##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2008
 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
    
    2,114,186,139
 þ o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o 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-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
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Sales
    
    $
    5,943.9
    
    
    $
    6,074.1
    
    
    $
    17,817.9
    
    
    $
    17,954.8Costs, Expenses and OtherMaterials and production
    
    
    1,477.9
    
    
    
    1,517.7
    
    
    
    4,112.5
    
    
    
    4,595.9Marketing and administrative
    
    
    1,730.3
    
    
    
    1,951.4
    
    
    
    5,515.0
    
    
    
    5,837.2Research and development
    
    
    1,171.1
    
    
    
    1,440.5
    
    
    
    3,418.7
    
    
    
    3,501.0Restructuring costs
    
    
    757.5
    
    
    
    49.3
    
    
    
    929.4
    
    
    
    170.9Equity income from affiliates
    
    
    (665.6
    )
    
    
    (768.5
    )
    
    
    (1,840.7
    )
    
    
    (2,180.2
    )Other (income) expense, net
    
    
    61.8
    
    
    
    (180.9
    )
    
    
    (2,197.4
    )
    
    
    (521.2
    )4,533.0
    
    
    
    4,009.5
    
    
    
    9,937.5
    
    
    
    11,403.6Income Before Taxes
    
    
    1,410.9
    
    
    
    2,064.6
    
    
    
    7,880.4
    
    
    
    6,551.2Taxes on Income
    
    
    318.2
    
    
    
    539.1
    
    
    
    1,716.8
    
    
    
    1,644.9Net Income
    
    $
    1,092.7
    
    
    $
    1,525.5
    
    
    $
    6,163.6
    
    
    $
    4,906.3Basic Earnings per Common Share
    
    $
    0.51
    
    
    $
    0.70
    
    
    $
    2.87
    
    
    $
    2.26Earnings per Common Share Assuming Dilution
    
    $
    0.51
    
    
    $
    0.70
    
    
    $
    2.86
    
    
    $
    2.24Dividends Declared per Common Share
    
    $
    0.38
    
    
    $
    0.38
    
    
    $
    1.14
    
    
    $
    1.14
  - 2 -




---



##### Table of Contents



September 30,
    
    December 31,2008
    
    2007AssetsCurrent AssetsCash and cash equivalents
    
    $
    5,720.1
    
    
    $
    5,336.1Short-term investments
    
    
    1,121.2
    
    
    
    2,894.7Accounts receivable
    
    
    3,642.6
    
    
    
    3,636.2Inventories (excludes inventories of $415.6 in 2008 and $345.2
in 2007 classified in Other assets  see Note 5)
    
    
    2,228.2
    
    
    
    1,881.0Deferred income taxes and other current assets
    
    
    6,706.4
    
    
    
    1,297.4Total current assets
    
    
    19,418.5
    
    
    
    15,045.4Investments
    
    
    6,211.6
    
    
    
    7,159.2Property, Plant and Equipment, at cost, net of allowance for
depreciation of $11,869.1 in 2008 and $12,457.1 in 2007
    
    
    12,103.2
    
    
    
    12,346.0Goodwill
    
    
    1,438.7
    
    
    
    1,454.8Other Intangibles, Net
    
    
    558.2
    
    
    
    713.2Other Assets
    
    
    8,815.5
    
    
    
    11,632.1$
    48,545.7
    
    
    $
    48,350.7Liabilities and Stockholders EquityCurrent LiabilitiesLoans payable and current portion of long-term debt
    
    $
    2,994.2
    
    
    $
    1,823.6Trade accounts payable
    
    
    474.7
    
    
    
    624.5Accrued and other current liabilities
    
    
    9,271.2
    
    
    
    8,534.9Income taxes payable
    
    
    879.3
    
    
    
    444.1Dividends payable
    
    
    808.9
    
    
    
    831.1Total current liabilities
    
    
    14,428.3
    
    
    
    12,258.2Long-Term Debt
    
    
    3,938.8
    
    
    
    3,915.8Deferred Income Taxes and Noncurrent Liabilities
    
    
    8,167.9
    
    
    
    11,585.3Minority Interests
    
    
    2,439.7
    
    
    
    2,406.7Stockholders EquityCommon stock, one cent par valueAuthorized - 5,400,000,000 sharesIssued - 2,983,508,675 shares
    
    
    29.8
    
    
    
    29.8Other paid-in capital
    
    
    8,269.5
    
    
    
    8,014.9Retained earnings
    
    
    42,857.3
    
    
    
    39,140.8Accumulated other comprehensive loss
    
    
    (1,033.6
    )
    
    
    (826.1
    )50,123.0
    
    
    
    46,359.4Less treasury stock, at cost869,322,536 shares at September 30, 2008811,005,791 shares at December 31, 2007
    
    
    30,552.0
    
    
    
    28,174.7Total stockholders equity
    
    
    19,571.0
    
    
    
    18,184.7$
    48,545.7
    
    
    $
    48,350.7
  - 3 -




---



##### Table of Contents



Nine Months EndedSeptember 30,2008
    
    2007Cash Flows from Operating ActivitiesNet income
    
    $
    6,163.6
    
    
    $
    4,906.3Adjustments to reconcile net income to net cash provided by operating activities:Gain on distribution from AstraZeneca LP
    
    
    (2,222.7
    )
    
    
    Equity income from affiliates
    
    
    (1,840.7
    )
    
    
    (2,180.2
    )Dividends and distributions from equity affiliates
    
    
    3,750.9
    
    
    
    1,626.1Depreciation and amortization
    
    
    1,157.2
    
    
    
    1,489.2Deferred income taxes
    
    
    (163.8
    )
    
    
    (391.6
    )Share-based compensation
    
    
    285.5
    
    
    
    250.8Acquired research
    
    
    
    
    
    
    325.1Other
    
    
    461.1
    
    
    
    19.8Taxes paid for Internal Revenue Service settlement
    
    
    
    
    
    
    (2,788.1
    )Net changes in assets and liabilities
    
    
    (2,030.2
    )
    
    
    1,394.0Net Cash Provided by Operating Activities
    
    
    5,560.9
    
    
    
    4,651.4Cash Flows from Investing ActivitiesCapital expenditures
    
    
    (914.3
    )
    
    
    (726.3
    )Purchases of securities and other investments
    
    
    (9,154.8
    )
    
    
    (7,188.1
    )Acquisitions of subsidiaries, net of cash acquired
    
    
    
    
    
    
    (1,135.9
    )Proceeds from sales of securities and other investments
    
    
    8,456.8
    
    
    
    8,311.9Distribution from AstraZeneca LP
    
    
    1,899.3
    
    
    
    Increase in restricted assets
    
    
    (1,662.3
    )
    
    
    (1,224.1
    )Other
    
    
    (8.9
    )
    
    
    0.3Net Cash Used by Investing Activities
    
    
    (1,384.2
    )
    
    
    (1,962.2
    )Cash Flows from Financing ActivitiesNet change in short-term borrowings
    
    
    2,553.3
    
    
    
    161.1Payments on debt
    
    
    (1,391.7
    )
    
    
    (1,158.9
    )Purchases of treasury stock
    
    
    (2,515.4
    )
    
    
    (574.6
    )Dividends paid to stockholders
    
    
    (2,469.6
    )
    
    
    (2,478.1
    )Proceeds from exercise of stock options
    
    
    100.5
    
    
    
    473.4Other
    
    
    (44.2
    )
    
    
    106.1Net Cash Used by Financing Activities
    
    
    (3,767.1
    )
    
    
    (3,471.0
    )Effect of Exchange Rate Changes on Cash and Cash Equivalents
    
    
    (25.6
    )
    
    
    75.4Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    384.0
    
    
    
    (706.4
    )Cash and Cash Equivalents at Beginning of Year
    
    
    5,336.1
    
    
    
    5,914.7Cash and Cash Equivalents at End of Period
    
    $
    5,720.1
    
    
    $
    5,208.3
  - 4 -




---



##### Table of Contents



Notes to Consolidated Financial Statements (unaudited)
 1.
    
    Basis of PresentationThe accompanying unaudited interim consolidated financial statements have been prepared pursuant
to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and
disclosures required by accounting principles generally accepted in the United States for
complete consolidated financial statements are not included herein. The interim statements
should be read in conjunction with the financial statements and notes thereto included in the
Companys latest Annual Report on Form 10-K.The results of operations of any interim period are not necessarily indicative of the results of
operations for the full year. In the Companys opinion, all adjustments necessary for a fair
presentation of these interim statements have been included and are of a normal and recurring
nature.On January 1, 2008, the Company adopted Financial Accounting Standards Board (FASB) Statement
No. 157, Fair Value Measurements(FAS 157), which clarifies the definition of fair value,
establishes a framework for measuring fair value, and expands the disclosures on fair value
measurements. In February 2008, the FASB issued Staff Position 157-2, Effective Date of FASB
Statement No. 157(FSP 157-2),that deferred the effective date of FAS 157 for one year for
nonfinancial assets and liabilities recorded at fair value on a non-recurring basis. The effect
of adoption of FAS 157 for financial assets and liabilities recognized at fair value on a
recurring basis did not have a material impact on the Companys financial position and results
of operations (see Note 4). The Company is assessing the impact of adopting FAS 157 for
nonfinancial assets and liabilities. In October 2008, the FASB issued Staff Position 157-3,
Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active
(FSP 157-3), which clarifies the application of FAS 157 in a market that is not active. FSP
157-3 was effective for the Company at September 30, 2008, and the effect of adoption on the
Companys financial position and results of operations was not material.On January 1, 2008, the Company adopted Emerging Issues Task Force (EITF) Issue No. 07-3,
Accounting for Advance Payments for Goods or Services Received for Use in Future Research and
Development Activities(EITF 07-3), which is being applied prospectively for new contracts.
EITF 07-3 addresses nonrefundable advance payments for goods or services that will be used or
rendered for future research and development activities. EITF 07-3 requires these payments be
deferred and capitalized and recognized as an expense as the related goods are delivered or the
related services are performed. The effect of adoption of EITF 07-3 on the Companys financial
position and results of operations was not material.On January 1, 2008, the Company adopted FASB Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115
(FAS 159). FAS 159 permits companies to choose an irrevocable election to measure certain
financial assets and financial liabilities at fair value. Unrealized gains and losses on items
for which the fair value option has been elected are reported in earnings at each subsequent
reporting date. The Company did not elect the fair value option under FAS 159 for any of its
financial assets or liabilities upon adoption.In December 2007, the FASB issued Statement No. 141R, Business Combinations(FAS 141R), and
Statement No. 160, Noncontrolling Interests in Consolidated Financial Statementsan amendment of
ARB No. 51(FAS 160). FAS 141R expands the scope of acquisition accounting to all
transactions under which control of a business is obtained. Among other things, FAS 141R
requires that contingent consideration as well as contingent assets and liabilities be recorded
at fair value on the acquisition date, that acquired in-process research and development be
capitalized and recorded as intangible assets at the acquisition date, and also requires
transaction costs and costs to restructure the acquired company be expensed. FAS 160 provides
guidance for the accounting, reporting and disclosure of noncontrolling interests and requires,
among other things, that noncontrolling interests be recorded as equity in the consolidated
financial statements. FAS 141R and FAS 160 are both effective, on a prospective basis, January
1, 2009 with the exception of the presentation and disclosure requirements of FAS 160 which must
be applied retrospectively. The Company is assessing the impacts of these standards on its
financial position and results of operations.In December 2007, the FASB ratified the consensus reached by the EITF on Issue No. 07-1
(EITF 07-1), Accounting for Collaborative Arrangements. EITF 07-1 is effective for the
Company beginning January 1, 2009 and will be applied retrospectively to all prior periods
presented for all collaborative arrangements existing as of the effective date. EITF 07-1
defines collaborative arrangements and establishes reporting requirements for transactions
between participants in a collaborative arrangement and between participants in the arrangement
and third parties. The Company is assessing the impact of adoption of EITF 07-1 on its financial
position and results of operations.
 - 5 -




---



##### Table of Contents



Notes to Consolidated Financial Statements (unaudited)
 In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and
Hedging Activities(FAS 161), which is effective January 1, 2009. FAS 161 requires enhanced
disclosures about derivative instruments and hedging activities to allow for a better
understanding of their effects on an entitys financial position, financial performance, and
cash flows. Among other things, FAS 161 requires disclosure of the fair values of derivative
instruments and associated gains and losses in a tabular format. Since FAS 161 requires only
additional disclosures about the Companys derivatives and hedging activities, the adoption of
FAS 161 will not affect the Companys financial position or results of operations.In May 2008, the FASB issued Statement No. 162, The Hierarchy of Generally Accepted Accounting
Principles(FAS 162), which is effective in the fourth quarter of 2008. FAS 162 identifies
the sources of accounting principles and the framework for selecting the principles used (order
of authority) in the preparation of financial statements that are presented in conformity with
generally accepted accounting standards in the United States. The Company does not expect the
adoption of FAS 162 to have a material impact on its financial statements.In June 2008, the FASB issued Staff Position EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities(FSP EITF 03-6-1),
which is effective January 1, 2009. FSP EITF 03-6-1 clarifies that share-based payment awards
that entitle holders to receive nonforfeitable dividends before they vest will be considered
participating securities and included in the basic earnings per share calculation. The Company
is assessing the impact of adoption of FSP EITF 03-6-1 on its results of operations.2.
    
    Restructuring2008 Global Restructuring ProgramIn October 2008, the Company announced a global restructuring program (the 2008 Restructuring
Program) which represents the Companys efforts to reduce its cost structure, increase
efficiency, and enhance competitiveness. As part of the 2008 Restructuring Program, the Company
expects to eliminate approximately 7,200 positions  6,800 active employees and 400 vacancies 
across all areas of the Company worldwide by the end of 2011. About 40% of the total reductions
will occur in the United States. To streamline management layers across the Company, Merck will
reduce its total number of senior and mid-level executives by approximately 25%. Merck will
accelerate the rollout of a new, more customer-centric selling model designed to provide Merck
with a meaningful competitive advantage and help physicians, patients and payers improve patient
outcomes. The Company also will make greater use of outside technology resources, centralize
common sales and marketing activities, and consolidate and streamline its operations. Mercks
manufacturing division will further focus its capabilities on core products and outsource
non-core manufacturing. In addition, Merck is enhancing its research operations to expand
access to worldwide external science and incorporate it as a key component of the Companys
pipeline, and ensure a more sustainable pipeline by translating basic research productivity into
late-stage clinical success. As a result, basic research operations will be organized to
consolidate work in support of a given therapeutic area into one of four locations.  This will
provide a more efficient use of research facilities and result in the closure of three basic
research sites in Tsukuba, Japan; Pomezia, Italy; and Seattle by the end of 2009.Separation costs are accounted for under FASB Statement No. 112, Employers Accounting for
Postemployment Benefits  an amendment of FASB Statement No. 5 and 43 (FAS 112), and FASB
Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities(FAS 146).
In connection with the 2008 Restructuring Program, separation costs under the Companys
existing severance programs worldwide were accounted for under FAS 112 and recorded in the third
quarter of 2008 to the extent such costs were estimable. The costs related to one-time
termination benefits offered to employees under the 2008 Restructuring Program will be accrued
in the fourth quarter of 2008 as that is when the criteria necessary for accrual under FAS 146
will be met. The Company recorded pretax restructuring costs of $720 million related to the
2008 Restructuring Program in the third quarter of 2008 and anticipates that an additional $250
million to $450 million will be recorded in the fourth quarter of 2008. The 2008 Restructuring
Program is expected to be completed by the end of 2011 with the total pretax costs estimated to
be $1.6 billion to $2.0 billion. The Company estimates that two-thirds of the cumulative pretax
costs will result in future cash outlays, primarily from employee separation expense.
Approximately one-third of the cumulative pretax costs are non-cash, relating primarily to the
accelerated depreciation of facilities to be closed or divested.
 - 6 -




---



##### Table of Contents



Notes to Consolidated Financial Statements (unaudited)
 2005 Global Restructuring Program
    2008Three Months Ended September 30,
    
    Nine Months Ended September 30,Separation
    
    Accelerated
    
    
    
    
    
    
    
    
    
    Separation
    
    Accelerated($ in millions)
    
    Costs
    
    Depreciation
    
    Other
    
    Total
    
    Costs
    
    Depreciation
    
    Other
    
    Total2008 ProgramMaterials and production
    
    $
    
    
    
    $
    3.9
    
    
    $
    30.0
    
    
    $
    33.9
    
    
    $
    
    
    
    $
    3.9
    
    
    $
    30.0
    
    
    $
    33.9Research and development
    
    
    
    
    
    
    31.0
    
    
    
    
    
    
    
    31.0
    
    
    
    
    
    
    
    31.0
    
    
    
    
    
    
    
    31.0Restructuring costs
    
    
    631.0
    
    
    
    
    
    
    
    24.1
    
    
    
    655.1
    
    
    
    631.0
    
    
    
    
    
    
    
    24.1
    
    
    
    655.1631.0
    
    
    
    34.9
    
    
    
    54.1
    
    
    
    720.0
    
    
    
    631.0
    
    
    
    34.9
    
    
    
    54.1
    
    
    
    720.02005 ProgramMaterials and production
    
    $
    
    
    
    $
    23.5
    
    
    $
    1.4
    
    
    $
    24.9
    
    
    $
    
    
    
    $
    54.6
    
    
    $
    1.3
    
    
    $
    55.9Research and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restructuring costs
    
    
    74.1
    
    
    
    
    
    
    
    28.3
    
    
    
    102.4
    
    
    
    251.1
    
    
    
    
    
    
    
    23.2
    (1)
    
    
    274.374.1
    
    
    
    23.5
    
    
    
    29.7
    
    
    
    127.3
    
    
    
    251.1
    
    
    
    54.6
    
    
    
    24.5
    
    
    
    330.2$
    705.1
    
    
    $
    58.4
    
    
    $
    83.8
    
    
    $
    847.3
    
    
    $
    882.1
    
    
    $
    89.5
    
    
    $
    78.6
    
    
    $
    1,050.2
 2007Three Months Ended September 30,
    
    Nine Months Ended September 30,Separation
    
    Accelerated
    
    
    
    
    
    
    
    
    
    Separation
    
    Accelerated($ in millions)
    
    Costs
    
    Depreciation
    
    Other
    
    Total
    
    Costs
    
    Depreciation
    
    Other
    
    Total2005 ProgramMaterials and production
    
    $
    
    
    
    $
    127.4
    
    
    $
    1.4
    
    
    $
    128.8
    
    
    $
    
    
    
    $
    363.7
    
    
    $
    1.9
    
    
    $
    365.6Research and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.1
    )
    
    
    (0.1
    )Restructuring costs
    
    
    36.7
    
    
    
    
    
    
    
    12.6
    
    
    
    49.3
    
    
    
    121.7
    
    
    
    
    
    
    
    49.2
    
    
    
    170.9$
    36.7
    
    
    $
    127.4
    
    
    $
    14.0
    
    
    $
    178.1
    
    
    $
    121.7
    
    
    $
    363.7
    
    
    $
    51.0
    
    
    $
    536.4
 (1)
    
    Includes proceeds from the sales of facilities in connection with the 2005 Restructuring Program.
    - 7 -




---



##### Table of Contents



Notes to Consolidated Financial Statements (unaudited)
  Separation
    
    Accelerated($ in millions)
    
    Costs
    
    Depreciation
    
    Other
    
    Total2008 ProgramRestructuring reserves as of January 1, 2008
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Expense
    
    
    631.0
    
    
    
    34.9
    
    
    
    54.1
    
    
    
    720.0(Payments) receipts, net
    
    
    
    
    
    
    
    
    
    
    (10.3
    )
    
    
    (10.3
    )Non-cash activity
    
    
    
    
    
    
    (34.9
    )
    
    
    (43.8
    )
    
    
    (78.7
    )Restructuring reserves as of September 30, 2008(1)
    
    $
    631.0
    
    
    $
    
    
    
    $
    
    
    
    $
    631.02005 ProgramRestructuring reserves as of January 1, 2008
    
    $
    231.5
    
    
    $
    
    
    
    $
    
    
    
    $
    231.5Expense
    
    
    251.1
    
    
    
    54.6
    
    
    
    24.5
    
    
    
    330.2(Payments) receipts, net
    
    
    (307.5
    )
    
    
    
    
    
    
    (12.9
    )      (2)
    
    
    (320.4
    )Non-cash activity
    
    
    
    
    
    
    (54.6
    )
    
    
    (11.6
    )
    
    
    (66.2
    )Restructuring reserves as of September 30, 2008(1)
    
    $
    175.1
    
    
    $
    
    
    
    $
    
    
    
    $
    175.1
 (1)
    
    The cash outlays associated with the restructuring reserve for the 2008
Restructuring Program are expected to be completed by the end of 2011. The cash outlays
associated with the remaining restructuring reserve for the 2005 Restructuring Program are
expected to be largely completed by the end of 2009.(2)
    
    Includes proceeds from the sales of facilities in connection with the 2005
Restructuring Program.
 3. Research Collaborations
   4. Fair Value Measurements
  - 8 -




---



##### Table of Contents



Notes to Consolidated Financial Statements (unaudited)
  Level 1
 Level 2
 Level 3
   Fair Value Measurements UsingQuoted Prices
    
    SignificantIn Active
    
    Other
    
    SignificantMarkets for
    
    Observable
    
    UnobservableIdentical Assets
    
    Inputs
    
    Inputs($ in millions)
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)
    
    TotalAssetsInvestmentsCorporate notes and bonds
    
    $
    
    
    
    $
    3,081.9
    
    
    $
    
    
    
    $
    3,081.9U.S. government and agency securities
    
    
    
    
    
    
    2,620.3
    
    
    
    
    
    
    
    2,620.3Mortgage-backed securities (1)
    
    
    
    
    
    
    555.6
    
    
    
    
    
    
    
    555.6Foreign government bonds
    
    
    
    
    
    
    456.4
    
    
    
    
    
    
    
    456.4Asset-backed securities(1)
    
    
    
    
    
    
    303.3
    
    
    
    
    
    
    
    303.3Equity securities
    
    
    104.6
    
    
    
    86.4
    
    
    
    
    
    
    
    191.0Commercial paper
    
    
    
    
    
    
    124.3
    
    
    
    
    
    
    
    124.3Total investments
    
    
    104.6
    
    
    
    7,228.2
    
    
    
    
    
    
    
    7,332.8Other assets(2)
    
    
    
    
    
    
    3,036.9
    
    
    
    183.7
    
    
    
    3,220.6Derivative assets
    
    
    
    
    
    
    471.7
    
    
    
    
    
    
    
    471.7Total Assets
    
    
    104.6
    
    
    
    10,736.8
    
    
    
    183.7
    
    
    
    11,025.1LiabilitiesDerivative liabilities
    
    $
    
    
    
    $
    74.7
    
    
    $
    
    
    
    $
    74.7
 (1)
    
    Mortgage-backed securities represent AAA rated securities issued or
unconditionally guaranteed as to payment of principal and interest by U.S. government agencies.
Substantially all of the asset-backed securities are highly-rated (Standard & Poors rating of
AAA and Moodys Investors Service rating of Aaa), secured primarily by credit card, auto loan,
and home equity receivables, with weighted-average lives of primarily 5 years or less.(2)
    
    Other assets represent a portion of the pledged collateral discussed in Note 7
and Note 12. Level 2 Other assets are comprised primarily of $1,411.1 million in corporate
notes and bonds, $750.7 million in municipal securities, $352.3 million in mortgage-backed
securities, $270.0 million of asset-backed securities and $227.8 million in commercial paper.
 - 9 -




---



##### Table of Contents



Notes to Consolidated Financial Statements (unaudited)
 Level 3 Valuation Techniques:
   Three Months Ended September 30, 2008Total Realized and
    
    
    
    
    
    
    LossesUnrealized Gains/
    
    
    
    
    
    
    Recorded inNet
    
    Purchases,
    
    (Losses) Included in:
    
    
    
    
    
    
    Earnings forBeginning
    
    Transfers
    
    Sales,
    
    
    
    
    
    Compre-
    
    Ending
    
    
    Level 3 AssetsBalance
    
    In to
    
    Settlements,
    
    
    
    
    
    hensive
    
    Balance
    
    
    Still Held at($ in millions)
    
    July 1
    
    Level 3
    
    Net
    
    Earnings (1)
    
    Income
    
    September 30
    
    
    September 30Other assets
    
    $
    179.5
    
    
    $
    32.6
    
    
    $
    (28.3
    )
    
    $
    1.3
    
    
    $
    (1.4
    )
    
    $
    183.7
    
    
    
    $
    (0.2
    )
 Nine Months Ended September 30, 2008Total Realized and
    
    
    
    
    
    
    LossesUnrealized Losses
    
    
    
    
    
    
    Recorded inNet
    
    Purchases,
    
    Included in:
    
    
    
    
    
    
    Earnings forBeginning
    
    Transfers
    
    Sales,
    
    
    
    
    
    Compre-
    
    Ending
    
    
    Level 3 AssetsBalance
    
    (Out) of
    
    Settlements,
    
    
    
    
    
    hensive
    
    Balance
    
    
    Still Held at($ in millions)
    
    January 1
    
    Level 3
    
    Net
    
    Earnings (1)
    
    Income
    
    September 30
    
    
    September 30Other assets
    
    $
    958.6
    
    
    $
    (712.2
    )
    
    $
    (52.9
    )
    
    $
    (6.9
    )
    
    $
    (2.9
    )
    
    $
    183.7
    
    
    
    $
    (7.2
    )Other debt securities
    
    
    314.5
    
    
    
    (314.5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    1,273.1
    
    
    $
    (1,026.7
    )
    
    $
    (52.9
    )
    
    $
    (6.9
    )
    
    $
    (2.9
    )
    
    $
    183.7
    
    
    
    $
    (7.2
    )
 (1)
    
    Amounts are recorded in Other (income) expense, net, in the Consolidated
Statement of Income.
  - 10 -




---



##### Table of Contents



5.
    
    InventoriesInventories consisted of:
 September 30,
    
    December 31,($ in millions)
    
    2008
    
    2007Finished goods
    
    $
    463.6
    
    
    $
    382.9Raw materials and work in process
    
    
    2,071.9
    
    
    
    1,732.2Supplies
    
    
    108.3
    
    
    
    111.1Total (approximates current cost)
    
    
    2,643.8
    
    
    
    2,226.2Reduction to LIFO cost for domestic inventories
    
    
    
    
    
    
    $
    2,643.8
    
    
    $
    2,226.2Recognized as:Inventories
    
    $
    2,228.2
    
    
    $
    1,881.0Other assets
    
    $
    415.6
    
    
    $
    345.2
 Amounts recognized as Other assets are comprised entirely of raw materials and work in process
inventories, representing inventories for products not expected to be sold within one year, the
majority of which are vaccines.6.
    
    Joint Ventures and Other Equity Method AffiliatesEquity income from affiliates reflects the performance of the Companys joint ventures and other
equity method affiliates and was comprised of the following:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,($ in millions)
    
    2008
    
    2007
    
    2008
    
    2007Merck/Schering-Plough
    
    $
    400.2
    
    
    $
    480.9
    
    
    $
    1,158.2
    
    
    $
    1,293.1AstraZeneca LP
    
    
    139.1
    
    
    
    181.2
    
    
    
    331.6
    
    
    
    608.3Other (1)
    
    
    126.3
    
    
    
    106.4
    
    
    
    350.9
    
    
    
    278.8$
    665.6
    
    
    $
    768.5
    
    
    $
    1,840.7
    
    
    $
    2,180.2
 (1)
    
    Primarily reflects results from Merial Limited, Sanofi Pasteur MSD and Johnson &
Johnson°Merck Consumer Pharmaceuticals Company.
 Merck/Schering-PloughIn 2000, the Company and Schering-Plough Corporation (Schering-Plough) (collectively the
Partners) entered into agreements to create separate equally-owned partnerships to develop and
market in the United States new prescription medicines in the cholesterol-management and
respiratory therapeutic areas. These agreements generally provide for equal sharing of
development costs and for co-promotion of approved products by each company. In 2001, the
cholesterol-management partnership agreements were expanded to include all the countries of the
world, excluding Japan. In 2002, ezetimibe, the first in a new class of cholesterol-lowering
agents, was launched in the United States as Zetia(marketed as Ezetroloutside the United
States). In 2004, a combination product containing the active ingredients of both Zetiaand
Zocorwas approved in the United States as Vytorin(marketed as Inegyoutside of the United
States).The cholesterol agreements provide for the sharing of operating income generated by the
Merck/Schering-Plough cholesterol partnership (the MSP Partnership) based upon percentages
that vary by product, sales level and country. In the U.S. market, the Partners share profits
on Zetiaand Vytorinsales equally, with the exception of the first $300 million of annual Zetia
sales on which Schering-Plough receives a greater share of profits. Operating income includes
expenses that the Partners have contractually agreed to share, such as a portion of
manufacturing costs, specifically identified promotion costs (including direct-to-consumer
advertising and direct and identifiable out-of-pocket promotion) and other agreed upon costs for
specific services such as on-going clinical research, market support, market research, market
expansion, as well as a specialty sales force and physician education programs. Expenses
incurred in support of the MSP Partnership but not shared between the Partners, such as
marketing and administrative expenses (including certain sales force costs), as well as certain
manufacturing costs, are not included in Equity income from affiliates. However, these costs
are reflected in the overall results of the Company. Certain
 - 11 -




---



##### Table of Contents



Notes to Consolidated Financial Statements (unaudited)
 research and development expenses are generally shared equally by the Partners, after adjusting
for earned milestones.See Note 8 for information with respect to litigation involving the MSP Partnership and the
Partners related to the sale and promotion of Zetiaand Vytorin.The respiratory therapeutic agreements provided for the joint development and marketing in the
United States by the Partners of a once-daily, fixed-combination tablet containing the active
ingredients montelukast sodium and loratadine. Montelukast sodium, a leukotriene receptor
antagonist, is sold by Merck as Singulairand loratadine, an antihistamine, is sold by
Schering-Plough as Claritin, both of which are indicated for the relief of symptoms of allergic
rhinitis. In April 2008, the Partners announced that they had received a non-approvable letter
from the U.S. Food and Drug Administration (FDA) for the proposed fixed combination of
loratadine/montelukast. In June 2008, the Partners announced the withdrawal of the New Drug
Application for the loratadine/montelukast combination tablet. The companies also terminated
the respiratory joint venture. This action had no impact on the business of the cholesterol
joint venture. As a result of the termination of the respiratory joint venture, the Company was
obligated to Schering-Plough in the amount of $105 million as specified in the joint venture
agreements. This resulted in a charge of $43 million during the second quarter of 2008,
included in Equity income from affiliates. The remaining amount is being amortized over the
remaining patent life of Zetiathrough 2016.Summarized financial information for the MSP Partnership is as follows:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,($ in millions)
    
    2008
    
    2007
    
    2008
    
    2007Sales
    
    $
    1,101.5
    
    
    $
    1,300.0
    
    
    $
    3,486.9
    
    
    $
    3,731.7Vytorin
    
    
    567.2
    
    
    
    693.0
    
    
    
    1,810.5
    
    
    
    2,003.2Zetia
    
    
    534.3
    
    
    
    607.0
    
    
    
    1,676.4
    
    
    
    1,728.5Materials and production costs
    
    
    41.0
    
    
    
    60.9
    
    
    
    144.6
    
    
    
    162.1Other expense, net
    
    
    283.5
    
    
    
    302.9
    
    
    
    929.6
    
    
    
    948.9Income before taxes
    
    $
    777.0
    
    
    $
    936.2
    
    
    $
    2,412.7
    
    
    $
    2,620.7Mercks share of income before taxes (1)
    
    $
    383.9
    
    
    $
    481.9
    
    
    $
    1,124.9
    
    
    $
    1,297.7
 
 (1)
    
    Mercks share of the MSP Partnerships income before taxes differs from the
equity income recognized from the MSP Partnership primarily due to the timing of
recognition of certain transactions between the Company and the MSP Partnership, including
milestone payments.
 AstraZeneca LP
As previously disclosed, the 1999 AstraZeneca merger triggered a partial redemption in March
2008 of Mercks limited partnership interest in AstraZeneca LP (AZLP). Upon this redemption,
Merck received $4.3 billion from AZLP. This amount was based primarily on a multiple of Mercks
average annual variable returns derived from sales of the former Astra USA, Inc. products for
the three years prior to the redemption (the Limited Partner Share of Agreed Value). Merck
recorded a $1.5 billion pretax gain on the partial redemption in the first quarter of 2008.Also, as a result of the 1999 AstraZeneca merger, in exchange for Mercks relinquishment of
rights to future Astra products with no existing or pending U.S. patents at the time of the
merger, Astra paid $967.4 million (the Advance Payment). The Advance Payment was deferred as
it remained subject to a true-up calculation that was directly dependent on the fair market
value in March 2008 of the Astra product rights retained by the Company. The calculated True-Up
Amount of $243.7 million was returned to AZLP in March 2008 and Merck recognized a pretax gain
of $723.7 million related to the residual Advance Payment balance.In 1998, Astra purchased an option (the Asset Option) to buy Mercks interest in the KBI Inc.
(KBI) products, excluding the gastrointestinal medicines Nexiumand Prilosec(the Non-PPI
Products), for a payment of $443.0 million, which was deferred. The Asset Option is
exercisable in the first half of 2010 at an exercise price equal to the net present value as of
March 31, 2008 of projected future pretax revenue to be received by the Company from the Non-PPI
Products (the Appraised Value). Merck also had the right to require Astra to purchase such
interest in 2008 at the Appraised Value. In February 2008, the Company advised AZLP that it would not
exercise the Asset Option, thus the $443.0 million remains deferred.
 - 12 -




---



##### Table of Contents



Notes to Consolidated Financial Statements (unaudited)
 The sum of the Limited Partner Share of Agreed Value, the Appraised Value and the True-Up
Amount was guaranteed to be a minimum of $4.7 billion. Distribution of the Limited Partner
Share of Agreed Value less payment of the True-Up Amount resulted in cash receipts to Merck of
$4.0 billion and an aggregate pretax gain of $2.2 billion which is included in Other (income)
expense, net. AstraZenecas purchase of Mercks interest in the Non-PPI Products is contingent
upon the exercise of the Asset Option by AstraZeneca in 2010 and, therefore, payment of the
Appraised Value may or may not occur. Also, in March 2008, the outstanding loan from Astra in
the amount of $1.38 billion plus interest through the redemption date was settled. As a result
of these transactions, the Company received net proceeds from AZLP of $2.6 billion in the first
quarter of 2008.
 Summarized financial information for AZLP is as follows:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,($ in millions)
    
    2008
    
    2007
    
    2008
    
    2007Sales
    
    $
    1,306.2
    
    
    $
    1,486.0
    
    
    $
    3,983.0
    
    
    $
    4,873.1Materials and production costs
    
    
    690.2
    
    
    
    607.8
    
    
    
    2,016.6
    
    
    
    2,562.5Other expense, net
    
    
    335.0
    
    
    
    315.5
    
    
    
    1,072.7
    
    
    
    870.3Income before taxes
    
    $
    281.0
    
    
    $
    562.7
    
    
    $
    893.7
    
    
    $
    1,440.3
 7.
    
    Debt and Financial Instruments
 In January and February 2008, the Company terminated four interest rate swap contracts with
notional amounts of $250 million each, and in September 2008 terminated an interest rate swap
contract with a notional amount of $500 million. These swaps had effectively converted its $1.0
billion, 4.75% fixed-rate notes due 2015 and its $500 million, 4.375% fixed-rate notes due 2013
to variable rate debt. As a result of the swap terminations, the Company received $128.3
million in cash, excluding accrued interest which was not material. The corresponding gains
related to the basis adjustment of the debt associated with the terminated swap contracts were
deferred and are being amortized as a reduction of interest expense over the remaining term of
the notes. The cash flows from these contracts are reported as operating activities in the
Consolidated Statement of Cash Flows.
 In August 2008, the Company executed a $4.1 billion letter of credit agreement with a financial
institution which satisfied certain conditions set forth in the U.S. VioxxSettlement Agreement
(see Note 8). The Company pledged collateral to the financial institution of approximately $5.1
billion pursuant to the terms of the letter of credit agreement. Although the amount of assets
pledged as collateral is set by the letter of credit agreement and such assets are held in
custody by a third party, the assets are managed by the Company. The Company considers the
assets pledged under the letter of credit agreement to be restricted. As a result, $2.1 billion
and $1.4 billion of cash and investments, respectively, were classified as restricted current
assets and $1.6 billion of investments were classified as restricted non-current assets. The
letter of credit amount and required collateral balances will decline as payments (after the
first $750 million) under the Settlement Agreement are made. (See Note 12 for a discussion of
other restricted asset activities.) As of September 30, 2008, $3.7 billion was recorded within
Deferred income taxes and other current assets and $1.4 billion was classified as Other assets.
 Also in March 2008, the Company settled the $1.38 billion Astra Note due in 2008 (see Note 6).
 In April 2008, the Company extended the maturity date of its $1.5 billion, 5-year revolving
credit facility from April 2012 to April 2013. The facility provides backup liquidity for the
Companys commercial paper borrowing facility and is to be used for general corporate purposes.
The Company has not drawn funding from this facility.
 8.
    
    Contingencies
 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.
 - 13 -




---



##### Table of Contents



Notes to Consolidated Financial Statements (unaudited)
 
 VioxxLitigationProduct Liability Lawsuits
As previously disclosed, individual and putative class actions have been filed against the
Company in state and federal courts alleging personal injury and/or economic loss with respect
to the purchase or use of Vioxx. All such actions filed in federal court are coordinated in a
multidistrict litigation in the U.S. District Court for the Eastern District of Louisiana (the
MDL) before District Judge Eldon E. Fallon. A number of such actions filed in state court are
coordinated in separate coordinated proceedings in state courts in New Jersey, California and
Texas, and the counties of Philadelphia, Pennsylvania and Washoe and Clark Counties, Nevada. As
of September 30, 2008, the Company had been served or was aware that it had been named as a
defendant in approximately 11,575 lawsuits, which include approximately 29,200 plaintiff groups,
alleging personal injuries resulting from the use of Vioxx, and in approximately 246 putative
class actions alleging personal injuries and/or economic loss. (All of the actions discussed in
this paragraph are collectively referred to as the VioxxProduct Liability Lawsuits.) Of
these lawsuits, approximately 9,000 lawsuits representing approximately 23,400 plaintiff groups
are or are slated to be in the federal MDL and approximately 725 lawsuits representing
approximately 725 plaintiff groups are included in a coordinated proceeding in New Jersey
Superior Court before Judge Carol E. Higbee.In addition to the VioxxProduct Liability Lawsuits discussed above, the claims of over 25,100
plaintiffs had been dismissed as of September 30, 2008. Of these, there have been over 3,650
plaintiffs whose claims were dismissed with prejudice (i.e., they cannot be brought again)
either by plaintiffs themselves or by the courts. Over 21,450 additional plaintiffs have had
their claims dismissed without prejudice (i.e., subject to the applicable statute of
limitations, they can be brought again). Of these, approximately 13,575 plaintiff groups
represent plaintiffs who had lawsuits pending in the New Jersey Superior Court at the time of
the Settlement Agreement described below and who have expressed an intent to enter the program
established by the Settlement Agreement; Judge Higbee has dismissed these cases without
prejudice for administrative reasons.On November 9, 2007, Merck announced that it had entered into an agreement (the Settlement
Agreement) with the law firms that comprise the executive committee of the Plaintiffs Steering
Committee (PSC) of the federal VioxxMDL as well as representatives of plaintiffs counsel in
the Texas, New Jersey and California state coordinated proceedings to resolve state and federal
myocardial infarction (MI) and ischemic stroke (IS) claims filed as of that date in the
United States. The Settlement Agreement, which also applies to tolled claims, was signed by the
parties after several meetings with three of the four judges overseeing the coordination of more
than 95% of the U.S. VioxxProduct Liability Lawsuits. The Settlement Agreement applies only to
U.S. legal residents and those who allege that their MI or IS occurred in the United States.Merck will pay a fixed aggregate amount of $4.85 billion into two funds ($4.0 billion for MI
claims and $850 million for IS claims) for qualifying claims that enter into the resolution
process (the Settlement Program). Individual claimants will be examined by administrators of
the Settlement Program to determine qualification based on objective, documented facts provided
by claimants, including records sufficient for a scientific evaluation of independent risk
factors. The conditions in the Settlement Agreement require claimants to pass three gates: an
injury gate requiring objective, medical proof of an MI or IS (each as defined in the Settlement
Agreement), a duration gate based on documented receipt of at least 30 Vioxxpills, and a
proximity gate requiring receipt of pills in sufficient number and proximity to the event to
support a presumption of ingestion of Vioxxwithin 14 days before the claimed injury.The Settlement Agreement provides that Merck does not admit causation or fault. The Settlement
Agreement provided that Mercks payment obligations would be triggered only if, among other
conditions, (1) law firms on the federal and state PSCs and firms that have tried cases in the
coordinated proceedings elect to recommend enrollment in the program to 100% of their clients
who allege either MI or IS and (2) by June 30, 2008, plaintiffs enroll in the Settlement Program
at least 85% of each of all currently pending and tolled (i) MI claims, (ii) IS claims,
(iii) eligible MI and IS claims together which involve death, and (iv) eligible MI and IS claims
together which allege more than 12 months of use. Under the terms of the Settlement Agreement,
Merck could exercise a right to walk away from the Settlement Agreement if the thresholds and
other requirements were not met. The Company waived that right as of August 4, 2008. The
waiver of that right triggered Mercks obligation to pay a fixed total of $4.85 billion.
Payments will be made in installments into the settlement fund. The first payment of $500
million was made in August 2008 and an additional payment of $250 million was made in October
2008. Additional payments will be made on a periodic basis going forward, when and as needed
to fund payments of claims and administrative expenses.Mercks total payment for both funds of $4.85 billion is a fixed amount to be allocated among
qualifying claimants based on their individual evaluation. While at this time the exact number
of claimants covered by the Settlement Agreement is unknown, the total dollar amount is fixed.
The distribution of interim payments to qualified claimants
 - 14 -




---



##### Table of Contents



Notes to Consolidated Financial Statements (unaudited)
 began in August 2008 and will continue on a rolling basis until all claimants who qualify for an
interim payment are paid. Final payments will be made after the examination of all of the
eligible claims has been completed.After the Settlement Agreement was announced on November 9, 2007, judges in the Federal MDL,
California, Texas and New Jersey State coordinated proceedings entered a series of orders. The
orders: (1) temporarily stayed their respective litigations; (2) required plaintiffs to register
their claims by January 15, 2008; (3) required plaintiffs with cases pending as of November 9,
2007 to preserve and produce records and serve expert reports; and
(4) required plaintiffs who
file thereafter to make similar productions on an accelerated schedule. The Clark County,
Nevada and Washoe County, Nevada coordinated proceedings were also generally stayed.As of October 30, 2008, the last day for enrollment in the
Settlement Program, more than 48,100 of the approximately 48,325
individuals who were eligible for the Settlement Program and whose
claims are not 1) dismissed, 2) expected to be dismissed in the near
future, or 3) tolled claims that appear to have been abandoned have
submitted some or all of the materials required for enrollment in the
Settlement Program to resolve state and federal MI and IS claims filed against
the Company in the United States. If all of these eligible
submissions are completed in accordance with the Settlement
Agreement, this would represent more than 99% of the eligible MI and
IS claims previously registered with the Settlement Program.On April 14, 2008 and June 3, 2008, two groups of various private insurance companies and health
plans filed suit against BrownGreer, the claims administrator for the
Settlement Program (the Claims Administrator), and U.S. Bancorp, escrow agent for the Settlement Program
(the AvMed and Greater New York Benefit Fund suits). The private insurance companies and
health plans claim to have paid healthcare costs on behalf of some of the enrolling claimants
and seek to enjoin the Claims Administrator from paying enrolled claimants until their claims
for reimbursement from the enrolled claimants are resolved. Each group sought temporary
restraining orders and preliminary injunctions. Judge Fallon denied these requests. In AvMed,
the defendants moved to sever the claims of the named plaintiffs and, in Greater New York
Benefit Fund, to strike the class allegations. Judge Fallon granted these motions. AvMed has
appealed both of these decisions. The Fifth Circuit will hear argument on AvMeds appeal on
November 4, 2008. Greater New York Benefit Fund has served a notice of appeal.The Company has previously disclosed the outcomes of several VioxxProduct Liability Lawsuits
that were tried prior to January 1, 2008.The following sets forth certain significant rulings that occurred in or after the third quarter
of 2008 with respect to the VioxxProduct Liability Lawsuits.On April 19, 2007, Judge Randy Wilson, who presides over the Texas Vioxxcoordinated proceeding,
dismissed the failure to warn claim of plaintiff Ruby Ledbetter, whose case was scheduled to be
tried on May 14, 2007. Judge Wilson relied on a Texas statute enacted in 2003 that provides
that there can be no failure to warn regarding a prescription medicine if the medicine is
distributed with FDA approved labeling. There is an exception in the statute if required,
material, and relevant information was withheld from the FDA that would have led to a different
decision regarding the approved labeling, but Judge Wilson found that the exception is preempted
by federal law unless the FDA finds that such information was withheld. Judge Wilson is
currently presiding over approximately 1,000 Vioxxsuits in Texas in which a principal
allegation is failure to warn. Judge Wilson certified the decision for an expedited appeal to
the Texas Court of Civil Appeals. Plaintiffs appealed the decision.


On March 20, 2008, plaintiffs moved to dismiss their
appeal, seeking instead to vacate the trial courts decision. Merck filed an opposition to
plaintiffs motion. On May 15, 2008, the Court of Appeals issued an order granting plaintiffs
motion to dismiss the appeal, but denying plaintiffs motion to vacate the order dismissing the
claim. On July 25, 2008, the appeal was dismissed by agreement of the parties.In April 2006, in a trial involving two plaintiffs, Thomas Cona and John McDarby, in Superior
Court of New Jersey, Law Division, Atlantic County, the jury returned a split verdict. The jury
determined that Vioxxdid not substantially contribute to the heart attack of Mr. Cona, but did
substantially contribute to the heart attack of Mr. McDarby. The jury
 - 15 -




---



##### Table of Contents



Notes to Consolidated Financial Statements (unaudited)
 also concluded that, in each case, Merck violated New Jerseys consumer fraud statute, which allows plaintiffs to
receive their expenses for purchasing the drug, trebled, as well as reasonable attorneys fees.
The jury awarded $4.5 million in compensatory damages to Mr. McDarby and his wife, who also was
a plaintiff in that case, as well as punitive damages of $9 million. On June 8, 2007, Judge
Higbee denied Mercks motion for a new trial. On June 15, 2007, Judge Higbee awarded
approximately $4 million in the aggregate in attorneys fees and costs. The Company appealed
the judgments in both cases and the Appellate Division held oral argument on both cases on
January 16, 2008. On May 29, 2008, the New Jersey Appellate Division vacated the consumer fraud
awards in both cases on the grounds that the Product Liability Act provides the sole remedy for
personal injury claims. The Appellate Division also vacated the McDarby punitive damage award
on the grounds that it is preempted and vacated the attorneys fees and costs awarded under the
Consumer Fraud Act in both cases. The Court upheld the McDarby compensatory award. The Company
has filed with the Supreme Court of New Jersey a petition to appeal those parts of the trial
courts rulings that the Appellate Division affirmed. Plaintiffs filed a cross-petition to
appeal those parts of the trial courts rulings that the Appellate Division reversed. Those
petitions are currently pending. On October 8, 2008, the Supreme
Court of New Jersey granted Mercks petition for certification
of appeal, limited solely to the issue of whether the Federal Food,
Drug and Cosmetic Act preempts state law tort claims predicated on the
alleged inadequacy of warnings contained in Vioxx labeling
that was approved by the FDA. The court denied the plaintiffs
cross-petition.As previously reported, in September 2006, Merck filed a notice of appeal of the August 2005
jury verdict in favor of the plaintiff in the Texas state court case, Ernst v. Merck. On May
29, 2008, the Texas Court of Appeals reversed the trial courts judgment and issued a judgment
in favor of Merck. The Court of Appeals found the evidence to be legally insufficient on the
issue of causation. Plaintiffs have filed a motion for rehearing en bancin the Court of
Appeals. Merck filed a response in October 2008.As previously reported, 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 even though under Texas law, in
this case, potential punitive damages were capped at $750,000. On May 14, 2008, the San Antonio
Court of Appeals reversed the judgment and rendered a judgment in favor of Merck. On May 29,
2008, plaintiffs filed a motion for rehearing, which is currently pending.Other Lawsuits
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
sought 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. On March 31, 2006, the New Jersey Superior Court, Appellate Division, affirmed
the class certification order. On September 6, 2007, the New Jersey Supreme Court reversed the
certification of a nationwide class action of third-party payors, finding that the suit does not
meet the requirements for a class action. Claims of certain individual third-party payors
remain pending in the New Jersey court, and counsel representing various third-party payors have
filed additional such actions. Judge Higbee lifted the stay on these cases and the parties are
currently discussing discovery issues.At the parties request, Judge Higbee has extended the briefing schedule in Martin-Kleinman v.
Merck, which is a putative consumer class action pending in New Jersey Superior Court. The
Court will set a new schedule after resolving certain discovery issues.There are also pending in various U.S. courts putative class actions purportedly brought on
behalf of individual purchasers or users of Vioxxclaiming either reimbursement of alleged
economic loss or an entitlement to medical monitoring. The majority of these cases are at early
procedural stages. On June 12, 2008, a Missouri state court certified a class of Missouri
plaintiffs seeking reimbursement for out-of-pocket costs relating to Vioxx.The plaintiffs do
not allege any personal injuries from taking Vioxx.The Company filed a petition for
interlocutory review on June 23, 2008, which was granted on July 30, 2008. During the pendency
of the appeal, discovery is proceeding in the lower court.Plaintiffs also have filed a class action in California state court seeking class certification
of California third-party payors and end-users. The parties are engaged in class certification
discovery and briefing.As previously reported, the Company has also been named as a defendant in separate lawsuits
brought by the Attorneys General of nine states, and the City of New York. A Colorado taxpayer
has also filed a derivative suit, on behalf of the State of Colorado, naming the Company. 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
 - 16 -




---



##### Table of Contents



Notes to Consolidated Financial Statements (unaudited)
 theories, including state consumer fraud and/or fair business practices or Medicaid fraud statutes, including civil penalties.In addition, the Company has been named in six other lawsuits containing similar allegations
filed by (or on behalf of) governmental entities seeking the reimbursement of alleged Medicaid
expenditures for Vioxxor statutory penalties tied to such expenditures. Those lawsuits are (1)
a class action filed by Santa Clara County, California on behalf of all similarly situated
California counties, (2) separate actions filed by Erie County, Chautauqua County, and Orange
County, New York, (3) a qui tamaction brought by a resident of the District of Columbia, and
(4) a qui tamaction brought by a resident of Florida. With the exception of a case filed by
the Texas Attorney General (which remains in Texas state court and is currently scheduled for
trial in September 2009), a case recently filed by the Michigan Attorney General (which has been
removed to federal court and will likely be transferred to the federal MDL shortly) and the
recently-filed Orange County and Florida cases (which will be removed to federal court and will
likely be transferred to the federal MDL), the rest of the actions described in this paragraph
have been transferred to the federal MDL and are in the discovery phase.Shareholder Lawsuits
As previously disclosed, in addition to the VioxxProduct Liability Lawsuits, the Company and
various current and former officers and directors are defendants in various putative class
actions and individual lawsuits under the federal securities laws and state securities laws (the
VioxxSecurities Lawsuits). All of the VioxxSecurities Lawsuits pending in federal court
have been transferred by the Judicial Panel on Multidistrict Litigation (the JPML) to the
United States District Court for the District of New Jersey before District Judge Stanley R.
Chesler for inclusion in a nationwide MDL (the Shareholder MDL). Judge Chesler has
consolidated the VioxxSecurities Lawsuits for all purposes. The putative class action, which
requested damages on behalf of purchasers of Company stock between May 21, 1999 and October 29,
2004, alleged that the defendants made false and misleading statements regarding Vioxxin
violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and sought
unspecified compensatory damages and the costs of suit, including attorneys fees. The
complaint also asserted claims under Section 20A of the Securities and Exchange Act against
certain defendants relating to their sales of Merck stock and under Sections 11, 12 and 15 of
the Securities Act of 1933 against certain defendants based on statements in a registration
statement and certain prospectuses filed in connection with the Merck Stock Investment Plan, a
dividend reinvestment plan. On April 12, 2007, Judge Chesler granted defendants motion to
dismiss the complaint with prejudice. Plaintiffs appealed Judge Cheslers decision to the
United States Court of Appeals for the Third Circuit. On September 9, 2008, the Third Circuit
issued an opinion reversing Judge Cheslers order and remanding the case to the district court.
On September 23, 2008, Merck filed a petition seeking rehearing en bancwhich was denied.In October 2005, a Dutch pension fund filed a complaint in the District of New Jersey alleging
violations of federal securities laws as well as violations of state law against the Company and
certain officers. Pursuant to the Case Management Order governing the Shareholder MDL, the
case, which is based on the same allegations as the VioxxSecurities Lawsuits, was consolidated
with the VioxxSecurities Lawsuits. Defendants motion to dismiss the pension funds complaint
was filed on August 3, 2007. In September 2007, the Dutch pension fund filed an amended
complaint rather than responding to defendants motion to dismiss. In addition in 2007, six new
complaints were filed in the District of New Jersey on behalf of various foreign institutional
investors also alleging violations of federal securities laws as well as violations of state law
against the Company and certain officers.As previously disclosed, various shareholder derivative actions filed in federal court were
transferred to the Shareholder MDL and consolidated for all purposes by Judge Chesler (the
VioxxDerivative Lawsuits). On May 5, 2006, Judge Chesler granted defendants motion to
dismiss and denied plaintiffs request for leave to amend their complaint. Plaintiffs appealed,
arguing that Judge Chesler erred in denying plaintiffs leave to amend their complaint with
materials acquired during discovery. On July 18, 2007, the United States Court of Appeals for
the Third Circuit reversed the District Courts decision on the grounds that Judge Chesler
should have allowed plaintiffs to make use of the discovery material to try to establish demand
futility, and remanded the case for the District Courts consideration of whether, even with the
additional materials, plaintiffs request to amend their complaint would still be futile.
Plaintiffs filed their brief in support of their request for leave to amend their complaint in
November 2007. The Court denied the motion in June 2008 and closed the case. Plaintiffs have
appealed Judge Cheslers decision to the United States Court of Appeals for the Third Circuit.In addition, as previously disclosed, various putative class actions filed in federal court
under the Employee Retirement Income Security Act (ERISA) against the Company and certain
current and former officers and directors
 - 17 -




---



##### Table of Contents



Notes to Consolidated Financial Statements (unaudited)
 (the VioxxERISA Lawsuits and, together with the VioxxSecurities Lawsuits and the VioxxDerivative Lawsuits, the VioxxShareholder Lawsuits)
have been transferred to the Shareholder MDL and consolidated for all purposes. The
consolidated complaint asserts claims on behalf of certain of the Companys current and former
employees who are participants in certain of the Companys retirement plans for breach of fiduciary duty. The
lawsuits make similar allegations to the allegations contained in the VioxxSecurities Lawsuits.
On July 11, 2006, Judge Chesler granted in part and denied in part defendants motion to
dismiss the ERISA complaint. In October 2007, plaintiffs moved for certification of a class of
individuals who were participants in and beneficiaries of the Companys retirement savings plans
at any time between October 1, 1998 and September 30, 2004 and whose plan accounts included
investments in the Merck Common Stock Fund and/or Merck common stock. That motion is pending.
On October 6, 2008 defendants filed a motion for judgment on the pleadings seeking dismissal of
the complaint.As previously disclosed, on October 29, 2004, two individual shareholders made a demand on the
Companys 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 December 2004, the Special
Committee of the Board of Directors retained the Honorable John S. Martin, Jr. of Debevoise &
Plimpton LLP to conduct an independent investigation of, among other things, the allegations set
forth in the demand. Judge Martins report was made public in September 2006. Based on the
Special Committees recommendation made after careful consideration of the Martin report and the
impact that derivative litigation would have on the Company, the Board rejected the demand. On
October 11, 2007, the shareholders filed a lawsuit in state court in Atlantic County, NJ against
current and former executives and directors of the Company alleging that the Boards rejection
of their demand was unreasonable and improper, and that the defendants breached various duties
to the Company in allowing Vioxxto be marketed. The current and former executive and director
defendants filed motions to dismiss the complaint in June 2008. Those motions are pending.International Lawsuits
As previously disclosed, in addition to the lawsuits discussed above, the Company has been named
as a defendant in litigation relating to Vioxxin various countries (collectively, the Vioxx
Foreign Lawsuits) in Europe, as well as Canada, Brazil, Argentina, Australia, The Philippines,
Turkey, and Israel.On May 30, 2008, the provincial court of Queens Bench in Saskatchewan, Canada entered an order
certifying a class of Vioxxusers in Canada, except those in Quebec. The class includes
individual purchasers who allege inducement to purchase by unfair marketing practices;
individuals who allege Vioxxwas not of acceptable quality, defective or not fit for the purpose
of managing pain associated with approved indications; or ingestors who claim Vioxxcaused or
exacerbated a cardiovascular or gastrointestinal condition. On June 17, 2008, the Court of
Appeal for Saskatchewan granted the Company leave to appeal the certification order and the
appeal is pending before that court. On July 28, 2008, the Superior court in Ontario decided to
certify an overlapping class of Vioxxusers in Canada, except those in Quebec and Saskatchewan,
who allege negligence and an entitlement to elect to waive the tort. The Companys motion for
leave to appeal that decision is pending before the Ontario Divisional Court. Earlier, in
November 2006, the Superior court in Quebec authorized the institution of a class action on
behalf of all individuals who, in Québec, consumed Vioxxand suffered damages arising out of its
ingestion. As of September 30, 2008, the plaintiffs have not instituted an action based upon
that authorization.Additional Lawsuits
Based on media reports and other sources, the Company anticipates that additional VioxxProduct
Liability Lawsuits, VioxxShareholder Lawsuits and VioxxForeign Lawsuits (collectively, the
VioxxLawsuits) will be filed against it and/or certain of its current and former officers and
directors in the future.Insurance
As previously disclosed, the Company has product liability insurance for claims brought in the
VioxxProduct Liability Lawsuits with stated upper limits of approximately $630 million after
deductibles and co-insurance. This insurance provides coverage for legal defense costs and
potential damage amounts in connection with the VioxxProduct Liability Lawsuits. Through an
arbitration proceeding and negotiated settlements, the Company received an aggregate of
approximately $590 million in product liability insurance proceeds relating to the VioxxProduct
Liability Lawsuits, plus approximately $45 million in fees and interest payments. The Company
has no additional insurance for the VioxxProduct Liability Lawsuits. The Companys insurance
coverage with respect to the VioxxLawsuits will not be adequate to cover its defense costs and
losses.The Company also has Directors and Officers insurance coverage applicable to the Vioxx
Securities 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. As a result of the
 - 18 -




---



##### Table of Contents



Notes to Consolidated Financial Statements (unaudited)
 arbitration proceeding referenced above, additional insurance coverage for these claims should also be available, if
needed, under upper-level excess policies that provide coverage for a variety of risks. There
are disputes with the insurers about the availability of some or all of the Companys insurance
coverage for these claims and there are likely to be additional disputes. The amounts actually recovered under the policies discussed
in this paragraph may be less than the stated upper limits.Investigations
As previously disclosed, in November 2004, the Company was
advised by the staff of the  Securities and Exchange Commission (SEC) that
it was commencing an informal inquiry concerning Vioxx.On January 28, 2005, the Company
announced that it received notice that the SEC issued a formal notice of investigation. Also,
the Company has received subpoenas from the U.S. Department of Justice (the DOJ) requesting
information related to the Companys research, marketing and selling activities with respect to
Vioxxin a federal health care investigation under criminal statutes. In addition, as
previously disclosed, investigations are being conducted by local authorities in certain cities
in Europe in order to determine whether any criminal charges should be brought concerning Vioxx.
The Company is cooperating with these governmental entities in their respective investigations
(the VioxxInvestigations). The Company cannot predict the outcome of these inquiries;
however, they could result in potential civil and/or criminal dispositions.As previously disclosed, on May 20, 2008, the Company reached civil settlements with Attorneys
General from 29 states and the District of Columbia to fully resolve previously disclosed
investigations under state consumer protection laws related to past activities for Vioxx. As
part of the civil resolution of these investigations, Merck paid a total of $58 million to be
divided among the 29 states and the District of Columbia. In April 2008, Merck announced it had
taken a pretax charge in the first quarter of $55 million in anticipation of this settlement.
The agreement also includes compliance measures that supplement policies and procedures
previously established by the Company.In addition, the Company received a subpoena in September 2006 from the State of California
Attorney General seeking documents and information related to the placement of Vioxxon
Californias Medi-Cal formulary. The Company is cooperating with the Attorney General in
responding to the subpoena.Reserves
As discussed above, on November 9, 2007, Merck entered into the Settlement Agreement with the
law firms that comprise the executive committee of the PSC of the federal VioxxMDL as well as
representatives of plaintiffs counsel in the Texas, New Jersey and California state coordinated
proceedings to resolve state and federal MI and IS claims filed as of that date in the United
States. The Settlement Agreement, which also applies to tolled claims, was signed by the
parties after several meetings with three of the four judges overseeing the coordination of more
than 95% of the U.S. VioxxProduct Liability Lawsuits. The Settlement Agreement applies only to
U.S. legal residents and those who allege that their MI or IS occurred in the United States. As
a result of entering into the Settlement Agreement, the Company recorded a pretax charge of
$4.85 billion in 2007 which represents the fixed aggregate amount to be paid to plaintiffs
qualifying for payment under the Settlement Program.The Company currently anticipates that VioxxProduct Liability Lawsuits will be tried in the
future. 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 not
included in the Settlement Program. The Company has not established any reserves for any
potential liability relating to the VioxxLawsuits not included in the Settlement Program or the
VioxxInvestigations (other than as set forth above), including for those cases in which
verdicts or judgments have been entered against the Company, and are now in post-verdict
proceedings or on appeal. In each of those cases the Company believes it has strong points to
raise on appeal and therefore that unfavorable outcomes in such cases are not probable.
Unfavorable outcomes in the VioxxLitigation (as defined below) could have a material adverse
effect on the Companys financial position, liquidity and results of operations.Legal defense costs expected to be incurred in connection with a loss contingency are accrued
when probable and reasonably estimable. As of December 31, 2007, the Company had a reserve of
$5.372 billion which represented the aggregate amount to be paid under the Settlement Agreement
and its future legal defense costs related to (i) the VioxxProduct Liability Lawsuits, (ii) the
VioxxShareholder Lawsuits, (iii) the VioxxForeign Lawsuits, and (iv) the VioxxInvestigations
(collectively, the VioxxLitigation). During the first half of 2008, the Company spent
approximately $156 million in the aggregate in legal defense costs related to the Vioxx
Litigation. In the third quarter of 2008, the Company spent approximately $66 million in the
aggregate in legal defense costs related to the VioxxLitigation. In addition, in the third quarter the Company paid
$500 million into the settlement fund in connection with the Settlement
 - 19 -




---



##### Table of Contents



Notes to Consolidated Financial Statements (unaudited)
 Agreement referred to above. Thus, as of September 30, 2008, the Company had a reserve of approximately $4.649
billion related to the VioxxLitigation.Some of the significant factors considered in the review of the reserve were as follows: the
actual costs incurred by the Company; the development of the Companys legal defense strategy
and structure in light of the scope of the VioxxLitigation, including the Settlement Agreement,
but that certain lawsuits will continue to be pending; the number of cases being brought against
the Company; the costs and outcomes of completed trials and the most current information
regarding anticipated timing, progression, and related costs of pre-trial activities and trials
in the VioxxProduct Liability Lawsuits. Events such as
 trials, which may
occur in 2009, and the inherent inability to predict the ultimate outcomes of such trials and
the disposition of VioxxProduct Liability Lawsuits not participating in or not eligible for the
Settlement Program, limit the Companys ability to reasonably estimate its legal costs beyond
2009.The Company will continue to monitor its legal defense costs and review the adequacy of the
associated reserves and may determine to increase its reserves for legal defense costs at any
time in the future if, based upon the factors set forth, it believes it would be appropriate to
do so.Other Product Liability Litigation
As previously disclosed, the Company is a defendant in product liability lawsuits in the United
States involving Fosamax(the FosamaxLitigation). As of September 30, 2008, approximately
700 cases, which include approximately 1,143 plaintiff groups had been filed and were pending
against Merck in either federal or state court, including two cases which seek class action
certification, as well as damages and medical monitoring. In these actions, plaintiffs allege,
among other things, that they have suffered osteonecrosis of the jaw, generally subsequent to
invasive dental procedures such as tooth extraction or dental implants, and/or delayed healing,
in association with the use of Fosamax. On August 16, 2006, the JPML ordered that the Fosamax
product liability cases pending in federal courts nationwide should be transferred and
consolidated into one multidistrict litigation (the FosamaxMDL) for coordinated pre-trial
proceedings. The FosamaxMDL has been transferred to Judge John Keenan
 in the United States
District Court for the Southern District of New York. As a result of the JPML order,
approximately 583 of the cases are before Judge Keenan. Judge Keenan  issued a Case
Management Order (and various amendments thereto) setting forth a schedule governing the
proceedings which focuses primarily upon resolving the class action certification motions in
2007 and completing fact discovery in an initial group of 25 cases by October 1, 2008. Briefing
and argument on plaintiffs motions for certification of medical monitoring classes were
completed in 2007 and Judge Keenan issued an order denying the motions on January 3, 2008. On
January 28, 2008, Judge Keenan issued a further order dismissing with prejudice all class claims
asserted in the first four class action lawsuits filed against Merck that sought personal injury
damages and/or medical monitoring relief on a class wide basis. In October 2008, Judge Keenan
issued an order requiring that Daubertmotions be filed in May 2009 and scheduling trials in the
first three cases in the MDL for August 2009, October 2009, and January 2010, respectively.In addition, in July 2008, an application was made by the Atlantic County Superior Court of New
Jersey requesting that all of the Fosamaxcases pending in New Jersey be considered for mass
tort designation and centralized management before one judge in New Jersey. On October 6, 2008,
the New Jersey Supreme Court ordered that all pending and future actions filed in New Jersey
arising out of the use of Fosamaxand seeking damages for existing dental and jaw-related
injuries, including osteonecrosis of the jaw, but not solely seeking medical monitoring, be
designated as a mass tort for centralized management purposes before Judge Carol Higbee in
Atlantic County Superior Court. Judge Higbee has scheduled an initial case management
conference in the New Jersey matters for November 14, 2008.Discovery is ongoing in both the FosamaxMDL litigation as well as in various state court cases.
The Company intends to defend against these lawsuits.As of December 31, 2007, the Company had a remaining reserve of approximately $27 million solely
for its future legal defense costs for the FosamaxLitigation. During the first half of 2008,
the Company spent approximately $17 million and added $40 million to its reserve. In the third
quarter, the Company spent approximately $8 million. Consequently, as of September 30, 2008,
the Company had a reserve of approximately $42 million. Some of the significant factors
considered in the establishment and ongoing assessment of the reserve for the FosamaxLitigation
legal defense costs were as follows: the actual costs incurred by the Company thus far; the
development of the Companys legal defense strategy and structure in light of the creation of
the FosamaxMDL; the number of cases being brought against the Company; and the anticipated
timing, progression, and related costs of pre-trial activities in the FosamaxLitigation. The
Company will continue to monitor its legal defense costs and review the adequacy of the
associated reserves. Due to the uncertain nature of litigation, the Company is unable to
estimate its costs beyond the
 - 20 -




---



##### Table of Contents



Notes to Consolidated Financial Statements (unaudited)
 completion of the first three federal trials discussed above. The Company has not established any reserves for any potential liability relating to the Fosamax
Litigation. Unfavorable outcomes in the FosamaxLitigation could have a material adverse effect
on the Companys financial position, liquidity and results of operations.Vytorin/ZetiaLitigation
As previously disclosed, since December 2007, the Company and
its joint venture partner,
Schering-Plough, have received several letters addressed to both companies from the House
Committee on Energy and Commerce, its Subcommittee on Oversight and Investigations (O&I), and
the Ranking Minority Member of the Senate Finance Committee, collectively seeking a combination
of witness interviews, documents and information on a variety of issues related to the ENHANCE
clinical trial, the sale and promotion of Vytorin, as well as sales of stock by corporate
officers. In addition, on August 21 and September 2, 2008, respectively, the companies received
additional letters from O&I seeking certain information and documents related to the SEAS
clinical trial. As previously disclosed, the companies have each received subpoenas from the
New York and New Jersey State Attorneys General Offices and a letter from the Connecticut
Attorney General seeking similar information and documents. In addition, the Company has
received five Civil Investigative Demands (CIDs) from a multistate group of 35 State Attorneys
General who are jointly investigating whether the companies violated state consumer protection
laws when marketing Vytorin. Finally, on September 10, 2008, the Company received a letter from
the Civil Division of the U.S. Department of Justice informing it that the DOJ is investigating
whether the companies conduct relating to the promotion of Vytorincaused false claims to be
submitted to federal health care programs. The Company is cooperating with these investigations
and working with Schering-Plough to respond to the inquiries. In addition, since mid-January
2008, the Company has become aware of or been served with approximately 140 civil class action
lawsuits alleging common law and state consumer fraud claims in connection with the MSP
Partnerships sale and promotion of Vytorinand Zetia. Certain of those lawsuits allege
personal injuries and/or seek medical monitoring.Also, as previously disclosed, on April 3, 2008, a Merck shareholder filed a putative class
action lawsuit in federal court in the Eastern District of Pennsylvania alleging that Merck and
its Chairman, President and Chief Executive Officer, Richard T. Clark, violated the federal
securities laws.

This suit has since been withdrawn and re-filed in
the District of New Jersey and has been consolidated with another
federal securities lawsuit under the caption In re Merck &
Co., Inc. Vytorin Securities Litigation.  An amended consolidated
complaint was filed on October 6, 2008 and names as defendants
Merck; Merck/Schering-Plough Pharmaceuticals, LLC; and certain of the
Companys officers and directors.

Specifically, the complaint alleges that Merck delayed releasing unfavorable
results of a clinical study regarding the efficacy of Vytorinand that Merck made false and
misleading statements about expected earnings, knowing that once the results of the Vytorin
study were released, sales of Vytorinwould decline and Mercks earnings would suffer. On April
22, 2008, a member of a Merck ERISA plan filed a putative class action lawsuit against the
Company and certain of its officers and directors alleging they breached their fiduciary duties
under ERISA. Since that time, there have been other similar ERISA
lawsuits filed against the Company in the District of New Jersey, and
all of those lawsuits have been consolidated under the caption In
re Merck & Co., Inc. Vytorin ERISA Litigation.  Plaintiffs in these suits allege that the ERISA plans investment in Company stock was imprudent
because the Companys earnings are dependent on the commercial success of its cholesterol drug
Vytorinand that defendants knew or should have known that the results of a scientific study
would cause the medical community to turn to less expensive drugs for cholesterol management.
The Company intends to defend the lawsuits referred to in this section vigorously. Unfavorable
outcomes resulting from the government investigations or the civil litigation could have a
material adverse effect on the Companys financial position, liquidity and results of
operations.Patent Litigation
From time to time, generic manufacturers of pharmaceutical products file Abbreviated New Drug
Applications (ANDAs) 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 ANDAs to the FDA seeking to market in the United States a generic
form of Propecia, Prilosec, Nexium, Singulairand Primaxinprior to the
expiration of the Companys (and AstraZenecas in the case of Prilosecand Nexium) patents
concerning these products. In addition, an ANDA has been submitted to the FDA seeking to market
in the United States a generic form of Zetiaprior to the expiration of Schering-Ploughs patent
concerning that product. The generic companies ANDAs 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 ANDAs for generic finasteride
(Propecia),  montelukast (Singulair),
imipenem/cilastatin (Primaxin) and AstraZeneca and the Company have filed patent infringement
suits in federal court against companies filing ANDAs for generic omeprazole (Prilosec) and
esomeprazole (Nexium). Also, the Company and Schering-Plough have filed a patent infringement
suit in federal court against companies filing ANDAs for generic ezetimibe (Zetia). 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.
 - 21 -




---



##### Table of Contents



Notes to Consolidated Financial Statements (unaudited)
 As previously disclosed, in February 2007, the Company received a notice from Teva
Pharmaceuticals (Teva), a generic company, indicating that it had filed an ANDA for
montelukast and that it is challenging the U.S. patent that is listed for Singulair. On April
2, 2007, the Company filed a patent infringement action against Teva. The lawsuit automatically
stays FDA approval of Tevas ANDA for 30 months or until an adverse court decision, if any,
whichever may occur earlier. A trial in this matter has been scheduled to begin on February 23,
2009.Other Litigation
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.9.
    
    Share-Based CompensationThe Company has share-based compensation plans under which employees, non-employee directors and
employees of certain of the Companys equity method investees may be granted options to purchase
shares of Company common stock at the fair market value at the time of grant. In addition to
stock options, the Company grants performance share units (PSUs) and restricted stock units
(RSUs) to certain management-level employees. The Company recognizes the fair value of
share-based compensation in net income on a straight-line basis over the requisite service
period.The following table provides amounts of share-based compensation cost recorded in the
Consolidated Statement of Income:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,($ in millions)
    
    2008
    
    2007
    
    2008
    
    2007Pretax share-based compensation expense
    
    $
    86.8
    
    
    $
    72.7
    
    
    $
    285.5
    
    
    $
    250.9Income tax benefits
    
    
    (26.7
    )
    
    
    (22.8
    )
    
    
    (88.8
    )
    
    
    (79.1
    )Total share-based compensation
expense, net of tax
    
    $
    60.1
    
    
    $
    49.9
    
    
    $
    196.7
    
    
    $
    171.8
 During the first nine months of 2008 and 2007, the Company granted 34.5 million options and 33.7
million options, respectively, related to its annual grant and other grants. The weighted
average fair value of options granted for the first nine months of 2008 and 2007 was $9.89 and
$9.30 per option, respectively, and was determined using the following assumptions:
 Nine Months EndedSeptember 30,2008
    
    2007Expected dividend yield
    
    
    3.5
    %
    
    
    3.4
    %Risk-free interest rate
    
    
    2.7
    %
    
    
    4.4
    %Expected volatility
    
    
    30.8
    %
    
    
    24.5
    %Expected life (years)
    
    
    6.1
    
    
    
    5.7
 At September 30, 2008, there was $515.1 million of total pretax unrecognized compensation
expense related to nonvested stock options, RSU and PSU awards which will be recognized over a
weighted average period of 2.2 years. For segment reporting, share-based compensation costs are
unallocated expenses.
 - 22 -




---



##### Table of Contents



Notes to Consolidated Financial Statements (unaudited)
 
 10.
    
    Pension and Other Postretirement Benefit Plans
 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:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,($ in millions)
    
    2008
    
    2007
    
    2008
    
    2007Service cost
    
    $
    90.1
    
    
    $
    90.3
    
    
    $
    263.4
    
    
    $
    275.3Interest cost
    
    
    105.4
    
    
    
    99.9
    
    
    
    318.8
    
    
    
    284.5Expected return on plan assets
    
    
    (142.8
    )
    
    
    (123.1
    )
    
    
    (427.7
    )
    
    
    (366.7
    )Net amortization
    
    
    19.3
    
    
    
    44.0
    
    
    
    62.1
    
    
    
    112.5Termination benefits
    
    
    24.4
    
    
    
    2.5
    
    
    
    42.9
    
    
    
    18.5Curtailments
    
    
    8.1
    
    
    
    
    
    
    
    11.3
    
    
    
    Settlements
    
    
    2.5
    
    
    
    
    
    
    
    2.5
    
    
    
    $
    107.0
    
    
    $
    113.6
    
    
    $
    273.3
    
    
    $
    324.1
 The Company provides medical, dental and life insurance benefits, principally to its eligible
U.S. retirees and similar benefits to their dependents, through its other postretirement benefit
plans. The net cost of such plans consisted of the following components:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,($ in millions)
    
    2008
    
    2007
    
    2008
    
    2007Service cost
    
    $
    18.4
    
    
    $
    25.8
    
    
    $
    55.9
    
    
    $
    68.1Interest cost
    
    
    28.2
    
    
    
    28.8
    
    
    
    84.5
    
    
    
    80.7Expected return on plan assets
    
    
    (33.2
    )
    
    
    (37.4
    )
    
    
    (97.7
    )
    
    
    (98.0
    )Net amortization
    
    
    (5.2
    )
    
    
    (7.5
    )
    
    
    (16.6
    )
    
    
    (12.5
    )Termination benefits
    
    
    2.9
    
    
    
    0.2
    
    
    
    7.1
    
    
    
    3.7Curtailments
    
    
    (12.3
    )
    
    
    
    
    
    
    (12.9
    )
    
    
    (3.9
    )$
    (1.2
    )
    
    $
    9.9
    
    
    $
    20.3
    
    
    $
    38.1
 In connection with restructuring actions (see Note 2), the Company recorded termination charges
for the three and nine months ended September 30, 2008 and 2007 on its pension and other
postretirement benefit plans related to expanded eligibility for certain employees exiting the
Company. Also, in connection with these restructuring actions, the Company recorded net
curtailment losses on its pension plans for the three and nine months ended September 30, 2008
and curtailment gains on its other postretirement benefit plans for the three and nine months
ended September 30, 2008 and the nine months ended September 30, 2007. In addition, the Company
recorded settlement losses on its pension plans for the three and nine months ended September
30, 2008.
 - 23 -




---



##### Table of Contents



Notes to Consolidated Financial Statements (unaudited)
 
 11.
    
    Other (Income) Expense, Net
 Other (income) expense, net, consisted of:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,($ in millions)
    
    2008
    
    2007
    
    2008
    
    2007Interest income
    
    $
    (171.3
    )
    
    $
    (186.9
    )
    
    $
    (484.2
    )
    
    $
    (540.9
    )Interest expense
    
    
    71.4
    
    
    
    91.5
    
    
    
    194.6
    
    
    
    297.2Exchange losses (gains)
    
    
    52.3
    
    
    
    (8.3
    )
    
    
    73.6
    
    
    
    (39.8
    )Minority interests
    
    
    31.2
    
    
    
    30.6
    
    
    
    93.9
    
    
    
    92.0Other, net
    
    
    78.2
    
    
    
    (107.8
    )
    
    
    (2,075.3
    )
    
    
    (329.7
    )$
    61.8
    
    
    $
    (180.9
    )
    
    $
    (2,197.4
    )
    
    $
    (521.2
    )
 Other, net for the nine months ended September 30, 2008 primarily reflects an aggregate gain
from AZLP of $2.2 billion (see Note 6) and a gain of $249 million related to the sale of the
Companys remaining worldwide rights to Aggrastat, partially offset by a $300 million expense
for a contribution to the Merck Company Foundation, recognized losses of $108 million, including
$88 million of losses in the third quarter, in the Companys investment portfolio and a $58
million charge related to the resolution of an investigation into whether the Company violated
consumer protection laws with respect to the sales and marketing of Vioxx(see Note 8). Other,
net for the first nine months of 2007 primarily reflects the favorable impact of gains on sales
of assets and product divestitures, as well as a net gain on the settlements of certain patent
disputes. Interest paid for the nine months ended September 30, 2008 and 2007 was $181.2
million and $318.4 million, respectively.
 12.
    
    Taxes on Income
 The effective tax rate of 22.6% for the third quarter of 2008 reflects the favorable impact of
restructuring charges. The effective tax rate of 21.8% for the first nine months of 2008
reflects a net favorable impact of approximately 2 percentage points which includes favorable
impacts relating to second quarter tax settlements that resulted in a reduction of the Companys
liability for unrecognized tax benefits of approximately $200 million, the first quarter
realization of foreign tax credits and year-to-date restructuring costs, largely offset by an
unfavorable impact resulting from the AZLP gain (see Note 6) being fully taxable in the United
States at a combined federal and state tax rate of approximately 36.3%. In the first quarter of
2008, the Company decided to repatriate certain prior years foreign earnings which will result
in a utilization of foreign tax credits. These foreign tax credits arose as a result of tax
payments made outside of the United States in prior years that became realizable in the first
quarter based on a change in the Companys repatriation plans. The effective tax rates of 26.1%
for the third quarter of 2007 and 25.1% for the first nine months of 2007 reflect the impact of
acquired research expense which is not deductible for tax purposes, as well as the favorable
impact of restructuring costs.
 - 24 -




---



##### Table of Contents



Notes to Consolidated Financial Statements (unaudited)
 
 As previously disclosed, Mercks Canadian tax returns for the years 1998 through 2004 are being
examined by the Canada Revenue Agency (CRA). In October 2006, the CRA issued the Company a
notice of reassessment containing adjustments related to certain intercompany pricing matters,
which result in additional Canadian and provincial tax due of approximately $1.5 billion (U.S.
dollars) plus interest of approximately $1.0 billion (U.S. dollars). In addition, in July 2007,
the CRA proposed additional adjustments for 1999 relating to another intercompany pricing
matter. The adjustments would increase Canadian tax due by approximately $21 million (U.S.
dollars) plus $22 million (U.S. dollars) of interest. It is possible that the CRA will propose
similar adjustments for later years. The Company disagrees with the positions taken by the CRA
and believes they are without merit. The Company intends to contest the assessments through the
CRA appeals process and the courts if necessary. In connection with the appeals process, during
2007, the Company pledged collateral to two financial institutions, one of which provided a
guarantee to the CRA and the other to the Quebec Ministry of Revenue representing a portion of
the tax and interest assessed. The collateral is included in Other Assets in the Consolidated
Balance Sheet and totaled approximately $1.3 billion at September 30, 2008. During the first
nine months of 2008, approximately $400 million of cash and cash equivalents in the collateral
account was transferred out and a corresponding amount of investments was transferred in. The
Company has previously established reserves for these matters. While the resolution of these
matters may result in liabilities higher or lower than the reserves, management believes that
resolution of these matters will not have a material effect on the Companys financial position
or liquidity. However, an unfavorable resolution could have a material adverse effect on the
Companys results of operations or cash flows in the quarter in which an adjustment is recorded
or tax is due.
 In July 2007, the CRA notified the Company that it is in the process of proposing a penalty of
$160 million (U.S. dollars) in connection with the 2006 notice. The penalty is for failing to
provide information on a timely basis. The Company vigorously disagrees with the penalty and
feels it is inapplicable and that appropriate information was provided on a timely basis. The
Company is pursuing all appropriate remedies to avoid having the penalty assessed and was
notified in early August 2007 that the CRA is holding the imposition of a penalty in abeyance
pending a review of the Companys submissions as to the inapplicability of a penalty.
 13.
    
    Earnings Per Share
 The weighted average common shares used in the computations of basic earnings per common share
and earnings per common share assuming dilution are as follows:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(shares in millions)
    
    2008
    
    2007
    
    2008
    
    2007Average common shares outstanding
    
    
    2,128.5
    
    
    
    2,170.5
    
    
    
    2,144.4
    
    
    
    2,168.2Common shares issuable(1)
    
    
    7.1
    
    
    
    22.3
    
    
    
    12.4
    
    
    
    19.2Average common shares outstanding assuming dilution
    
    
    2,135.6
    
    
    
    2,192.8
    
    
    
    2,156.8
    
    
    
    2,187.4
 
 (1)
    
    Issuable primarily under share-based compensation plans.
 For the three months ended September 30, 2008 and 2007, 227.5 million and 124.5 million,
respectively, and for the nine months ended September 30, 2008 and 2007, 202.1 million and 177.1
million, respectively, of common shares issuable under the Companys share-based compensation
plans were excluded from the computation of earnings per common share assuming dilution because
the effect would have been antidilutive.
 14.
    
    Comprehensive Income
 Comprehensive income was $994.7 million and $1,584.5 million for the three months ended
September 30, 2008 and 2007, respectively, and was $5,956.1 million and $5,017.0 million for the
nine months ended September 30, 2008 and 2007, respectively.
 - 25 -




---



##### Table of Contents



Notes to Consolidated Financial Statements (unaudited)
 
 15.
    
    Segment Reporting
 The Companys operations are principally managed on a products basis and are comprised of two
reportable segments: the Pharmaceutical segment and the Vaccines and Infectious Diseases
segment. Segment composition reflects certain managerial changes that were implemented in early
2008. In addition, in the first quarter of 2008, the Company revised the calculation of segment
profits to include a greater allocation of costs to the segments. Segment disclosures for 2007
have been recast on a comparable basis with 2008.
The Pharmaceutical segment includes human health pharmaceutical products marketed either
directly or through joint ventures. These products consist of therapeutic and preventive
agents, sold by prescription, for the treatment of human disorders. Merck sells these human
health pharmaceutical products primarily to drug wholesalers and retailers, hospitals,
government agencies and managed health care providers such as health maintenance organizations,
pharmacy benefit managers and other institutions. The Vaccines and Infectious Diseases segment
includes human health vaccine and infectious disease products marketed either directly or
through joint ventures. Vaccine products consist of preventive pediatric, adolescent and adult
vaccines, primarily administered at physician offices. Merck sells these human health vaccines
primarily to physicians, wholesalers, physician distributors and government entities. A large
component of pediatric and adolescent vaccines is sold to the U.S. Centers for Disease Control
and Prevention Vaccines for Children program, which is funded by the U.S. government.
Infectious disease products consist of therapeutic agents for the treatment of infection sold
primarily to drug wholesalers, retailers, hospitals and government agencies. The Vaccines and
Infectious Diseases segment includes the majority of the Companys aggregate vaccine and
infectious disease product sales, but excludes sales of these products by non-U.S. subsidiaries
which are included in the Pharmaceutical segment.
Other segments include other non-reportable human and animal health segments.
 Revenues and profits for these segments are as follows:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,($ in millions)
    
    2008
    
    2007
    
    2008
    
    2007Segment revenues:Pharmaceutical segment
    
    $
    4,804.6
    
    
    $
    4,765.2
    
    
    $
    14,622.1
    
    
    $
    14,539.0Vaccines and Infectious Diseases segment
    
    
    1,085.9
    
    
    
    1,236.0
    
    
    
    3,098.1
    
    
    
    3,213.1Other segment revenues
    
    
    21.2
    
    
    
    44.9
    
    
    
    65.3
    
    
    
    125.6$
    5,911.7
    
    
    $
    6,046.1
    
    
    $
    17,785.5
    
    
    $
    17,877.7Segment profits:(1)Pharmaceutical segment
    
    $
    3,165.5
    
    
    $
    3,305.1
    
    
    $
    9,397.5
    
    
    $
    9,977.6Vaccines and Infectious Diseases segment
    
    
    772.7
    
    
    
    815.7
    
    
    
    2,042.9
    
    
    
    1,941.1Other segment profits
    
    
    98.6
    
    
    
    112.9
    
    
    
    363.9
    
    
    
    395.5$
    4,036.8
    
    
    $
    4,233.7
    
    
    $
    11,804.3
    
    
    $
    12,314.2
 
 (1)
    
    Includes the majority of Equity income from affiliates.
 - 26 -




---



##### Table of Contents



Notes to Consolidated Financial Statements (unaudited)
 Sales (1) of the Companys products were as follows:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,($ in millions)
    
    2008
    
    2007
    
    2008
    
    2007Pharmaceutical:Singulair
    
    $
    1,029.3
    
    
    $
    1,018.1
    
    
    $
    3,214.6
    
    
    $
    3,111.9Cozaar/Hyzaar
    
    
    888.3
    
    
    
    813.6
    
    
    
    2,676.3
    
    
    
    2,458.8Fosamax
    
    
    353.9
    
    
    
    725.2
    
    
    
    1,234.8
    
    
    
    2,253.0Januvia
    
    
    378.5
    
    
    
    184.6
    
    
    
    984.4
    
    
    
    415.3Cosopt/Trusopt
    
    
    208.6
    
    
    
    196.8
    
    
    
    627.4
    
    
    
    575.0Zocor
    
    
    157.2
    
    
    
    217.8
    
    
    
    513.1
    
    
    
    654.2Maxalt
    
    
    136.4
    
    
    
    125.0
    
    
    
    388.3
    
    
    
    341.5Propecia
    
    
    107.9
    
    
    
    99.2
    
    
    
    320.6
    
    
    
    292.8Arcoxia
    
    
    96.8
    
    
    
    76.1
    
    
    
    294.1
    
    
    
    245.2Vasotec/Vaseretic
    
    
    82.1
    
    
    
    119.5
    
    
    
    271.5
    
    
    
    368.5Proscar
    
    
    80.9
    
    
    
    89.6
    
    
    
    251.9
    
    
    
    328.0Janumet
    
    
    100.7
    
    
    
    18.6
    
    
    
    231.5
    
    
    
    42.9Emend
    
    
    68.2
    
    
    
    48.9
    
    
    
    193.3
    
    
    
    143.6Other pharmaceutical(2)
    
    
    519.1
    
    
    
    575.4
    
    
    
    1,734.2
    
    
    
    1,980.2Vaccine and infectious disease product sales
included in the Pharmaceutical segment (3)
    
    
    596.7
    
    
    
    456.8
    
    
    
    1,686.1
    
    
    
    1,328.1Pharmaceutical segment revenues
    
    
    4,804.6
    
    
    
    4,765.2
    
    
    
    14,622.1
    
    
    
    14,539.0Vaccines (4)and Infectious Diseases:Gardasil
    
    
    401.0
    
    
    
    418.4
    
    
    
    1,117.1
    
    
    
    1,141.3RotaTeq
    
    
    134.5
    
    
    
    171.3
    
    
    
    502.4
    
    
    
    375.4Zostavax
    
    
    11.2
    
    
    
    61.2
    
    
    
    150.8
    
    
    
    150.7ProQuad/M-M-R II/Varivax
    
    
    430.4
    
    
    
    428.5
    
    
    
    973.8
    
    
    
    1,018.1Hepatitis vaccines
    
    
    36.2
    
    
    
    68.4
    
    
    
    107.9
    
    
    
    219.5Other vaccines
    
    
    80.6
    
    
    
    96.5
    
    
    
    222.8
    
    
    
    284.6Primaxin
    
    
    187.6
    
    
    
    185.6
    
    
    
    591.5
    
    
    
    568.4Cancidas
    
    
    147.9
    
    
    
    135.2
    
    
    
    457.4
    
    
    
    403.2Isentress
    
    
    107.3
    
    
    
    5.4
    
    
    
    231.1
    
    
    
    11.9Crixivan/Stocrin
    
    
    68.5
    
    
    
    72.3
    
    
    
    222.8
    
    
    
    229.9Invanz
    
    
    71.1
    
    
    
    49.5
    
    
    
    197.0
    
    
    
    137.4Other infectious disease
    
    
    6.3
    
    
    
    0.5
    
    
    
    9.6
    
    
    
    0.8Vaccine and infectious disease product sales
included in the Pharmaceutical segment (3)
    
    
    (596.7
    )
    
    
    (456.8
    )
    
    
    (1,686.1
    )
    
    
    (1,328.1
    )Vaccines and Infectious Diseases segment revenues
    
    
    1,085.9
    
    
    
    1,236.0
    
    
    
    3,098.1
    
    
    
    3,213.1Other segment (5)
    
    
    21.2
    
    
    
    44.9
    
    
    
    65.3
    
    
    
    125.6Total segment revenues
    
    
    5,911.7
    
    
    
    6,046.1
    
    
    
    17,785.5
    
    
    
    17,877.7Other (6)
    
    
    32.2
    
    
    
    28.0
    
    
    
    32.4
    
    
    
    77.1$
    5,943.9
    
    
    $
    6,074.1
    
    
    $
    17,817.9
    
    
    $
    17,954.8
 
 (1)
    
    Presented net of discounts and returns.(2)
    
    Other pharmaceutical primarily includes sales of other human pharmaceutical
products and revenue from the Companys relationship with
AstraZeneca LP primarily relating
to sales of Nexium, as well asPrilosec.Revenue from AstraZeneca LP was $375.2 million
and $416.3 million for the third quarter of 2008 and 2007, respectively, and was $1,235.7
million and $1,438.2 million for the first nine months of 2008 and 2007, respectively.(3)
    
    Sales of vaccine and infectious disease products by non-U.S. subsidiaries are
included in the Pharmaceutical segment.(4)
    
    These amounts do not reflect sales of vaccines sold in most major European
markets through the Companys joint venture, Sanofi Pasteur MSD, the results of which are
reflected in Equity income from affiliates. These amounts do, however, reflect supply
sales to Sanofi Pasteur MSD.(5)
    
    Includes other non-reportable human and animal health segments.(6)
    
    Other revenues are primarily comprised of miscellaneous corporate revenues, sales
related to divested products or businesses and other supply sales not included in segment
results.
 - 27 -




---



##### Table of Contents



Notes to Consolidated Financial Statements (unaudited)
 A reconciliation of segment profits to Income Before Taxes is as follows:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,($ in millions)
    
    2008
    
    2007
    
    2008
    
    2007Segment profits
    
    $
    4,036.8
    
    
    $
    4,233.7
    
    
    $
    11,804.3
    
    
    $
    12,314.2Other profits
    
    
    21.1
    
    
    
    10.3
    
    
    
    (6.8
    )
    
    
    40.3Adjustments
    
    
    72.1
    
    
    
    86.6
    
    
    
    271.7
    
    
    
    258.7Unallocated:Interest income
    
    
    171.3
    
    
    
    186.9
    
    
    
    484.2
    
    
    
    540.9Interest expense
    
    
    (71.4
    )
    
    
    (91.5
    )
    
    
    (194.6
    )
    
    
    (297.2
    )Equity income from affiliates
    
    
    32.9
    
    
    
    47.9
    
    
    
    31.7
    
    
    
    180.6Depreciation and amortization
    
    
    (367.0
    )
    
    
    (458.0
    )
    
    
    (1,079.4
    )
    
    
    (1,388.5
    )Research and development
    
    
    (1,171.1
    )
    
    
    (1,440.5
    )
    
    
    (3,418.7
    )
    
    
    (3,501.0
    )Gain on distribution from
AstraZeneca LP
    
    
    
    
    
    
    
    
    
    
    2,222.7
    
    
    
    Other expenses, net
    
    
    (1,313.8
    )
    
    
    (510.8
    )
    
    
    (2,234.7
    )
    
    
    (1,596.8
    )$
    1,410.9
    
    
    $
    2,064.6
    
    
    $
    7,880.4
    
    
    $
    6,551.2
 Segment profits are comprised of segment revenues less certain elements of materials and
production costs and operating expenses, including the majority of equity income from affiliates
and components of depreciation and amortization expenses. For internal management reporting
presented to the chief operating decision maker, the Company does not allocate the vast majority
of research and development expenses, general and administrative expenses, depreciation related
to fixed assets utilized by nonmanufacturing divisions, as well as the cost of financing these
activities. Separate divisions maintain responsibility for monitoring and managing these costs
and, therefore, they are not included in segment profits.Other profits are primarily comprised of miscellaneous corporate profits as well as operating
profits related to divested products or businesses and other supply sales. Adjustments
represent the elimination of the effect of double counting certain items of income and expense.
Equity income from affiliates includes taxes paid at the joint venture level and a portion of
equity income that is not reported in segment profits. Other expenses, net, includes expenses
from corporate and manufacturing cost centers and other miscellaneous income (expense), net.
 - 28 -




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Operating Results   Sales
 Fosamax Fosamax Fosamax Plus D Zostavax RotaTeq Zocor Januvia Janumet Isentress Cozaar/Hyzaar*
 Fosamax Zocor Januvia Janumet Isentress, Cozaar/Hyzaar RotaTeq Singulair
 Cozaar Hyzaar
 - 29 -




---



##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,($ in millions)
    
    2008
    
    2007
    
    2008
    
    2007Pharmaceutical:Singulair
    
    $
    1,029.3
    
    
    $
    1,018.1
    
    
    $
    3,214.6
    
    
    $
    3,111.9Cozaar/Hyzaar
    
    
    888.3
    
    
    
    813.6
    
    
    
    2,676.3
    
    
    
    2,458.8Fosamax
    
    
    353.9
    
    
    
    725.2
    
    
    
    1,234.8
    
    
    
    2,253.0Januvia
    
    
    378.5
    
    
    
    184.6
    
    
    
    984.4
    
    
    
    415.3Cosopt/Trusopt
    
    
    208.6
    
    
    
    196.8
    
    
    
    627.4
    
    
    
    575.0Zocor
    
    
    157.2
    
    
    
    217.8
    
    
    
    513.1
    
    
    
    654.2Maxalt
    
    
    136.4
    
    
    
    125.0
    
    
    
    388.3
    
    
    
    341.5Propecia
    
    
    107.9
    
    
    
    99.2
    
    
    
    320.6
    
    
    
    292.8Arcoxia
    
    
    96.8
    
    
    
    76.1
    
    
    
    294.1
    
    
    
    245.2Vasotec/Vaseretic
    
    
    82.1
    
    
    
    119.5
    
    
    
    271.5
    
    
    
    368.5Proscar
    
    
    80.9
    
    
    
    89.6
    
    
    
    251.9
    
    
    
    328.0Janumet
    
    
    100.7
    
    
    
    18.6
    
    
    
    231.5
    
    
    
    42.9Emend
    
    
    68.2
    
    
    
    48.9
    
    
    
    193.3
    
    
    
    143.6Other pharmaceutical(1)
    
    
    519.1
    
    
    
    575.4
    
    
    
    1,734.2
    
    
    
    1,980.2Vaccine and infectious disease product sales
included in the Pharmaceutical segment (2)
    
    
    596.7
    
    
    
    456.8
    
    
    
    1,686.1
    
    
    
    1,328.1Pharmaceutical segment revenues
    
    
    4,804.6
    
    
    
    4,765.2
    
    
    
    14,622.1
    
    
    
    14,539.0Vaccines(3)and Infectious Diseases:Gardasil
    
    
    401.0
    
    
    
    418.4
    
    
    
    1,117.1
    
    
    
    1,141.3RotaTeq
    
    
    134.5
    
    
    
    171.3
    
    
    
    502.4
    
    
    
    375.4Zostavax
    
    
    11.2
    
    
    
    61.2
    
    
    
    150.8
    
    
    
    150.7ProQuad/M-M-R II/Varivax
    
    
    430.4
    
    
    
    428.5
    
    
    
    973.8
    
    
    
    1,018.1Hepatitis vaccines
    
    
    36.2
    
    
    
    68.4
    
    
    
    107.9
    
    
    
    219.5Other vaccines
    
    
    80.6
    
    
    
    96.5
    
    
    
    222.8
    
    
    
    284.6Primaxin
    
    
    187.6
    
    
    
    185.6
    
    
    
    591.5
    
    
    
    568.4Cancidas
    
    
    147.9
    
    
    
    135.2
    
    
    
    457.4
    
    
    
    403.2Isentress
    
    
    107.3
    
    
    
    5.4
    
    
    
    231.1
    
    
    
    11.9Crixivan/Stocrin
    
    
    68.5
    
    
    
    72.3
    
    
    
    222.8
    
    
    
    229.9Invanz
    
    
    71.1
    
    
    
    49.5
    
    
    
    197.0
    
    
    
    137.4Other infectious disease
    
    
    6.3
    
    
    
    0.5
    
    
    
    9.6
    
    
    
    0.8Vaccine and infectious disease product sales
included in the Pharmaceutical segment (2)
    
    
    (596.7
    )
    
    
    (456.8
    )
    
    
    (1,686.1
    )
    
    
    (1,328.1
    )Vaccines and Infectious Diseases segment revenues
    
    
    1,085.9
    
    
    
    1,236.0
    
    
    
    3,098.1
    
    
    
    3,213.1Other segment (4)
    
    
    21.2
    
    
    
    44.9
    
    
    
    65.3
    
    
    
    125.6Total segment revenues
    
    
    5,911.7
    
    
    
    6,046.1
    
    
    
    17,785.5
    
    
    
    17,877.7Other (5)
    
    
    32.2
    
    
    
    28.0
    
    
    
    32.4
    
    
    
    77.1$
    5,943.9
    
    
    $
    6,074.1
    
    
    $
    17,817.9
    
    
    $
    17,954.8
 (1)
    
    Other pharmaceutical primarily includes sales of other human pharmaceutical products
and revenue from the Companys relationship with AZLP primarily relating to sales ofNexium,
as well asPrilosec. Revenue from AZLP was $375.2 million and $416.3 million for the third
quarter of 2008 and 2007, respectively, and was $1,235.7 million and $1,438.2 million for the
first nine months of 2008 and 2007, respectively.(2)
    
    Sales of vaccine and infectious disease products by non-U.S. subsidiaries are
included in the Pharmaceutical segment.(3)
    
    These amounts do not reflect sales of vaccines sold in most major European markets
through the Companys joint venture, Sanofi Pasteur MSD, the results of which are reflected in
Equity income from affiliates. These amounts do, however, reflect supply sales to Sanofi
Pasteur MSD.(4)
    
    Includes other non-reportable human and animal health segments.(5)
    
    Other revenues are primarily comprised of miscellaneous corporate revenues, sales
related to divested products or businesses and other supply sales not included in segment
results.  - 30 -




---



##### Table of Contents



Pharmaceutical Segment Revenues
 Januvia, Janumet, Isentress Cozaar/Hyzaar, Fosamax, Zocor
 Singulair Singulair
 Cozaar Hyzaar Hyzaar Preminent) Cozaar Hyzaar
 Fosamax Fosamax Plus D Fosavance Fosamac Fosamax
 Januvia Januvia Januvia
 th Januvia Januvia Januvia
 Janumet Januvia Janumet,
 - 31 -




---



##### Table of Contents



Janumet Janumet
 Zocor
 Arcoxia Emend Maxalt Cosopt Propecia
 Arcoxia Arcoxia Arcoxia
 Zolinza Zolinza Zolinza
 Trusopt Cosopt
 Aggrastat
 (Nexium)
 Vaccines and Infectious Diseases Segment Revenues
 of
Zostavax, Gardasil, RotaTeq Isentress. Gardasil Varivax, M-M-RII ProQuad, Isentress RotaTeq.
  Gardasil
 - 32 -




---



##### Table of Contents



Gardasil Gardasil,
 Gardasil Gardasil
 Gardasil Gardasil Gardasil   RotaTeq
 RotaTeq RotaTeq RotaTeq RotaTeq RotaTeq
 RotaTeq RotaTeq
 Pneumovax Pneumovax
 Varivax Zostavax
 - 33 -




---



##### Table of Contents



ProQuad M-M-RII Varivax ProQuad
 Varivax Varivax ProQuad M-M-R Varivax M-M-R ProQuad ProQuad M-M-RII Varivax
 Zostavax Zostavax Zostavax
 PedvaxHIB Comvax PedvaxHIB Comvax Vaqta
 Isentress Isentress Isentress Isentress Isentress
 Isentress Isentress Isentress Isentress Isentress
 Invanz Cancidas,
 Cancidas
 Costs, Expenses and Other
  - 34 -




---



##### Table of Contents



Employers Accounting for
Postemployment Benefits  an amendment of FASB Statement No. 5 and 43 ( ) Accounting for Costs Associated with Exit or Disposal Activities
      - 35 -




---



##### Table of Contents



Fosamax Vioxx
     th
 - 36 -




---



##### Table of Contents



Tredaptive Tredaptive Tredaptive Tredaptive Tredaptive Tredaptive Tredaptive Tredaptive
 Cordaptive Tredaptive
    - 37 -




---



##### Table of Contents



Zetia Vytorin Zetia Gardasil.
 Aggrastat Vioxx
 Segment Profits
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,($ in millions)
    
    2008
    
    2007
    
    2008
    
    2007Pharmaceutical segment
    
    $
    3,165.5
    
    
    $
    3,305.1
    
    
    $
    9,397.5
    
    
    $
    9,977.6Vaccines and Infectious Diseases segment
    
    
    772.7
    
    
    
    815.7
    
    
    
    2,042.9
    
    
    
    1,941.1Other segment
    
    
    98.6
    
    
    
    112.9
    
    
    
    363.9
    
    
    
    395.5Other
    
    
    (2,625.9
    )
    
    
    (2,169.1
    )
    
    
    (3,923.9
    )
    
    
    (5,763.0
    )Income before income taxes
    
    $
    1,410.9
    
    
    $
    2,064.6
    
    
    $
    7,880.4
    
    
    $
    6,551.2
  Fosamax, Nexium Zocor
 - 38 -




---



##### Table of Contents



Zostavax, RotaTeq Isentress RotaTeq
   Selected Joint Venture and Affiliate Information   Merck/Schering-Plough Partnership
 Zetia Vytorin Zetia Ezetrol Zetia Vytorin Inegy Vytorin
 Vytorin
 - 39 -




---



##### Table of Contents



Vytorin Vytorin Vytorin Vytorin Vytorin Vytorin Vytorin Vytorin Vytorin Vytorin
 Zetia Vytorin.
 Singulair Zetia
 AstraZeneca LP
   Nexium Prilosec
  - 40 -




---



##### Table of Contents



Sanofi Pasteur MSD
 Gardasil Gardasil
  Liquidity and Capital Resources
 September 30,
    
    December 31,($ in millions)
    
    2008
    
    2007Cash and investments
    
    $
    13,053.0
    
    
    $
    15,390.0Working capital
    
    $
    4,990.3
    
    
    $
    2,787.2Total debt to total liabilities and equity
    
    
    14.3
    %
    
    
    11.9
    %
  Vioxx
 Vioxx
 Vioxx
 - 41 -




---



##### Table of Contents



Financial Instruments and Market Risk Disclosure
  Critical Accounting Policies
  - 42 -




---



##### Table of Contents



Fair Value Measurements
  Recently Issued Accounting Standards
 Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active
 , Determining Whether Instruments Granted
in Share-Based Payment Transactions Are Participating Securities
 The Hierarchy of Generally Accepted Accounting
Principles
 Disclosures about Derivative Instruments and
Hedging Activities
 Accounting for Collaborative Arrangements
 - 43 -




---



##### Table of Contents



Business Combinations Noncontrolling Interests in Consolidated Financial Statementsan amendment of
ARB No. 51
 Legal Proceedings
  Vioxx Litigation   Product Liability Lawsuits
 Vioxx Vioxx Vioxx
 Vioxx
 Vioxx Vioxx
 www.merck.com
 - 44 -




---



##### Table of Contents



Vioxx Vioxx
      Vioxx www.merck.com
 - 45 -




---



##### Table of Contents



Vioxx
 Vioxx
 Vioxx Vioxx
 Vioxx Vioxx
 en banc
  Other Lawsuits
 Vioxx Vioxx Vioxx
 - 46 -




---



##### Table of Contents



Vioxx Vioxx. Vioxx.
  Vioxx Vioxx Vioxx
 Vioxx qui tam qui tam
 Shareholder Lawsuits
 Vioxx Vioxx Vioxx Vioxx Vioxx en banc
  - 47 -




---



##### Table of Contents



Vioxx Vioxx
 Vioxx
 Vioxx Vioxx Vioxx Vioxx Vioxx
 Vioxx Vioxx
 International Lawsuits
 Vioxx Vioxx
 Vioxx Vioxx Vioxx Vioxx
 - 48 -




---



##### Table of Contents



Vioxx
 Additional Lawsuits
 Vioxx Vioxx Vioxx Vioxx
 Insurance
 Vioxx Vioxx Vioxx Vioxx Vioxx
 Vioxx Vioxx Vioxx
 Investigations
 Vioxx. Vioxx Vioxx Vioxx
 Vioxx
 Vioxx
 Reserves
 Vioxx Vioxx
 - 49 -




---



##### Table of Contents



Vioxx Vioxx Vioxx Vioxx Vioxx Vioxx
 Vioxx Vioxx Vioxx Vioxx Vioxx Vioxx Vioxx Vioxx
 Vioxx Vioxx Vioxx
  Other Product Liability Litigation
 Fosamax Fosamax Fosamax Fosamax Fosamax Fosamax Daubert
 - 50 -




---



##### Table of Contents



Fosamax Fosamax
 Fosamax
 Fosamax Fosamax Fosamax Fosamax Fosamax Fosamax
 Vytorin/Zetia Litigation
 Vytorin Vytorin Vytorin Vytorin Zetia
 In re Merck &
Co., Inc. Vytorin Securities Litigation. Vytorin Vytorin Vytorin In
re Merck & Co., Inc. Vytorin ERISA Litigation. Vytorin
 - 51 -




---



##### Table of Contents



Patent Litigation
 Propecia, Prilosec, Nexium, Singulair Primaxin Prilosec Nexium Zetia Prilosec. Propecia Singulair Primaxin Prilosec Nexium Zetia
 Singulair
 Other Litigation
  - 52 -




---



##### Table of Contents



Item 4. Controls and Procedures
  CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
   - 53 -




---



##### 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, 2008
    
    
    8,647,445
    
    
    $
    33.07
    
    
    $
    3,260.6August 1 - August 31, 2008
    
    
    10,743,405
    
    
    $
    35.03
    
    
    $
    2,884.2September 1 - September 30, 2008
    
    
    9,241,000
    
    
    $
    32.67
    
    
    $
    2,582.3Total
    
    
    28,631,850
    
    
    $
    33.68
    
    
    $
    2,582.3
 
 (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
 Number
    
    Description3.1
    
    Restated Certificate of Incorporation of Merck & Co., Inc. (May 17,
2007)  Incorporated by reference to Current Report on Form 8-K
dated May 17, 20073.2
    
    By-Laws of Merck & Co., Inc. (as amended effective May 31, 2007) 
Incorporated by reference to Current Report on Form 8-K dated May
31, 200731.1
    
    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
 - 54 -




---



##### Table of Contents



Signatures
  MERCK & CO., INC.Date: November 3, 2008
    
    /s/ Bruce N. KuhlikBRUCE N. KUHLIKExecutive Vice President and General CounselDate: November 3, 2008
    
    /s/ John CananJOHN CANANSenior Vice President and Controller
 - 55 -




---



##### Table of Contents



EXHIBIT INDEX
 Number
    
    Description3.1
    
    Restated Certificate of Incorporation of Merck & Co., Inc. (May 17,
2007)  Incorporated by reference to Current Report on Form 8-K
dated May 17, 20073.2
    
    By-Laws of Merck & Co., Inc. (as amended effective May 31, 2007) 
Incorporated by reference to Current Report on Form 8-K dated May
31, 200731.1
    
    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
 - 56 -