What changed in this filing

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Item 1. Financial Statements

2023-08-07 compared with 2023-05-05 · 322 added, 235 removed, 786 unchanged (41% of the section changed)

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AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF INCOME

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited, $ in millions except per share amounts)

Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

Sales $ 15,035 $ 14,593 $ 29,522 $ 30,494

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20,370 10,106 31,207 21,146

Income Before Taxes 3,650 4,861

Taxes on Income 825 554

Net Income 2,825 4,307

Net Income (Loss) Attributable to Noncontrolling Interests 4 ( 3 )

Net Income Attributable to Merck & Co., Inc.

(Loss) Income Before Taxes ( 5,335 ) 4,487 ( 1,685 ) 9,348

Income Tax Provision 637 538 1,462 1,092

Net (Loss) Income ( 5,972 ) 3,949 ( 3,147 ) 8,256

Net Income Attributable to Noncontrolling Interests 3 5 7 2

Net (Loss) Income Attributable to Merck & Co., Inc.

$ ( 5,975 ) $ 3,944 $ ( 3,154 ) $ 8,254

Basic Earnings per Common Share Attributable to Merck & Co., Inc.

Basic (Loss) Earnings per Common Share Attributable to Merck & Co., Inc.

Common Shareholders $ ( 2.35 ) $ 1.56 $ ( 1.24 ) $ 3.26

Earnings per Common Share Assuming Dilution Attributable to Merck & Co., Inc.

(Loss) Earnings per Common Share Assuming Dilution Attributable to Merck & Co., Inc.

Common Shareholders $ ( 2.35 ) $ 1.55 $ ( 1.24 ) $ 3.25

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AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE (LOSS) INCOME

(Unaudited, $ in millions)

Three Months Ended

Net Income Attributable to Merck & Co., Inc.

June 30, Six Months Ended

2023 2022 2023 2022

Net (Loss) Income Attributable to Merck & Co., Inc.

$ ( 5,975 ) $ 3,944 $ ( 3,154 ) $ 8,254

Other Comprehensive (Loss) Income Net of Taxes:

Net unrealized (loss) gain on derivatives, net of reclassifications ( 133 ) 63

Net unrealized gain on derivatives, net of reclassifications 145 183 12 246

Benefit plan net (loss) gain and prior service (cost) credit, net of amortization ( 25 ) 246 ( 75 ) 278

Cumulative translation adjustment ( 137 ) ( 387 ) ( 69 ) ( 422 )

Comprehensive Income Attributable to Merck & Co., Inc.

( 17 ) 42 ( 132 ) 102

Comprehensive (Loss) Income Attributable to Merck & Co., Inc.

$ ( 5,992 ) $ 3,986 $ ( 3,286 ) $ 8,356

The accompanying notes are an integral part of these condensed consolidated financial statements.

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(Unaudited, $ in millions except per share amounts)

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Current Assets

48 unchanged sentences

(Unaudited, $ in millions)

Three Months Ended

Six Months Ended

Cash Flows from Operating Activities

Net income $ 2,825 $ 4,307

Adjustments to reconcile net income to net cash provided by operating activities:

Net (loss) income $ ( 3,147 ) $ 8,256

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

Amortization 1,020 1,163

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(Income) loss from investments in equity securities, net ( 274 ) 991

Charge for the acquisition of Prometheus Biosciences, Inc.

Charge for the acquisition of Imago BioSciences, Inc.

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Share-based compensation 314 257

Other ( 197 ) 143

Net changes in assets and liabilities ( 4,526 ) ( 2,698 )

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Proceeds from sales of securities and other investments 785 374

Acquisition of Prometheus Biosciences, Inc., net of cash acquired ( 10,705 ) —

Acquisition of Imago BioSciences, Inc., net of cash acquired ( 1,327 ) —

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Cash Flows from Financing Activities

Net change in short-term borrowings 1,937 —

Proceeds from issuance of debt 5,946 —

Payments on debt ( 1,751 ) ( 1,250 )

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Other ( 315 ) ( 207 )

Net Cash Used in Financing Activities ( 2,054 ) ( 3,086 )

Net Cash Provided by (Used in) Financing Activities 1,704 ( 4,863 )

Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash ( 6 ) ( 364 )

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Cash, Cash Equivalents and Restricted Cash at End of Period (includes restricted cash of $ 52

and $ 58 at March 31, 2023 and 2022, respectively, included in Other current assets )

and $ 78 at June 30, 2023 and 2022, respectively, included in Other current assets )

$ 5,712 $ 9,753

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Certain reclassifications have been made to prior year amounts to conform to the current year presentation.

Recently Adopted Accounting Standard

Recently Adopted Accounting Standards

In October 2021, the FASB issued amended guidance that requires acquiring entities to recognize and measure contract assets and liabilities in a business combination in accordance with existing revenue recognition guidance.

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however, the impact in future periods will be dependent upon the contract assets and contract liabilities acquired in future business combinations.

Recently Issued Accounting Standard Not Yet Adopted

In June 2022, the FASB issued guidance related to the fair value measurement of an equity security subject to contractual restrictions that prohibit the sale of the equity security.

The new guidance also introduces new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value.

The amended guidance is effective for interim and annual periods in 2024 and is to be applied prospectively.

Early adoption is permitted for both interim and annual periods.

The Company does not expect there to be an impact to its consolidated financial statements upon adoption .

The Company adopted the guidance effective July 1, 2023.

There was no impact to the Company’s consolidated financial statements upon adoption.

Acquisitions, Research Collaborations and Licensing Agreements

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Pro forma financial information for acquired businesses is not presented if the historical financial results of the acquired entity are not significant when compared with the Company’s financial results.

In April 2023, Merck announced an agreement to acquire Prometheus Biosciences, Inc.

In June 2023, Merck acquired Prometheus Biosciences, Inc.

(Prometheus), a clinical-stage biotechnology company pioneering a precision medicine approach for the discovery, development, and commercialization of novel therapeutic and companion diagnostic products for the treatment of immune-mediated diseases.

Prometheus’ lead candidate, PRA023, is a humanized monoclonal antibody directed to tumor necrosis factor-like ligand 1A, a target associated with both intestinal inflammation and fibrosis.

Prometheus is developing PRA023 for the treatment of immune-mediated diseases including ulcerative colitis, Crohn’s disease, and other autoimmune conditions.

Under the terms of the acquisition agreement, Merck, through a subsidiary, will acquire all of the outstanding shares of Prometheus for $ 200 per share in cash for a total equity value of approximately $ 10.8 billion.

The acquisition is subject to Prometheus shareholder approval.

The closing of the proposed transaction will be subject to certain conditions, including the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act and other customary conditions.

The transaction is expected to close in the third quarter of 2023.

If the proposed transaction closes, the Company anticipates it will be accounted for as an asset acquisition, which would result in a charge of approximately $ 10.3 billion in Research and development expenses.

Total consideration paid of $ 11.0 billion included $ 1.2 billion of costs to settle share-based equity awards (including $ 700 million to settle unvested equity awards).

Prometheus’ lead candidate, MK-7240 (formerly PRA023), is a humanized monoclonal antibody directed to tumor necrosis factor-like ligand 1A, a target associated with both intestinal inflammation and fibrosis.

MK-7240 is being developed for the treatment of immune-mediated diseases including ulcerative colitis, Crohn’s disease, and other autoimmune conditions.

The transaction was accounted for as an acquisition of an asset since MK-7240 accounted for substantially all of the fair value of the gross assets acquired (excluding cash and deferred income taxes).

Merck recorded net assets of $ 877 million, including cash of $ 368 million, investments of $ 296 million, deferred tax assets of $ 218 million and other net liabilities of $ 5 million, as well as Research and development expenses of $ 10.2 billion in the second quarter and first six months of 2023 related to the transaction.

There are no future contingent payments associated with the acquisition.

In February 2023, Merck and Kelun-Biotech (a holding subsidiary of Sichuan Kelun Pharmaceutical Co., Ltd.) closed a license and collaboration agreement expanding their relationship in which Merck gained exclusive rights for the research, development, manufacture and commercialization of up to seven investigational preclinical antibody drug conjugates (ADCs) for the treatment of cancer.

Kelun-Biotech retained the right to research, develop, manufacture and commercialize certain licensed and option ADCs for Chinese mainland, Hong Kong and Macau.

Merck made an upfront payment of $ 175 million, which was recorded in Research and development expenses in the first quarter of 2023.

Merck made an upfront payment of $ 175 million, which was recorded in Research and development expenses in the first six months of 2023.

In addition, Kelun-Biotech is eligible to receive future contingent development-related payments aggregating up to $ 1.0 billion, $ 2.8 billion in regulatory milestones, and $ 5.5 billion in sales-based milestones if Kelun-Biotech does not retain Chinese mainland, Hong Kong and Macau rights for the option ADCs and all candidates achieve regulatory approval.

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In January 2023, Merck acquired Imago BioSciences, Inc.

(Imago), a clinical stage biopharmaceutical company developing new medicines for the treatment of myeloproliferative neoplasms and other bone marrow diseases, for $ 1.35 billion

(Imago), a clinical stage biopharmaceutical company developing new medicines for the treatment of myeloproliferative neoplasms and other bone marrow diseases, for $ 1.35 billion (including payments to settle share-based equity awards) and also incurred approximately $ 60 million of transaction costs.

Imago’s lead candidate bomedemstat, MK-3543 (formerly IMG-7289), is an investigational orally available lysine-specific demethylase 1 inhibitor currently being evaluated in multiple Phase 2 clinical trials for the treatment of essential

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

(including payments to settle share-based equity awards) and also incurred approximately $ 60 million of transaction costs.

thrombocythemia, myelofibrosis, and polycythemia vera, in addition to other indications.

The transaction was accounted for as an acquisition of an asset since bomedemstat represented substantially all of the fair value of the gross assets acquired (excluding cash and deferred income taxes).

Merck recorded net assets of $ 219 million, as well as Research and development expenses of $ 1.2 billion in the first quarter of 2023 related to the transaction.

Merck recorded net assets of $ 219 million, as well as Research and development expenses of $ 1.2 billion in the first six months of 2023 related to the transaction.

There are no future contingent payments associated with the acquisition.

In May 2022, in connection with an existing arrangement, Merck exercised its option to obtain an exclusive license outside of Chinese mainland, Hong Kong, Macau and Taiwan for the development, manufacture and commercialization of Kelun-Biotech’s trophoblast antigen 2 (TROP2)-targeting ADC programs, including its lead compound, SKB-264 (MK-2870), which is currently in Phase 2 clinical development.

Under the terms of the agreement, Merck and Kelun-Biotech will collaborate on certain early clinical development plans, including evaluating the potential of MK-2870 as a monotherapy and in combination with Keytruda for advanced solid tumors.

Upon option exercise, Merck made a payment of $ 30 million, which was recorded in Research and development expenses in the second quarter and first six months of 2022, and agreed to make additional payments of $ 30 million upon completion of specified project activities and $ 25 million upon technology transfer.

Merck also agreed to make quarterly payments in 2022 and 2023 aggregating up to $ 111 million to fund Kelun-Biotech’s ongoing research and development activities, of which $ 81 million has been paid through June 2023.

In addition, Kelun-Biotech is eligible to receive future contingent milestone payments (which include all program compounds) aggregating up to $ 90 million in developmental milestones, $ 290 million in first commercial sale milestones, and $ 780 million in sales-based milestones.

The agreement also provides for Merck to pay tiered royalties ranging from a mid-single-digit rate to a low-double-digit rate on future net sales.

Collaborative Arrangements

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Merck’s more significant collaborative arrangements are discussed below.

AstraZeneca PLC

In 2017, Merck and AstraZeneca PLC (AstraZeneca) entered into a global strategic oncology collaboration to co-develop and co-commercialize AstraZeneca’s Lynparza (olaparib) for multiple cancer types.

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In the first quarter of 2022, Merck determined it was probable that sales of Lynparza in the future would trigger a $ 600 million sales-based milestone payment from Merck to AstraZeneca.

Accordingly, Merck recorded a $ 600 million liability (which remained accrued at March 31, 2023) and a corresponding increase to the intangible asset related to Lynparza.

Merck also recognized $ 250 million of cumulative amortization catch-up expense related to the recognition of this milestone in the first quarter of 2022.

Also in the first quarter of 2022, Merck made a sales-based milestone payment to AstraZeneca (which had been previously accrued for) of $ 400 million.

Accordingly, Merck recorded a $ 600 million liability (which remained accrued at June 30, 2023) and a corresponding increase to the intangible asset related to Lynparza.

Merck also recognized $ 250 million of cumulative amortization catch-up expense related to the recognition of this milestone in the first six months of 2022.

Additionally, in the first six months of 2022, Merck made a sales-based milestone payment to AstraZeneca (which had been previously accrued for) of $ 400 million.

Potential future sales-based milestone payments of $ 2.1 billion have not yet been accrued as they are not deemed by the Company to be probable at this time.

In the first quarter of 2023, Merck made a regulatory milestone payment to AstraZeneca (which had been previously accrued for) of $ 105 million.

In 2022, Lynparza received regulatory approvals triggering capitalized milestone payments of $ 250 million from Merck to AstraZeneca.

Potential future regulatory milestone payments of $ 1.1 billion remain under the agreement.

The intangible asset balance related to Lynparza (which includes capitalized sales-based and regulatory milestone payments) was $ 1.5 billion at March 31, 2023 and is included in Other Intangibles, Net .

In the first quarter of 2023, Merck made a regulatory milestone payment to AstraZeneca of $ 105 million (which had been previously accrued for).

In the second quarter of 2023, Lynparza received a regulatory approval triggering a future milestone payment of up to $ 245 million from Merck to AstraZeneca.

In 2022, Lynparza received regulatory approvals triggering capitalized milestone payments of $ 250 million from Merck to AstraZeneca (of which $ 175 million was paid in the first six months of 2022).

Potential future regulatory milestone payments of $ 850 million remain under the agreement.

The intangible asset balance related to Lynparza (which includes capitalized sales-based and regulatory milestone payments) was $ 1.7 billion at June 30, 2023 and is included in Other Intangibles, Net .

The amount is being amortized over its estimated useful life through 2028 as supported by projected future cash flows, subject to impairment testing.

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Three Months Ended

June 30, Six Months Ended

($ in millions) 2023 2022 2023 2022

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Cost of sales (1)

78 62 148 361

Selling, general and administrative 51 46 98 90

Research and development 22 25 43 51

($ in millions) March 31, 2023 December 31, 2022

($ in millions) June 30, 2023 December 31, 2022

Receivables from AstraZeneca included in Other current assets

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(1) Represents amortization of capitalized milestone payments.

Amount in the first quarter of 2022 includes $ 250 million of cumulative amortization catch-up expense as noted above.

Amount in the first six months of 2022 includes $ 250 million of cumulative amortization catch-up expense as noted above.

(2) Includes accrued milestone payments.

Eisai Co., Ltd.

In 2018, Merck and Eisai Co., Ltd.

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Accordingly, Merck recorded a $ 125 million liability and a corresponding increase to the intangible asset related to Lenvima.

Merck also recognized $ 72 million of cumulative amortization catch-up expense related to the recognition of this milestone.

In 2022, Merck made sales-based milestone payments to Eisai (which had been previously accrued for) aggregating $ 600 million (of which $ 300 million was paid in the first quarter of 2022).

Merck also recognized $ 72 million of cumulative amortization catch-up expense related to the recognition of this milestone in the first six months of 2023.

The Company made this sales-based milestone payment to Eisai in the second quarter of 2023.

In the first six months of 2022, Merck made sales-based milestone payments to Eisai (which had been previously accrued for) aggregating $ 600 million.

Potential future sales-based milestone payments of $ 2.4 billion have not yet been accrued as they are not deemed by the Company to be probable at this time.

In 2022, Lenvima received regulatory approvals triggering capitalized milestone payments of $ 50 million from Merck to Eisai (of which $ 25 million was paid in the first quarter of 2022).

In 2022, Lenvima received regulatory approvals triggering capitalized milestone payments of $ 50 million from Merck to Eisai (of which $ 25 million was paid in the first six months of 2022).

There are no regulatory milestone payments remaining under the agreement.

The intangible asset balance related to Lenvima (which includes capitalized sales-based and regulatory milestone payments) was $ 812 million at March 31, 2023 and is included in Other Intangibles, Net .

The intangible asset balance related to Lenvima (which includes capitalized sales-based and regulatory milestone payments) was $ 756 million at June 30, 2023 and is included in Other Intangibles, Net .

The amount is being amortized over its estimated useful life through 2026 as supported by projected future cash flows, subject to impairment testing.

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Three Months Ended

June 30, Six Months Ended

($ in millions) 2023 2022 2023 2022

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Cost of sales (1)

57 53 183 106

Selling, general and administrative 48 42 99 73

Research and development 17 47 56 104

($ in millions) March 31, 2023 December 31, 2022

($ in millions) June 30, 2023 December 31, 2022

Receivables from Eisai included in Other current assets

Payables to Eisai included in Accrued and other current liabilities (2)

(1) Represents amortization of capitalized milestone payments.

Amount in the first quarter of 2023 includes $ 72 million of cumulative amortization catch-up expense as noted above.

(2) Represents an accrued milestone payment.

Amount in the first six months of 2023 includes $ 72 million of cumulative amortization catch-up expense as noted above.

In 2014, the Company entered into a worldwide clinical development collaboration with Bayer AG (Bayer) to market and develop soluble guanylate cyclase (sGC) modulators including Bayer’s Adempas (riociguat).

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In addition, the agreement provided for contingent payments from Merck to Bayer related to the successful achievement of sales-based milestones.

In the first quarter of 2022, Merck made the final $ 400 million sales-based milestone payment under this collaboration to Bayer.

The intangible asset balances related to Adempas (which includes the acquired intangible asset balance, as well as capitalized sales-based milestone payments attributed to Adempas) and Verquvo (which reflects the portion of the final sales-based milestone payment that was attributed to Verquvo) were $ 613 million and $ 56 million, respectively, at March 31, 2023 and are included in Other Intangibles, Net .

In the first six months of 2022, Merck made the final $ 400 million sales-based milestone payment under this collaboration to Bayer.

The intangible asset balances related to Adempas (which includes the acquired intangible asset balance, as well as capitalized sales-based milestone payments attributed to Adempas) and Verquvo (which reflects the portion of the final sales-based milestone payment that was attributed to Verquvo) were $ 586 million and $ 55 million, respectively, at June 30, 2023 and are included in Other Intangibles, Net .

The assets are being amortized over their estimated useful lives (through 2027 for Adempas and through 2031 for Verquvo) as supported by projected future cash flows, subject to impairment testing.

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Three Months Ended

June 30, Six Months Ended

($ in millions) 2023 2022 2023 2022

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Cost of sales (1)

56 54 113 103

Selling, general and administrative 34 42 67 65

Research and development 25 17 50 34

($ in millions) March 31, 2023 December 31, 2022

($ in millions) June 30, 2023 December 31, 2022

Receivables from Bayer included in Other current assets

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In 2020, Merck and Ridgeback Biotherapeutics LP (Ridgeback), a closely held biotechnology company, entered into a collaboration agreement to develop Lagevrio (molnupiravir), an investigational orally available antiviral candidate for the treatment of patients with COVID-19.

Merck gained exclusive worldwide rights to develop and commercialize Lagevrio and

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

related molecules.

Merck gained exclusive worldwide rights to develop and commercialize Lagevrio and related molecules.

Following initial authorizations in certain markets in the fourth quarter of 2021, Lagevrio has since received multiple additional authorizations worldwide.

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Under the terms of the agreement, Ridgeback received an upfront payment and is eligible to receive future contingent payments dependent upon the achievement of certain developmental and regulatory approval milestones.

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Three Months Ended

June 30, Six Months Ended

($ in millions) 2023 2022 2023 2022

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Cost of sales (1)(2)

193 615 414 2,341

Selling, general and administrative (2)

Research and development (2)

($ in millions) March 31, 2023 December 31, 2022

($ in millions) June 30, 2023 December 31, 2022

Receivables from Ridgeback included in Other current assets (3)

Payables to Ridgeback included in Accrued and other current liabilities (4)

(1) Includes royalty expense and amortization of capitalized milestone payments.

(1) Includes royalty expense, amortization of capitalized milestone payments and inventory reserves.

(2) Expenses include an allocation for overhead charges.

(3) Includes partner advances.

(4) Includes accrued royalties.

Amount at December 31, 2022 also includes an accrued milestone payment .

Bristol Myers Squibb

Reblozyl (luspatercept-aamt) is a first-in-class erythroid maturation recombinant fusion protein that is being commercialized through a global collaboration with Bristol Myers Squibb (BMS).

Bristol-Myers Squibb Company

Reblozyl (luspatercept-aamt) is a first-in-class erythroid maturation recombinant fusion protein that is being commercialized through a global collaboration with Bristol-Myers Squibb Company (BMS).

Reblozyl is approved in the U.S., Europe and certain other markets for the treatment of anemia in certain rare blood disorders and is also being evaluated for additional indications for hematology therapies.

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Additionally, Merck is eligible to receive future contingent sales-based milestone payments of up to $ 80 million.

Merck recorded alliance revenue related to this collaboration within Sales of $ 43 million in the first quarter of 2023 (consisting of royalties) compared with $ 52 million in the first quarter of 2022 (consisting of royalties of $ 32 million and the receipt of a regulatory approval milestone payment of $ 20 million).

Alliance revenue related to this collaboration (recorded within Sales ) consists of royalties and, for the first six months of 2022, also includes the receipt of a regulatory approval milestone payment of $ 20 million.

Merck recorded alliance revenue related to this collaboration of $ 47 million and $ 90 million in the second quarter and first six months of 2023, respectively, compared with $ 33 million and $ 86 million in the second quarter and first six months of 2022, respectively.

Spin-Off of Organon & Co.

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Under the TSA, Merck is providing Organon various services and, similarly, Organon is providing Merck various services.

The provision of services under the TSA generally will terminate within 25 months following the spin-off;

however, the provision of certain services has been extended to 35 months.

A majority of the services provided under the TSA terminated within 25 months following the spin-off;

a majority of the remaining services will terminate within 35 months following the spin-off.

Merck and Organon also entered into a series of interim operating agreements pursuant to which in various jurisdictions where Merck held licenses, permits and other rights in connection with marketing, import and/or distribution of Organon products prior to the separation, Merck is continuing to market, import and distribute such products until such time as the relevant licenses and permits are transferred to Organon.

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The terms of the MSAs range in initial duration from four years to ten years .

The amounts included in the condensed consolidated statement of income for the above MSAs include sales of $ 94 million and $ 99 million and related cost of sales of $ 107 million and $ 105 million for the first quarter of 2023 and 2022,

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

respectively.

Amounts included in the condensed consolidated statement of income for the TSAs were immaterial for both the first quarter of 2023 and 2022.

The amounts due from Organon under all of the above agreements were $ 473 million and $ 511 million at March 31, 2023 and December 31, 2022, respectively, and are reflected in Other current assets .

The amounts due to Organon under these agreements were $ 229 million and $ 345 million at March 31, 2023 and December 31, 2022, respectively, and are included in Accrued and other current liabilities .

The amounts included in the condensed consolidated statement of operations for the above MSAs include sales of $ 96 million and $ 95 million and related cost of sales of $ 101 million and $ 103 million for the second quarter of 2023 and 2022, respectively, and sales of $ 191 million and $ 194 million and related cost of sales of $ 208 million and $ 208 million for the first six months of 2023 and 2022, respectively.

Amounts included in the condensed consolidated statement of operations for the TSAs were immaterial for the three and six months ended June 30, 2023 and June 30, 2022.

The amounts due from Organon under all of the above agreements were $ 539 million and $ 511 million at June 30, 2023 and December 31, 2022, respectively, and are reflected in Other current assets .

The amounts due to Organon under these agreements were $ 351 million and $ 345 million at June 30, 2023 and December 31, 2022, respectively, and are included in Accrued and other current liabilities .

Restructuring

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Approximately 30 % of the cumulative pretax costs will be non-cash, relating primarily to the accelerated depreciation of facilities to be closed or divested.

The Company recorded total pretax costs of $ 97 million and $ 127 million in the first quarter of 2023 and 2022, respectively, related to restructuring program activities.

Since inception of the Restructuring Program through March 31, 2023, Merck has recorded total pretax accumulated costs of approximately $ 3.4 billion.

The Company recorded total pretax costs of $ 236 million and $ 258 million in the second quarter of 2023 and 2022, respectively, and $ 333 million and $ 384 million for the first six months of 2023 and 2022, respectively, related to restructuring program activities.

Since inception of the Restructuring Program through June 30, 2023, Merck has recorded total pretax accumulated costs of approximately $ 3.7 billion.

For the full year of 2023, the Company expects to record charges of approximately $ 550 million related to the Restructuring Program.

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The following tables summarize the charges related to restructuring program activities by type of cost:

Three Months Ended March 31, 2023

Three Months Ended June 30, 2023 Six Months Ended June 30, 2023

($ in millions) Separation

Costs Accelerated

Depreciation Other Total Separation

Costs Accelerated

Depreciation Other Total

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Selling, general and administrative — — 52 52 — — 53 53

Research and development — — 1 1 — — 1 1

Restructuring costs 110 — 41 151 151 — 67 218

$ 110 $ 22 $ 104 $ 236 $ 151 $ 43 $ 139 $ 333

Three Months Ended March 31, 2022

Three Months Ended June 30, 2022 Six Months Ended June 30, 2022

($ in millions) Separation

Costs Accelerated

Depreciation Other Total Separation

Costs Accelerated

Depreciation Other Total

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Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

The following table summarizes the charges and spending relating to restructuring program activities for the three months ended March 31, 2023:

The following table summarizes the charges and spending relating to restructuring program activities for the six months ended June 30, 2023:

($ in millions) Separation

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Non-cash activity — ( 43 ) ( 68 ) ( 111 )

Restructuring reserves March 31, 2023 (1)

Restructuring reserves June 30, 2023 (1)

$ 546 $ — $ 31 $ 577

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Accordingly, foreign currency transaction gains or losses due to spot rate fluctuations on the euro-denominated debt instruments are included in foreign currency translation adjustment within OCI .

The effects of the Company’s net investment hedges on OCI and the Consolidated Statement of Income are shown below:

The effects of the Company’s net investment hedges on OCI and the Condensed Consolidated Statement of Operations are shown below:

Amount of Pretax (Gain) Loss Recognized in Other Comprehensive Income (1)

Amount of Pretax (Gain) Loss Recognized in Other (income) expense, net for Amounts Excluded from Effectiveness Testing

Three Months Ended March 31, Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30, Three Months Ended June 30, Six Months Ended June 30,

($ in millions) 2023 2022 2023 2022 2023 2022 2023 2022

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The Company does not use leveraged swaps and, in general, does not leverage any of its investment activities that would put principal at risk.

In March 2023, the Company entered into five forward starting swaps and in April 2023 entered into two additional forward starting swaps, each with a notional amount of $ 100 million.

The Company is not currently a party to any interest rate swaps.

Presented in the table below is the fair value of derivatives on a gross basis segregated between those derivatives that are designated as hedging instruments and those that are not designated as hedging instruments:

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Fair Value of Derivative U.S.

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Derivatives Designated as Hedging Instruments Balance Sheet Caption

Interest rate swap contracts Other Assets $ 1 $ — $ 300 $ — $ — $ —

Interest rate swap contracts Other Noncurrent Liabilities — 1 200 — — —

Foreign exchange contracts Other current assets $ 200 $ — $ 5,976 $ 220 $ — $ 4,824

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Foreign exchange contracts Other current assets $ 222 $ — $ 8,838 $ 186 $ — $ 8,540

Foreign exchange contracts Other Assets 1 — 65 — — —

Foreign exchange contracts Accrued and other current liabilities — 181 10,112 — 307 10,926

Foreign exchange contracts Other Noncurrent Liabilities — 1 124 — — —

$ 222 $ 181 $ 18,950 $ 186 $ 307 $ 19,466

$ 465 $ 244 $ 29,249 $ 433 $ 409 $ 28,681

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

As noted above, the Company records its derivatives on a gross basis in the Condensed Consolidated Balance Sheet.

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The following table provides information on the Company’s derivative positions subject to these master netting arrangements as if they were presented on a net basis, allowing for the right of offset by counterparty and cash collateral exchanged per the master agreements and related credit support annexes:

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

($ in millions) Asset Liability Asset Liability

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Net amounts $ 183 $ 64 $ 147 $ 170

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

The table below provides information regarding the location and amount of pretax gains and losses of derivatives designated in fair value or cash flow hedging relationships:

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

($ in millions) 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022

Financial Statement Caption in which Effects of Fair Value or Cash Flow

Hedges are Recorded

Sales Other (income) expense, net (1)

Financial Statement Caption in which Effects of Fair Value or Cash Flow Hedges are Recorded Sales Other (income) expense, net (1)

Other comprehensive income (loss) Sales Other (income) expense, net (1)

Other comprehensive income (loss)

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Foreign exchange contracts

Amount of (loss) gain recognized in OCI on derivatives

Amount of gain recognized in OCI on derivatives

— — — — 194 403 — — — — 128 551

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— — — — — — — — ( 1 ) ( 1 ) — —

Amount of loss recognized in OCI on derivatives

Amount of gain (loss) recognized in OCI on derivatives

— — — — 13 — — — — — 13 ( 1 )

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Amount of Derivative Pretax (Gain) Loss Recognized in Income

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

($ in millions) 2023 2022 2023 2022

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(2) These derivative contracts serve as economic hedges of forecasted transactions .

At March 31, 2023, the Company estimates $ 71 million of pretax net unrealized losses on derivatives maturing within the next 12 months that hedge foreign currency denominated sales over that same period will be reclassified from AOCL to Sales .

At June 30, 2023, the Company estimates $ 83 million of pretax net unrealized gains on derivatives maturing within the next 12 months that hedge foreign currency denominated sales over that same period will be reclassified from AOCL to Sales .

The amount ultimately reclassified to Sales may differ as foreign exchange rates change.

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Information on investments in debt and equity securities is as follows:

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Cost Gross Unrealized Fair

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Corporate notes and bonds 4 — — 4 3 — — 3

Foreign government bonds 1 — — 1 — — — —

Total debt securities $ 821 $ — $ — $ 821 $ 569 $ — $ — $ 569

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Total debt and publicly traded equity securities $ 2,341 $ 1,853

(1) Unrealized net gains of $ 338 million were recorded in Other (income) expense, net in the first quarter of 2023 on equity securities still held at March 31, 2023.

Unrealized net losses of $ 225 million were recorded in Other (income) expense, net in the first quarter of 2022 on equity securities still held at March 31, 2022.

At March 31, 2023 and March 31, 2022, the Company also had $ 942 million and $ 643 million, respectively, of equity investments without readily determinable fair values included in Other Assets .

(1) Unrealized net losses (gains) of $ 71 million and $( 267 ) million were recorded in Other (income) expense, net in the second quarter and first six months of 2023, respectively, on equity securities still held at June 30, 2023.

Unrealized net (gains) losses of $( 25 ) million and $ 194 million were recorded in Other (income) expense, net in the second quarter and first six months of 2022, respectively, on equity securities still held at June 30, 2022.

At June 30, 2023 and June 30, 2022, the Company also had $ 949 million and $ 671 million, respectively, of equity investments without readily determinable fair values included in Other Assets .

The Company records unrealized gains on these equity investments based on favorable observable price changes from transactions involving similar investments of the same investee and records unrealized losses based on unfavorable observable price changes, which are included in Other (income) expense, net .

During the first quarter of 2023 , the Company recorded unrealized gains of $ 1 million and unrealized losses of $ 21 million related to certain of these equity investments still held at March 31, 2023.

During the first quarter of 2022 , the Company recorded unrealized gains of $ 14 million related to certain of these investments still held at March 31, 2022.

Cumulative unrealized gains and cumulative unrealized losses based on observable price changes for investments in equity investments without readily determinable fair values still held at March 31, 2023 were $ 287 million and $ 40 million, respectively.

At March 31, 2023 and March 31, 2022, the Company also had $ 725 million and $ 1.2 billion, respectively, recorded in Other Assets for equity securities held through ownership interests in investment funds.

(Gains) losses recorded in Other (income) expense, net relating to these investment funds were $( 132 ) million and $ 509 million for the first quarter of 2023 and 2022, respectively.

During the first six months of 2023 , the Company recorded unrealized gains of $ 3 million and unrealized losses of $ 23 million related to certain of these equity investments still held at June 30, 2023.

During the first six months of 2022 , the Company recorded unrealized gains of $ 20 million and unrealized losses of $ 1 million related to certain of these investments still held at June 30, 2022.

Cumulative unrealized gains and cumulative unrealized losses based on observable price changes for investments in equity investments without readily determinable fair values still held at June 30, 2023 were $ 287 million and $ 42 million, respectively.

At June 30, 2023 and June 30, 2022, the Company also had $ 622 million and $ 805 million, respectively, recorded in Other Assets for equity securities held through ownership interests in investment funds.

(Gains) losses recorded in Other (income) expense, net relating to these investment funds were $ 105 million and $ 302 million for the second quarter of 2023 and 2022, respectively, and were $( 27 ) million and $ 811 million for the first six months of 2023 and 2022, respectively.

Fair Value Measurements

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Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total

($ in millions) March 31, 2023 December 31, 2022

($ in millions) June 30, 2023 December 31, 2022

Commercial paper $ — $ 561 $ — $ 561 $ — $ 498 $ — $ 498

government and agency securities — 187 — 187 — — — —

Foreign government bonds — 1 — 1 — — — —

Publicly traded equity securities 1,184 — — 1,184 1,015 — — 1,015

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Derivative assets (2)

Purchased currency options — 139 — 139 — 215 — 215

Forward exchange contracts — 316 — 316 — 218 — 218

Interest rate swap contracts — 1 — 1 — — — —

Purchased currency options — 149 — 149 — 215 — 215

— 465 — 465 — 433 — 433

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Written currency options — 9 — 9 — 7 — 7

Interest rate swap contracts — 1 — 1 — — — —

— 244 — 244 — 409 — 409

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(2) The fair value determination of derivatives includes the impact of the credit risk of counterparties to the derivatives and the Company’s own credit risk, the effects of which were not significant.

As of March 31, 2023 and December 31, 2022, Cash and cash equivalents included $ 8.8 billion and $ 11.3 billion of cash equivalents, respectively (which would be considered Level 2 in the fair value hierarchy).

As of June 30, 2023 and December 31, 2022, Cash and cash equivalents included $ 4.9 billion and $ 11.3 billion of cash equivalents, respectively (which would be considered Level 2 in the fair value hierarchy).

Contingent Consideration

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Other — ( 2 )

Fair value March 31 (2)

Fair value June 30 (2)

(1) Recorded in Cost of sales, Research and development expenses, and Other (income) expense, net .

Includes cumulative translation adjustments.

(2) At March 31, 2023, $ 263 million of the liabilities relate to the termination of the Sanofi Pasteur MSD joint venture in 2016.

(2) At June 30, 2023, $ 262 million of the liabilities relate to the termination of the Sanofi Pasteur MSD joint venture in 2016.

As part of the termination, Merck recorded a liability for contingent future royalty payments of 11.5 % on net sales of all Merck products that were previously sold by the joint venture through December 31, 2024.

The fair value of this liability is determined utilizing the estimated amount and timing of projected cash flows using a risk-adjusted discount rate to present value the cash flows.

Balance at March 31, 2023 includes $ 127 million recorded as a current liability for amounts expected to be paid within the next 12 months.

Balance at June 30, 2023 includes $ 130 million recorded as a current liability for amounts expected to be paid within the next 12 months.

The payments of contingent consideration in both periods relate to the Sanofi Pasteur MSD liabilities described above.

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Some of the Company’s financial instruments, such as cash and cash equivalents, receivables and payables, are reflected in the balance sheet at carrying value, which approximates fair value due to their short-term nature.

The estimated fair value of loans payable and long-term debt (including current portion) at March 31, 2023, was $ 28.2 billion compared with a carrying value of $ 30.7 billion and at December 31, 2022, was $ 26.7 billion compared with a carrying value of $ 30.7 billion.

The estimated fair value of loans payable and long-term debt (including current portion) at June 30, 2023, was $ 34.0 billion compared with a carrying value of $ 36.9 billion and at December 31, 2022, was $ 26.7 billion compared with a carrying value of $ 30.7 billion.

Fair value was estimated using recent observable market prices and would be considered Level 2 in the fair value hierarchy.

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The Company has accounts receivable factoring agreements with financial institutions in certain countries to sell accounts receivable.

The Company factored $ 2.4 billion and $ 2.5 billion of accounts receivable as of March 31, 2023 and December 31, 2022, respectively, under these factoring arrangements, which reduced outstanding accounts receivable.

The Company factored $ 2.9 billion and $ 2.5 billion of accounts receivable as of June 30, 2023 and December 31, 2022, respectively, under these factoring arrangements, which reduced outstanding accounts receivable.

The cash received from the financial institutions is reported within operating activities in the Condensed Consolidated Statement of Cash Flows.

In certain of these factoring arrangements, for ease of administration, the Company will collect customer payments related to the factored receivables, which it then remits to the financial institutions.

As of March 31, 2023 and December 31, 2022, the Company had collected $ 31 million and $ 67 million, respectively, on behalf of the financial institutions, which is reflected as restricted cash in Other current assets and the related obligation to remit the cash within Accrued and other current liabilities .

The Company remitted the cash to the financial institutions in April 2023 and January 2023, respectively.

As of June 30, 2023 and December 31, 2022, the Company had collected $ 44 million and $ 67 million, respectively, on behalf of the financial institutions, which is reflected as restricted cash in Other current assets and the related obligation to remit the cash within Accrued and other current liabilities .

The Company remitted the cash to the financial institutions in July 2023 and January 2023, respectively.

The net cash flows related to these collections are reported as financing activities in the Condensed Consolidated Statement of Cash Flows.

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These annexes contain provisions that require collateral to be exchanged depending on the value of the derivative assets and liabilities, the Company’s credit rating, and the credit rating of the counterparty.

Cash collateral received by the Company from various counterparties was $ 13 million and $ 66 million at March 31, 2023 and December 31, 2022, respectively.

Cash collateral received by the Company from various counterparties was $ 102 million and $ 66 million at June 30, 2023 and December 31, 2022, respectively.

The obligation to return such collateral is recorded in Accrued and other current liabilities .

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Inventories consisted of:

($ in millions) March 31, 2023 December 31, 2022

($ in millions) June 30, 2023 December 31, 2022

Finished goods $ 1,841 $ 1,841

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Supplies 269 238

Total (approximates current cost) 9,497 9,142

Total 9,563 9,142

Decrease to LIFO cost ( 413 ) ( 293 )

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Amounts recognized as Other Assets are comprised almost entirely of raw materials and work in process inventories.

At March 31, 2023 and December 31, 2022, these amounts included $ 2.7 billion and $ 2.4 billion, respectively, of inventories not expected to be sold within one year.

In addition, these amounts included $ 590 million and $ 516 million at March 31, 2023 and December 31, 2022, respectively, of inventories produced in preparation for product launches.

At June 30, 2023 and December 31, 2022, these amounts included $ 2.6 billion and $ 2.4 billion, respectively, of inventories not expected to be sold within one year.

In addition, these amounts included $ 663 million and $ 516 million at June 30, 2023 and December 31, 2022, respectively, of inventories produced in preparation for product launches.

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Long-Term Debt

In May 2023, the Company issued $ 6.0 billion principal amount of senior unsecured notes consisting of $ 500 million of 4.05 % notes due 2028, $ 750 million of 4.30 % notes due 2030, $ 1.5 billion of 4.50 % notes due 2033, $ 750 million of 4.90 % notes due 2044, $ 1.5 billion of 5.00 % notes due 2053, and $ 1.0 billion of 5.15 % notes due 2063.

The Company used a portion of the $ 5.9 billion net proceeds from this offering to fund a portion of the cash consideration paid for the acquisition of Prometheus and related fees and expenses, and used the remaining net proceeds for general corporate purposes including to repay commercial paper borrowings and other indebtedness with upcoming maturities.

Contingencies

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involving Gardasil (Human Papillomavirus Quadrivalent [Types 6, 11, 16 and 18] Vaccine, Recombinant) and Gardasil 9 (Human Papillomavirus 9-valent Vaccine, Recombinant).

As of March 31, 2023, approximately 95 cases were filed and pending against Merck in either federal or state court.

As of June 30, 2023, approximately 95 cases were filed and pending against Merck in either federal or state court.

In these actions, plaintiffs allege, among other things, that they suffered various personal injuries after vaccination with Gardasil or Gardasil 9, with postural orthostatic tachycardia syndrome as a predominate alleged injury.

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Conrad in the Western District of North Carolina for coordinated pre-trial proceedings.

There are fewer than 15 product liability cases pending outside the U.S., including one purported class action in Colombia.

There are fewer than 15 product liability cases pending outside the U.S.

Governmental Proceedings

Inflation Reduction Act

On June 6, 2023, Merck filed a complaint in the U.S.

District Court for the District of Columbia against the U.S.

government regarding the Inflation Reduction Act’s “Drug Price Negotiation Program” for Medicare (the Program).

This litigation seeks relief from the Program by challenging its constitutionality as violative of the First and Fifth Amendments to the U.S.

Constitution.

Other Governmental Proceedings

As previously disclosed, from time to time, the Company’s subsidiaries in China receive inquiries regarding their operations from various Chinese governmental agencies.

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Should those proceedings be determined adversely to the Company, monetary fines and/or remedial undertakings may be required.

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Commercial and Other Litigation

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As previously disclosed, Merck, Merck Sharp & Dohme, LLC.

(MSD), Schering Corporation, Schering-Plough Corporation, and MSP Singapore Company LLC (collectively, the Merck Defendants) are defendants in a number of lawsuits filed in 2018 on behalf of direct and indirect purchasers of Zetia alleging violations of federal and state antitrust laws, as well as other state statutory and common law causes of action.

(MSD), Schering Corporation, Schering-Plough Corporation, and MSP Singapore Company LLC (collectively, the Merck Defendants) were defendants in a number of lawsuits filed in 2018 on behalf of direct and indirect purchasers of Zetia alleging violations of federal and state antitrust laws, as well as other state statutory and common law causes of action.

The cases were consolidated in a federal multidistrict litigation (the Zetia MDL) before Judge Rebecca Beach Smith in the Eastern District of Virginia.

In November 2019, the direct purchaser plaintiffs and the indirect purchaser plaintiffs filed motions for class certification.

In August 2020, the district court granted in part the direct purchasers’ motion for class certification and certified a class of 35 direct purchasers.

In August 2021, the Fourth Circuit vacated the district court’s class certification order and remanded for further proceedings consistent with the court’s ruling.

In September 2021, the direct purchaser plaintiffs filed a renewed motion for class certification.

In April 2022, the district court denied the direct purchaser plaintiffs’ renewed motion for class certification.

In August 2021, the district court granted certification of a class of indirect purchasers.

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

In 2020 and 2021, United Healthcare Services, Inc., Humana Inc., Centene Corporation and others, and Kaiser Foundation Health Plan, Inc.

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That motion to dismiss the Vytorin-related claims is still pending.

In April 2022, the direct purchaser plaintiffs moved for an order setting a deadline for direct purchasers of Zetia not currently parties to the case to file cases against defendants in order for those cases to be coordinated for trial with the existing direct purchaser plaintiffs and other MDL plaintiff groups.

The court granted that motion, setting a deadline of June 30, 2022 for unnamed direct purchasers to file claims.

On June 30, 2022, 23 new entities, many related, brought new complaints against defendants or otherwise sought to intervene.

On February 10, 2023, the district court denied the Merck Defendants’ and Glenmark Defendants’ motions for summary judgment.

In April 2023, the Merck Defendants reached settlements with the direct purchaser and retailer plaintiffs and a proposed settlement, subject to court approval, with the indirect purchaser class.

Under these agreements, Merck will pay $ 572.5 million to resolve the direct purchaser, retailer, and indirect purchaser plaintiffs’ claims, which was recorded as an expense in the Company’s first quarter 2023 financial results.

RotaTeq Antitrust Litigation

On March 3, 2023, the Mayor and City Council of Baltimore filed a putative class action against MSD in the Eastern District of Pennsylvania on behalf of all third-party payors in 35 states that indirectly purchased, paid, and/or provided reimbursement for some or all of the purchase price of RotaTeq (Rotavirus Vaccine, Live Oral, Pentavalent), other than for resale, from March 3, 2019 to the present.

Plaintiff alleges that MSD violated federal and state antitrust laws and state consumer protection laws.

Plaintiff alleges that MSD has implemented an anticompetitive vaccine bundling scheme whereby MSD leverages its alleged monopoly power in certain pediatric vaccine markets to maintain its alleged monopoly power in the U.S.

market for rotavirus vaccines in order to charge supracompetitive prices for RotaTeq .

Plaintiff seeks permanent injunctive relief and unspecified monetary damages on purchases of RotaTeq , trebled, and fees and costs.

Bravecto Litigation

As previously disclosed, in January 2020, the Company was served with a complaint in the U.S.

District Court for the District of New Jersey.

Following motion practice, the plaintiffs filed a second amended complaint on July 1, 2021, seeking to certify a nationwide class action of purchasers or users of Bravecto (fluralaner) products in the U.S.

or its territories between May 1, 2014 and July 1, 2021.

Plaintiffs contend Bravecto causes neurological events in dogs and cats and alleges violations of the New Jersey Consumer Fraud Act, Breach of Warranty, Product Liability, and related theories.

The Company moved to dismiss or, alternatively, to strike the class allegations from the second amended complaint, and that motion is pending.

A similar case was filed in Quebec, Canada in May 2019.

The Superior Court certified a class of dog owners in Quebec who gave Bravecto Chew to their dogs between February 16, 2017 and November 2, 2018 whose dogs experienced one of the conditions in the post-marketing adverse reactions section of the labeling approved on November 2, 2018.

The Company and plaintiffs each appealed the class certification decision.

The Court of Appeal of Quebec heard the appeal in February 2022 and issued a decision in April 2022 allowing both parties’ appeals in part.

The Court of Appeal amended the class period to start on July 2, 2014, allowed a second plaintiff to serve as a class representative, and modified the list of conditions in the class definition by adding “death” and removing “lack of efficacy.” The Court of Appeal also added to the list of questions to be considered by the trial court the questions of whether the Consumer Protection Act of Quebec applies to the sale of a veterinary product and, if so, whether it was breached.

The Company sought leave to appeal to the Supreme Court of Canada, which was denied.

The case is proceeding in the Superior Court.

As previously disclosed, in April 2023, the Merck Defendants reached settlements with the direct purchaser and retailer plaintiffs and a proposed settlement, subject to court approval, with the indirect purchaser class.

Under these agreements, Merck agreed to pay $ 572.5 million to resolve the direct purchaser, retailer, and indirect purchaser plaintiffs’ claims, which was recorded as an expense in the Company’s first quarter 2023 financial results.

On June 6, 2023, the court granted preliminary approval of the indirect purchaser class settlement and scheduled a fairness hearing for September 21, 2023.

Qui Tam Litigation

As previously disclosed, in June 2012, the U.S.

District Court for the Eastern District of Pennsylvania unsealed a complaint that had been filed against the Company under the federal False Claims Act by two former employees alleging, among other things, that the Company defrauded the U.S.

government by falsifying data in connection with a clinical study conducted on the mumps component of the Company’s M-M-R II vaccine.

The complaint alleges the fraud took place between 1999 and 2001.

government had the right to participate in and take over the prosecution of this lawsuit but notified the court that it declined to exercise that right.

The two former employees are pursuing the lawsuit without the involvement of the U.S.

In addition, as previously disclosed, two putative class action lawsuits on behalf of direct purchasers of the M-M-R II vaccine, which charge that the Company misrepresented the efficacy of the M-M-R II vaccine in violation of federal antitrust laws and various state consumer protection laws, are pending in the Eastern District of Pennsylvania.

In September 2014, the court denied Merck’s motion to dismiss the False Claims Act suit and granted in part and denied in part its motion to dismiss the then-pending antitrust suit.

As a result, both the False Claims Act suit and the antitrust suits proceeded into discovery, which is complete, and the parties filed and briefed cross-motions for summary judgment.

On July 27, 2023, in the False Claims Act case, the court denied relators’ motion for summary judgment, granted two of the Company’s motions for summary judgment, and denied the Company’s remaining motions for summary judgment as moot.

The court entered judgment in favor of the Company and dismissed relators’ amended complaint in full with prejudice.

Relators can appeal that decision.

In the antitrust case, the court granted the Company’s motion for summary judgment as to plaintiffs’ state law claims and denied the motion as to plaintiffs’ antitrust claim.

Plaintiffs’ antitrust claim will proceed in litigation.

Patent Litigation

From time to time, generic manufacturers of pharmaceutical products file abbreviated New Drug Applications (NDAs) with the FDA seeking to market generic forms of the Company’s products prior to the expiration of relevant patents owned by the Company.

From time to time, generic manufacturers of pharmaceutical products file abbreviated New Drug Applications (NDAs) with the U.S.

Food and Drug Administration (FDA) seeking to market generic forms of the Company’s products prior to the expiration of relevant patents owned by the Company.

To protect its patent rights, the Company may file patent infringement lawsuits against such generic companies.

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District Courts for the District of New Jersey and the Northern District of West Virginia against those generic companies.

All actions in the District of New Jersey have been consolidated.

These lawsuits, which assert one or more patents covering sugammadex and methods of using sugammadex, automatically stay FDA approval of the generic applications until June 2023 or until adverse court decisions, if any, whichever

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

may occur earlier.

All actions in the District of New Jersey were consolidated.

The West Virginia case was jointly dismissed with prejudice on August 8, 2022 in favor of proceeding in New Jersey.

The remaining defendants in the New Jersey action have stipulated to infringement of the asserted claims and have stated they are withdrawing all remaining claims and defenses other than a defense seeking to shorten the patent term extension of the sugammadex patent to December 2022.

District Court for the District of New Jersey held a one-day trial on December 19, 2022 on this remaining patent term extension calculation defense.

The court ordered post-trial briefing on this defense and held closing arguments on February 3, 2023.

The Company has settled with five generic companies providing that these generic companies can bring their generic versions of Bridion to the market in January 2026 (which may be delayed by any applicable pediatric exclusivity) or earlier under certain circumstances.

The Company has agreed to stay the lawsuit filed against two generic companies, which in exchange agreed to be bound by a judgment on the merits of the consolidated action in the District of New Jersey.

The remaining defendants in the New Jersey action stipulated to infringement of the asserted claims and withdrew all remaining claims and defenses other than a defense seeking to shorten the patent term extension (PTE) of the sugammadex patent to December 2022.

District Court for the District of New Jersey held a one-day trial on December 19, 2022 on this remaining PTE calculation defense and held closing arguments on February 3, 2023.

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

While the New Jersey action was pending, the Company settled with five generic companies providing that these generic companies can bring their generic versions of Bridion to the market in January 2026 (which may be delayed by any applicable pediatric exclusivity) or earlier under certain circumstances.

The Company agreed to stay the lawsuit filed against two generic companies, which in exchange agreed to be bound by a judgment on the merits of the consolidated action in the District of New Jersey.

One of the generic companies in the consolidated action requested dismissal of the action against it and the Company did not oppose this request, which was subsequently granted by the court.

The Company does not expect this company to bring its generic version of Bridion to the market before January 2026 or later, depending on any applicable pediatric exclusivity, unless the Company receives an adverse court decision.

The Company does not expect this company to bring its generic version of Bridion to the market before January 2026 or later, depending on any applicable pediatric exclusivity.

On June 13, 2023, the U.S.

District Court for the District of New Jersey ruled in Merck’s favor.

The court held that Merck’s calculation of PTE for the sugammadex patent covering the compound is not invalid and that the U.S.

Patent & Trademark Office correctly granted a full 5-year extension.

This ruling affirms and validates Merck’s U.S.

patent protection for Bridion through at least January 2026.

On June 29, 2023, the U.S.

District Court for the District of New Jersey issued a final judgment prohibiting the FDA from approving any of the pending or tentatively approved generic applications until January 27, 2026, except for any subsequent agreements between Defendants and Merck or further order by the court.

Januvia, Janumet, Janumet XR — As previously disclosed, the FDA granted pediatric exclusivity with respect to Januvia (sitagliptin), Janumet (sitagliptin/metformin HCI), and Janumet XR (sitagliptin and metformin HCl extended-release), which provides a further six months of exclusivity in the U.S.

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In response, the Company filed a patent infringement lawsuit in the U.S.

District Court for the District of Delaware against Par Pharmaceutical and additional companies that also indicated an intent to market generic versions of Januvia , Janumet , and Janumet XR following expiration of key patent protection, but prior to the expiration of the 2027 salt/polymorph patent, and a later granted patent owned by the Company covering the Janumet formulation where its term plus the pediatric exclusivity ends in 2029.

The Company also filed a patent infringement lawsuit against Mylan in the Northern District of West Virginia.

The Judicial Panel on Multidistrict Litigation entered an order transferring the Company’s lawsuit against Mylan to the U.S.

District Court for the District of Delaware for coordinated and consolidated pretrial proceedings with the other cases pending in that district.

The Company also filed a patent infringement lawsuit against Mylan in the U.S.

District Court for the Northern District of West Virginia.

Prior to the beginning of the scheduled October 2021 trial in the U.S.

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District Court for the Northern District of West Virginia, and the closing arguments were held in April 2022.

In September 2022, the District Court for the Northern District of West Virginia issued a decision in the Company’s favor, upholding all asserted patent claims.

In September 2022, the U.S.

District Court for the Northern District of West Virginia issued a decision in the Company’s favor, upholding all asserted patent claims.

Mylan (now Viatris) appealed to the U.S.

Court of Appeals for the Federal Circuit.

The parties have now settled the matter, and Mylan has agreed to voluntarily dismiss the appeal following entry of an amended final judgment by the district court.

Additionally, in 2019, Mylan filed a petition for inter partes review (IPR) at the U.S.

Patent and Trademark Office (USPTO) seeking invalidity of some, but not all, of the claims of the 2027 salt/polymorph patent.

The USPTO instituted IPR proceedings in May 2020, finding a reasonable likelihood that the challenged claims are not valid.

A trial was held in February 2021 and a final decision was rendered in May 2021, holding that all of the challenged claims were not invalid.

Mylan appealed the USPTO’s decision to the U.S.

Court of Appeals for the Federal Circuit, and a hearing was held in August 2022.

In September 2022, the U.S.

Court of Appeals for the Federal Circuit ruled in the Company’s favor, upholding the USPTO’s decision.

Mylan submitted a combined petition for panel rehearing and rehearing en banc, for which the Company was invited by the court to provide a response.

On February 3, 2023, the court issued a per curiam decision denying both rehearing requests.

The parties have now settled the matter, and Viatris has agreed to voluntarily dismiss the appeal following entry of an amended final judgment by the district court.

In total, the Company has settled with 25 generic companies providing that these generic companies can bring their generic versions of Januvia and Janumet to the market in May 2026 or earlier under certain circumstances, and their generic versions of Janumet XR to the market in July 2026 or earlier under certain circumstances.

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In December 2022, the parties reached settlement that included dismissal of the case without prejudice enabling Zydus to seek final approval of a non-automatically substitutable product containing a different form of sitagliptin than that used in Januvia .

In January 2023, the Company received a Paragraph IV Certification Letter under the Hatch-Waxman Act notifying the Company that Zydus has filed a NDA seeking approval of sitagliptin/metformin HCl tablets and certifying that no valid or enforceable claim of any of the patents listed in FDA’s Orange Book for Janumet will be infringed by the proposed Zydus product.

In January 2023, the Company received a Paragraph IV Certification Letter under the Hatch-Waxman Act notifying the Company that Zydus filed a NDA seeking approval of sitagliptin/metformin HCl tablets and certifying that no valid or enforceable claim of any of the patents listed in FDA’s Orange Book for Janumet will be infringed by the proposed Zydus product.

In March 2023, the parties reached settlement enabling Zydus to seek final approval of a non-automatically substitutable product containing a different form of sitagliptin than that used in Janumet.

As a result of these favorable court rulings and settlement agreements related to the later expiring patent directed to the specific sitagliptin salt form of the products, the Company expects that Januvia and Janumet will not lose market exclusivity in

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

As a result of these favorable court rulings and settlement agreements related to the later expiring 2027 salt/polymorph patent directed to the specific sitagliptin salt form of the products, the Company expects that Januvia and Janumet will not lose market exclusivity in the U.S.

until May 2026 and Janumet XR will not lose market exclusivity in the U.S.

until July 2026 , although another non-automatically substitutable form of sitagliptin is likely to be available prior to 2026 .

Supplementary Protection Certificates (SPCs) for Janumet expired between April 7 and 10, 2023, for the majority of European countries.

until July 2026 , although another non-automatically substitutable form of sitagliptin could be available prior to 2026 .

Supplementary Protection Certificates (SPCs) for Janumet expired in April 2023 for the majority of European countries.

Prior to expiration, generic companies sought revocation of the Janumet SPCs in a number of European countries.

In February 2022, a Finnish court referred certain questions to the Court of Justice of the European Union (CJEU) that could determine the validity of the Janumet SPCs in Europe, for which an oral hearing was held on March 8, 2023, and an Advocate General Opinion is expected on July 13, 2023.

If the CJEU renders a decision that negatively impacts the validity of the Janumet SPCs throughout Europe, generic companies that were prevented from launching products during the SPC period in certain European countries may have an action for damages.

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If the Janumet SPCs are ultimately upheld, the Company has reserved its rights related to the pursuit of damages for those countries where a generic launched prior to expiry of the Janumet SPC.

Keytruda — The Company filed a complaint against The Johns Hopkins University (JHU) on November 29, 2022, in the District Court of Maryland.

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Keytruda — The Company filed a complaint against The Johns Hopkins University (JHU) on November 29, 2022, in the U.S.

District Court of Maryland.

This action concerns patents emerging from a joint research collaboration between Merck and JHU regarding the use of pembrolizumab, which Merck sells under the trade name Keytruda .

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Merck alleges that JHU has breached the collaboration agreement by filing and obtaining these patents without informing or involving Merck and then licensing the patents to others.

Merck therefore brought this action for breach of contract;

declaratory judgment of noninfringement;

and promissory estoppel.

Merck therefore brought this action for breach of contract, declaratory judgment of noninfringement, and promissory estoppel.

JHU answered the complaint on April 13, 2023, denying Merck’s claims, and counterclaiming for willful infringement of five issued U.S.

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While it is not feasible to predict the outcome of such proceedings, in the opinion of the Company, either the likelihood of loss is remote or any reasonably possible loss associated with the resolution of such proceedings is not expected to be material to the Company’s financial condition, results of operations or cash flows either individually or in the aggregate.

Other Matters

As previously disclosed, the Company was involved in an arbitration with Johnson & Johnson with respect to two agreements pursuant to which Merck was supporting the manufacture and supply of Johnson & Johnson’s SARS-CoV-2/COVID-19 vaccine and vaccine drug product.

The arbitration has been settled with no material impact to the Company’s financial statements.

Legal Defense Reserves

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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 associated litigation.

The amount of legal defense reserves as of March 31, 2023 and December 31, 2022 of approximately $ 225 million and $ 230 million, respectively, represents the Company’s best estimate of the minimum amount of defense costs to be incurred in connection with its outstanding litigation;

The amount of legal defense reserves as of June 30, 2023 and December 31, 2022 of approximately $ 225 million and $ 230 million, respectively, represents the Company’s best estimate of the minimum amount of defense costs to be incurred in connection with its outstanding litigation;

however, events such as additional trials and other events that could arise in the course of its litigation could affect the ultimate amount of legal defense costs to be incurred by the Company.

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Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Three Months Ended March 31,

Three Months Ended June 30,

Common Stock Other

Capital Retained

1 unchanged sentence

Comprehensive

Treasury Stock

Loss Treasury Stock Non-

Interests Total

($ and shares in millions except per share amounts) Shares Par Value Shares Cost

Balance at January 1, 2022 3,577 $ 1,788 $ 44,238 $ 53,696 $ ( 4,429 ) 1,049 $ ( 57,109 ) $ 73 $ 38,257

Balance at April 1, 2022 3,577 $ 1,788 $ 44,275 $ 56,252 $ ( 4,369 ) 1,049 $ ( 57,063 ) $ 70 $ 40,953

Net income attributable to Merck & Co., Inc.

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Share-based compensation plans and other — — ( 160 ) — — ( 5 ) 293 — 133

Net loss attributable to noncontrolling interests — — — — — — — ( 3 ) ( 3 )

Balance at March 31, 2022 3,577 $ 1,788 $ 44,275 $ 56,252 $ ( 4,369 ) 1,049 $ ( 57,063 ) $ 70 $ 40,953

Net income attributable to noncontrolling interests — — — — — — — 5 5

Balance at June 30, 2022 3,577 $ 1,788 $ 44,115 $ 58,437 $ ( 4,327 ) 1,044 $ ( 56,770 ) $ 75 $ 43,318

Balance at April 1, 2023 3,577 $ 1,788 $ 44,467 $ 62,039 $ ( 4,883 ) 1,040 $ ( 56,577 ) $ 71 $ 46,905

Net loss attributable to Merck & Co., Inc.

— — — ( 5,975 ) — — — — ( 5,975 )

Other comprehensive loss, net of taxes — — — — ( 17 ) — — — ( 17 )

Cash dividends declared on common stock ($ 0.73 per share)

— — — ( 1,866 ) — — — — ( 1,866 )

Treasury stock shares purchased — — — — — 3 ( 338 ) — ( 338 )

Share-based compensation plans and other — — ( 248 ) — — ( 5 ) 303 — 55

Net income attributable to noncontrolling interests — — — — — — — 3 3

Distributions attributable to noncontrolling interests — — — — — — — ( 25 ) ( 25 )

Balance at June 30, 2023 3,577 $ 1,788 $ 44,219 $ 54,198 $ ( 4,900 ) 1,038 $ ( 56,612 ) $ 49 $ 38,742

Six Months Ended June 30,

Common Stock Other

Capital Retained

Earnings Accumulated

Comprehensive

Loss Treasury Stock Non-

Interests Total

($ and shares in millions except per share amounts) Shares Par Value Shares Cost

Balance at January 1, 2022

3,577 $ 1,788 $ 44,238 $ 53,696 $ ( 4,429 ) 1,049 $ ( 57,109 ) $ 73 $ 38,257

Net income attributable to Merck & Co., Inc.

— — — 8,254 — — — — 8,254

Other comprehensive income, net of taxes — — — — 102 — — — 102

Cash dividends declared on common stock ($ 1.38 per share)

— — — ( 3,513 ) — — — — ( 3,513 )

Share-based compensation plans and other — — ( 123 ) — — ( 5 ) 339 — 216

Net income attributable to noncontrolling interests — — — — — — — 2 2

Balance at June 30, 2022 3,577 $ 1,788 $ 44,115 $ 58,437 $ ( 4,327 ) 1,044 $ ( 56,770 ) $ 75 $ 43,318

Balance at January 1, 2023

3,577 $ 1,788 $ 44,379 $ 61,081 $ ( 4,768 ) 1,039 $ ( 56,489 ) $ 67 $ 46,058

Net loss attributable to Merck & Co., Inc.

— — — ( 3,154 ) — — — — ( 3,154 )

Other comprehensive loss, net of taxes — — — — ( 132 ) — — — ( 132 )

4 unchanged sentences

Net income attributable to noncontrolling interests — — — — — — — 7 7

Balance at March 31, 2023 3,577 $ 1,788 $ 44,467 $ 62,039 $ ( 4,883 ) 1,040 $ ( 56,577 ) $ 71 $ 46,905

Distributions attributable to noncontrolling interests — — — — — — — ( 25 ) ( 25 )

Balance at June 30, 2023 3,577 $ 1,788 $ 44,219 $ 54,198 $ ( 4,900 ) 1,038 $ ( 56,612 ) $ 49 $ 38,742

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Pension and Other Postretirement Benefit Plans

3 unchanged sentences

Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

($ in millions) U.S.

International U.S.

International

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Expected return on plan assets ( 185 ) ( 130 ) ( 197 ) ( 98 ) ( 372 ) ( 257 ) ( 393 ) ( 199 )

Amortization of unrecognized prior service credit — ( 3 ) ( 8 ) ( 4 )

Amortization of unrecognized prior service cost (credit) — 16 ( 8 ) ( 3 ) ( 1 ) 12 ( 16 ) ( 7 )

Net (gain) loss amortization — ( 1 ) 56 25 — ( 2 ) 112 50

Termination benefits 1 — 1 — 1 — 1 —

Curtailments 2 — 4 — 5 — 8 —

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Three Months Ended

June 30, Six Months Ended

($ in millions) 2023 2022 2023 2022

5 unchanged sentences

$ ( 15 ) $ ( 23 ) $ ( 30 ) $ ( 45 )

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

In connection with restructuring actions (see Note 5), termination charges were recorded on pension plans related to expanded eligibility for certain employees e x iting Merck.

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In addition, lump sum payments to U.S.

pension plan participants triggered a partial settlement resulting in a charge of $ 21 million in the first quarter of 2023.

This partial settlement triggered a remeasurement of some of the Company’s U.S.

pension plan participants triggered partial settlement charges in the second quarter and first six months of both 2023 and 2022.

These partial settlements triggered remeasurements of some of the Company’s U.S.

pension plans.

The remeasurement, which was calculated using discount rates and asset values as of March 31, 2023, resulted in a net increase of $ 44 million to net pension liabilities and also resulted in a related adjustment to AOCL .

The components of net periodic benefit cost (credit) other than the service cost component are included in Other (income) expense, net (see Note 11), with the exception of certain amounts for termination benefits and curtailments which are recorded in Restructuring costs if the event giving rise to the termination benefits or curtailment is related to restructuring actions.

Remeasurements during the first six months of 2023 resulted in an increase of $ 47 million to net pension liabilities and a related adjustment to AOCL .

The components of net periodic benefit cost (credit) other than the service cost component are included in Other (income) expense, net (see Note 12), with the exception of certain amounts for termination benefits, curtailments and settlements, which are recorded in Restructuring costs if the event giving rise to the termination benefits, curtailment or settlement related to restructuring actions.

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Other (Income) Expense, Net

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Three Months Ended

June 30, Six Months Ended

($ in millions) 2023 2022 2023 2022

2 unchanged sentences

Exchange losses 62 86 122 124

(Income) loss from investments in equity securities, net (1)

Loss (income) from investments in equity securities, net (1)

175 284 ( 274 ) 991

Net periodic defined benefit plan (credit) cost other than service cost ( 111 ) ( 27 ) ( 226 ) ( 148 )

Other, net ( 122 ) ( 130 ) 339 ( 280 )

$ 172 $ 438 $ 259 $ 1,148

(1) Includes net realized and unrealized gains and losses from investments in equity securities either owned directly or through ownership interests in investment funds.

Unrealized gains and losses from investments that are directly owned are determined at the end of the reporting period, while gains and losses from ownership interests in investment funds are accounted for on a one quarter lag.

Other, net (as reflected in the table above) in the first quarter of 2023 includes a $ 572.5 million charge related to settlements with certain plaintiffs in the Zetia antitrust litigation (see Note 8).

Interest paid for the three months ended March 31, 2023 and 2022 was $ 208 million and $ 211 million, respectively.

Taxes on Income

The effective income tax rates were 22.6 % and 11.4 % for the first quarter of 2023 and 2022, respectively.

The effective income tax rate for the first quarter of 2023 reflects the unfavorable discrete impact of a charge for the acquisition of Imago for which no tax benefit was recognized, as well as higher foreign taxes, the impact of the R&D capitalization provision of the Tax Cuts and Jobs Act of 2017 on the Company’s U.S.

Other, net (as reflected in the table above) in the first six months of 2023 includes a $ 572.5 million charge related to settlements with certain plaintiffs in the Zetia antitrust litigation (see Note 9).

Interest paid for both the six months ended June 30, 2023 and 2022 was $ 449 million.

The income tax provision of $ 637 million and $ 1.5 billion for the second quarter and first six months of 2023, respectively, on pretax losses of $ 5.3 billion and $ 1.7 billion, respectively, resulted in effective income tax rates of ( 11.9 )% and ( 86.8 )%, respectively.

The second quarter 2023 effective tax rate includes the impact of a charge for the acquisition of Prometheus for which no tax benefit was recognized, which unfavorably affected the tax rate by 25.1 percentage points, as well as the favorable impact of net unrealized losses from investments in equity securities, which were taxed at the U.S.

The effective income tax rate for the first six months of 2023 includes a 101.9 percentage point combined unfavorable impact of charges for the acquisitions of Prometheus and Imago for which no tax benefits were recognized, as well as higher foreign taxes, the impact of the R&D capitalization provision of the Tax Cuts and Jobs Act of 2017 (TCJA) on the Company’s U.S.

global intangible low-taxed income inclusion, and net unrealized gains from investments in equity securities, which were taxed at the U.S.

tax rate, partially offset by higher foreign tax credits.

The effective income tax rate in the first quarter of 2022 includes the favorable impact of net unrealized losses from investments in equity securities, which were taxed at the U.S.

The effective income tax rates of 12.0 % for the second quarter of 2022 and 11.7 % for the first six months of 2022 reflect the favorable impact of net unrealized losses from investments in equity securities, which were taxed at the U.S.

The Internal Revenue Service (IRS) is currently conducting examinations of the Company’s tax returns for the years 2017 and 2018, including the one-time transition tax enacted under the TCJA.

If the IRS disagrees with the Company’s transition tax position, it may result in a significant tax liability.

Earnings Per Share

The calculations of earnings per share are as follows:

The calculations of (loss) earnings per share are as follows:

Three Months Ended

June 30, Six Months Ended

($ and shares in millions except per share amounts) 2023 2022 2023 2022

Net Income Attributable to Merck & Co., Inc.

Net (Loss) Income Attributable to Merck & Co., Inc.

$ ( 5,975 ) $ 3,944 $ ( 3,154 ) $ 8,254

2 unchanged sentences

Average common shares outstanding assuming dilution 2,539 2,540 2,539 2,538

Basic Earnings per Common Share Attributable to Merck & Co., Inc.

Basic (Loss) Earnings per Common Share Attributable to Merck & Co., Inc.

Common Shareholders $ ( 2.35 ) $ 1.56 $ ( 1.24 ) $ 3.26

Earnings per Common Share Assuming Dilution Attributable to Merck & Co., Inc.

(Loss) Earnings per Common Share Assuming Dilution Attributable to Merck & Co., Inc.

Common Shareholders $ ( 2.35 ) $ 1.55 $ ( 1.24 ) $ 3.25

(1) Issuable primarily under share-based compensation plans.

For the first quarter of 2023 and 2022, 1 million and 7 million, respectively, of common shares issuable under share-based compensation plans were excluded from the computation of earnings per common share assuming dilution because the effect would have been antidilutive.

The Company recorded a net loss for the three and six months ended June 30, 2023;

therefore, no potential dilutive common shares were used in the computations of loss per common share assuming dilution because the effects would have been antidilutive.

For the three and six months ended June 30, 2022, 2 million and 6 million, respectively, of common shares issuable under share-based compensation plans were excluded from the computations of earnings per common share assuming dilution because the effect would have been antidilutive.

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

1 unchanged sentence

Changes in each component of other comprehensive income (loss) are as follows:

Three Months Ended March 31,

Three Months Ended June 30,

($ in millions) Derivatives Employee

2 unchanged sentences

Comprehensive

Balance April 1, 2022, net of taxes $ 207 $ ( 2,711 ) $ ( 1,865 ) $ ( 4,369 )

Other comprehensive income (loss) before reclassification adjustments, pretax 403 168 ( 365 ) 206

Tax ( 85 ) ( 35 ) ( 22 ) ( 142 )

Other comprehensive income (loss) before reclassification adjustments, net of taxes 318 133 ( 387 ) 64

Reclassification adjustments, pretax ( 171 ) (1)

Tax 36 ( 31 ) — 5

Reclassification adjustments, net of taxes ( 135 )

Other comprehensive income (loss), net of taxes 183 246 ( 387 ) 42

Balance June 30, 2022, net of taxes $ 390 $ ( 2,465 ) $ ( 2,252 ) $ ( 4,327 )

Balance April 1, 2023, net of taxes $ ( 60 ) $ ( 2,458 ) $ ( 2,365 ) $ ( 4,883 )

Other comprehensive income (loss) before reclassification adjustments, pretax 194 ( 6 ) ( 115 ) 73

Tax ( 41 ) 1 ( 22 ) ( 62 )

Other comprehensive income (loss) before reclassification adjustments, net of taxes 153 ( 5 ) ( 137 ) 11

Reclassification adjustments, pretax ( 11 ) (1)

Reclassification adjustments, net of taxes ( 8 )

Other comprehensive income (loss), net of taxes 145 ( 25 ) ( 137 ) ( 17 )

Balance June 30, 2023, net of taxes $ 85 $ ( 2,483 ) $ ( 2,502 ) $ ( 4,900 )

Six Months Ended June 30,

($ in millions) Derivatives Employee

Plans Foreign Currency

Adjustment Accumulated Other

Comprehensive

Balance January 1, 2022, net of taxes $ 144 $ ( 2,743 ) $ ( 1,830 ) $ ( 4,429 )

6 unchanged sentences

Other comprehensive income (loss), net of taxes 246 278 ( 422 ) 102

Balance March 31, 2022, net of taxes $ 207 $ ( 2,711 ) $ ( 1,865 ) $ ( 4,369 )

Balance June 30, 2022, net of taxes $ 390 $ ( 2,465 ) $ ( 2,252 ) $ ( 4,327 )

Balance January 1, 2023, net of taxes $ 73 $ ( 2,408 ) $ ( 2,433 ) $ ( 4,768 )

6 unchanged sentences

Other comprehensive income (loss), net of taxes 12 ( 75 ) ( 69 ) ( 132 )

Balance March 31, 2023, net of taxes $ ( 60 ) $ ( 2,458 ) $ ( 2,365 ) $ ( 4,883 )

Balance June 30, 2023, net of taxes $ 85 $ ( 2,483 ) $ ( 2,502 ) $ ( 4,900 )

(1) Primarily relates to foreign currency cash flow hedges that were reclassified from AOCL to Sales .

(2) Includes net amortization of prior service cost, actuarial gains and losses, settlements and curtailments included in net periodic benefit cost (see Note 11)

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Segment Reporting

13 unchanged sentences

Sales of the Company’s products were as follows:

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

($ in millions) U.S.

Int’l Total U.S.

Pharmaceutical:

4 unchanged sentences

163 79 242 128 103 231 316 158 474 284 175 459

Welireg 49 2 50 27 — 27 90 3 92 45 — 45

Alliance revenue-Reblozyl (2)

36 11 47 28 5 33 66 24 90 55 30 86

Welireg 41 1 42 18 — 18

Gardasil/Gardasil 9

9 unchanged sentences

Prevymis 61 82 143 47 56 103 116 157 273 87 110 197

Primaxin 4 76 80 1 58 58

Dificid 68 8 76 63 3 66 130 11 141 113 6 119

Primaxin ( 2 ) 56 53 — 64 64 2 132 133 1 122 122

Noxafil 11 45 55 16 45 60 25 91 116 25 92 118

17 unchanged sentences

Livestock 165 643 807 164 662 826 338 1,318 1,656 335 1,322 1,658

Companion Animals 308 334 642 302 348 650

Companion Animal 310 339 649 313 328 641 618 673 1,291 616 676 1,291

Total Animal Health segment sales 475 982 1,456 477 990 1,467 956 1,991 2,947 951 1,998 2,949

4 unchanged sentences

(1) Alliance revenue for Lynparza and Lenvima represents Merck’s share of profits, which are product sales net of cost of sales and commercialization costs (see Note 3).

(2) Alliance revenue for Reblozyl represents royalties and, for 2022, also includes the receipt of a regulatory approval milestone payment (see Note 3).

(2) Alliance revenue for Reblozyl represents royalties and, for the first six months of 2022, also includes the receipt of a regulatory approval milestone payment (see Note 3).

(3) Alliance revenue for Adempas/Verquvo represents Merck’s share of profits from sales in Bayer’s marketing territories, which are product sales net of cost of sales and commercialization costs (see Note 3).

(4) Other pharmaceutical primarily reflects sales of other human health pharmaceutical products, including products within the franchises not listed separately.

(5) Other is primarily comprised of miscellaneous corporate revenue, including revenue hedging activities which increased sales by $ 99 million and $ 69 million for the three months ended March 31, 2023 and 2022, respectively, as well as revenue from third-party manufacturing arrangements (including sales to Organon).

Other for the three months ended March 31, 2023 and 2022 also includes $ 51 million and $ 114 million, respectively, related to upfront and milestone payments received by Merck for out-licensing arrangements.

(5) Other is primarily comprised of miscellaneous corporate revenue, including revenue hedging activities which increased sales by $ 128 million and $ 277 million for the six months ended June 30, 2023 and 2022, respectively, as well as revenue from third-party manufacturing arrangements (including sales to Organon).

Other for the six months ended June 30, 2023 and 2022 also includes $ 54 million and $ 146 million, respectively, related to upfront and milestone payments received by Merck for out-licensing arrangements.

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

1 unchanged sentence

These discounts, in the aggregate, reduced U.S.

sales by $ 3.1 billion and $ 2.9 billion for the three months ended March 31, 2023 and 2022, respectively.

sales by $ 3.2 billion and $ 3.0 billion for the three months ended June 30, 2023 and 2022, respectively, and $ 6.3 billion and $ 5.9 billion for the six months ended June 30, 2023 and 2022, respectively.

Consolidated sales by geographic area where derived are as follows:

Three Months Ended

June 30, Six Months Ended

($ in millions) 2023 2022 2023 2022

7 unchanged sentences

$ 15,035 $ 14,593 $ 29,522 $ 30,494

A reconciliation of segment profits to Income Before Taxes is as follows:

A reconciliation of segment profits to (Loss) Income Before Taxes is as follows:

Three Months Ended

June 30, Six Months Ended

($ in millions) 2023 2022 2023 2022

19 unchanged sentences

Other profits are primarily comprised of miscellaneous corporate profits, as well as operating profits related to third-party manufacturing arrangements.

Other unallocated, net, includes expenses from corporate and manufacturing cost centers, goodwill and other intangible asset impairment charges, gains or losses on sales of businesses, expense or income related to changes in the estimated fair value measurement of liabilities for contingent consideration, and other miscellaneous income or expense items.

Other unallocated, net, includes expenses from corporate and manufacturing cost centers, intangible asset impairment charges, gains or losses on sales of businesses, expense or income related to changes in the estimated fair value measurement of liabilities for contingent consideration, and other miscellaneous income or expense items.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements