )
    
    $
    26.5
 The increase in interest income reflects interest income generated from the short-term
investment portfolio derived from higher short-term interest rates.Interest paid for the three months ended March 31, 2006 and 2005 was $147.1 million and $93.1
million, respectively.
 15




---



##### Table of Contents



Notes to Consolidated Financial Statements
 12.
    
    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 31,2006
    
    
    2005Average common shares outstanding
    
    
    2,184.3
    
    
    
    2,207.2Common shares issuable(1)
    
    
    6.2
    
    
    
    3.2Average common shares outstanding
assuming dilution
    
    
    2,190.5
    
    
    
    2,210.4
 (1)
    
    Issuable primarily under share-based compensation plans.For the three months ended March 31, 2006 and 2005, 230.5 million and 253.2 million,
respectively, common shares issuable under the Companys share-based compensation plans were
excluded from the computation of earnings per common share assuming dilution because the
effect would have been antidilutive.13.
    
    Comprehensive income for the three months ended March 31, 2006 and 2005, representing all
changes in stockholders equity during the period other than changes resulting from the
Companys stock, was $1,515.4 million and $1,343.1 million, respectively.14.
    
    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 31,2006
    
    
    2005Segment revenues:Merck Pharmaceutical
    
    $
    5,071.2
    
    
    $
    5,072.3Other segment revenues
    
    
    264.6
    
    
    
    232.9$
    5,335.8
    
    
    $
    5,305.2Segment profits:Merck Pharmaceutical
    
    $
    3,497.7
    
    
    $
    3,162.5Other segment profits
    
    
    248.9
    
    
    
    240.4$
    3,746.6
    
    
    $
    3,402.9
 A reconciliation of total segment revenues to consolidated sales is as follows:
 ($ in millions)Three MonthsEnded March 31,2006
    
    
    2005Segment revenues
    
    $
    5,335.8
    
    
    $
    5,305.2Other revenues
    
    
    74.0
    
    
    
    57.0$
    5,409.8
    
    
    $
    5,362.2
 16




---



##### Table of Contents



Notes to Consolidated Financial Statements
 Other revenues are primarily comprised of miscellaneous corporate revenues, sales related to
divested products or businesses and other supply sales.
 Sales (1)of the Companys products were as follows:
 ($ in millions)Three MonthsEnded March 31,2006
    
    
    2005Zocor
    
    $
    1,063.5
    
    
    $
    1,106.0Singulair
    
    
    801.4
    
    
    
    735.0Fosamax
    
    
    753.6
    
    
    
    771.8Cozaar/Hyzaar
    
    
    701.1
    
    
    
    719.1Proscar
    
    
    188.2
    
    
    
    175.1Primaxin
    
    
    169.6
    
    
    
    184.8Cosopt/Trusopt
    
    
    151.6
    
    
    
    140.2Cancidas
    
    
    146.3
    
    
    
    130.3Vasotec/Vaseretic
    
    
    136.1
    
    
    
    158.2Maxalt
    
    
    92.9
    
    
    
    77.7Propecia
    
    
    75.3
    
    
    
    70.1Vaccines/Biologicals
    
    
    271.5
    
    
    
    223.8Other
    
    
    858.7
    
    
    
    870.1$
    5,409.8
    
    
    $
    5,362.2
 (1)Presented net of discounts and returns.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 primarily relating to sales of Nexiumand Prilosec.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 Income Before Taxes is as follows:
 ($ in millions)Three MonthsEnded March 31,2006
    
    
    2005Segment profits
    
    $
    3,746.6
    
    
    $
    3,402.9Other profits
    
    
    58.2
    
    
    
    65.5Adjustments
    
    
    156.0
    
    
    
    120.3Unallocated:Interest income
    
    
    181.7
    
    
    
    93.8Interest expense
    
    
    (98.2
    )
    
    
    (84.5
    )Equity income from affiliates
    
    
    69.5
    
    
    
    62.8Depreciation and amortization
    
    
    (582.8
    )
    
    
    (340.2
    )Research and development
    
    
    (942.0
    )
    
    
    (846.6
    )Other expenses, net
    
    
    (618.6
    )
    
    
    (553.3
    )$
    1,970.4
    
    
    $
    1,920.7
 17




---



##### Table of Contents



Notes to Consolidated Financial Statements
 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.
 18




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Management
  Operating Results
 Global Restructuring Program
  Share-Based Compensation
   Summary
      19




---



##### Table of Contents



Sales
  ($ in millions)Three MonthsEnded March 31,2006
    
    
    2005Zocor
    
    $
    1,063.5
    
    
    $
    1,106.0Singulair
    
    
    801.4
    
    
    
    735.0Fosamax
    
    
    753.6
    
    
    
    771.8Cozaar/Hyzaar
    
    
    701.1
    
    
    
    719.1Proscar
    
    
    188.2
    
    
    
    175.1Primaxin
    
    
    169.6
    
    
    
    184.8Cosopt/Trusopt
    
    
    151.6
    
    
    
    140.2Cancidas
    
    
    146.3
    
    
    
    130.3Vasotec/Vaseretic
    
    
    136.1
    
    
    
    158.2Maxalt
    
    
    92.9
    
    
    
    77.7Propecia
    
    
    75.3
    
    
    
    70.1Vaccines/Biologicals
    
    
    271.5
    
    
    
    223.8Other
    
    
    858.7
    
    
    
    870.1$
    5,409.8
    
    
    $
    5,362.2
  Singulair Singulair Singulair
 20




---



##### Table of Contents



Cozaar Hyzaar Cozaar/Hyzaar
 Fosamax Fosamax Fosavance
  Zocor Zocor Zocor
  RotaTeq RotaTeq RotaTeq
 Arcoxia Arcoxia Arcoxia
  Zetia Vytorin,
 
 * COZAAR and HYZAAR are registered trademarks of E.I. DuPont de Nemours & Company, Wilmington,
Delaware.
 21




---



##### Table of Contents



Zetia Ezetrol
 Vytorin Vytorin Inegy
  Research and Development
  Zostavax Zostavax
 Zostavax RotaTeq Zostavax RotaTeq
 Gardasil Gardasil Gardasil
 Januvia Januvia
 Januvia Januvia
    th
 22




---



##### Table of Contents



Liquidity and Capital Resources($ in millions)
    
    March 31, 2006
    
    
    December 31, 2005Cash and Investments
    
    $
    15,503.9
    
    
    $
    16,745.5Working Capital
    
    $
    6,712.9
    
    
    $
    7,806.9Total debt to total liabilities and equity
    
    
    15.5
    %
    
    
    18.1
    %
       23




---



##### Table of Contents



Critical Accounting Policies
  Recently Issued Accounting Standards
 Determining the Variability to Be Considered in Applying FASB Interpretation No.
46R Consolidation of Variable Interest Entities
 Legal Proceedings
  Vioxx Litigation
 Product Liability Lawsuits
 Vioxx Vioxx Vioxx Vioxx Vioxx
 Vioxx
 Vioxx
 24




---



##### Table of Contents



Vioxx www.Merck.com
 Vioxx
 Vioxx Vioxx
  Other Lawsuits
 Vioxx Vioxx Vioxx
 Vioxx Vioxx Vioxx
 Shareholder Lawsuits
 Vioxx Vioxx Vioxx Vioxx Vioxx
 25




---



##### Table of Contents



Vioxx
 Vioxx Vioxx Vioxx Vioxx
 Vioxx
 Vioxx Vioxx Vioxx Vioxx Vioxx Vioxx Vioxx Vioxx
 International Lawsuits
 Vioxx Vioxx
 Additional Lawsuits
 Vioxx Vioxx Vioxx Vioxx
 Insurance
 Vioxx Vioxx Vioxx Vioxx Vioxx Vioxx
 26




---



##### Table of Contents



Vioxx
 Vioxx Vioxx
 Investigations
 Vioxx Vioxx Vioxx Vioxx Vioxx
 Vioxx
 Reserves
 Vioxx Vioxx Vioxx Vioxx Vioxx Vioxx
 Vioxx
 Vioxx Vioxx Vioxx Vioxx Vioxx Vioxx Vioxx Vioxx Vioxx
 27




---



##### Table of Contents



Vioxx L
 Other Product Liability Litigation
 Fosamax Fosamax
 Governmental Proceedings
 qui tam Pepcid
 qui tam
  Patent Litigation
 Fosamax Prilosec, Nexium Propecia,
Trusopt Cosopt Prilosec Nexium Prilosec Fosamax Propecia Trusopt Cosopt Prilosec Nexium
  28




---



##### Table of Contents



Fosamax Fosamax
 Trusopt Cosopt Trusopt Cosopt Cosopt Trusopt Cosopt
  Nexium Nexium
 Propecia
 Cozaar
 Other Litigation
  29




---



##### Table of Contents



Item 4. Controls and Procedures
   CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
   30




---



##### Table of Contents



PART II   Other Information
 
 Item 1. Legal Proceedings
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   ($ in millions)Approximate Dollar ValueTotal Number
    
    
    Average Price
    
    
    Of Shares That May Yetof Shares
    
    
    Paid Per
    
    
    Be Purchased Under thePeriod
    
    Purchased(1)
    
    
    Share
    
    
    Plans or Programs(1)January 1 - January 31, 2006
    
    
    2,375,000
    
    
    $
    33.38
    
    
    $
    7,450.5February 1 - February 28, 2006
    
    
    2,168,500
    
    
    $
    34.84
    
    
    $
    7,374.9March 1 - March 31, 2006
    
    
    2,607,700
    
    
    $
    35.41
    
    
    $
    7,282.6Total
    
    
    7,151,200
    
    
    $
    34.56
    
    
    $
    7,282.6
 (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
 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 May 24, 2005) -
Incorporated by reference to Current Report on Form 8-K dated May 24, 200510.1
    
    Offer Letter between Merck & Co., Inc. and Peter Loescher, dated March 15, 200612
    
    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
 31




---



##### Table of Contents



Signatures
  MERCK & CO., INC.Date: May 9, 2006
    
    /s/ Kenneth C. FrazierKENNETH C. FRAZIERSenior Vice President and General CounselDate: May 9, 2006
    
    /s/ Richard C. HenriquesRICHARD C. HENRIQUESVice President, Controller
 32




---



##### 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, 200510.1
    
    Offer Letter between Merck & Co., Inc. and Peter Loescher, dated March 15, 200612
    
    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
 33