What changed in this filing

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Item 1. Financial Statements

2023-11-03 compared with 2023-08-07 · 305 added, 183 removed, 925 unchanged (35% of the section changed)

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AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

CONDENSED CONSOLIDATED STATEMENT OF INCOME

(Unaudited, $ in millions except per share amounts)

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2023 2022 2023 2022

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10,342 11,376 41,550 32,522

(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

Income Before Taxes 5,620 3,583 3,935 12,931

Taxes on Income

870 330 2,332 1,423

Net Income 4,750 3,253 1,603 11,508

Net Income Attributable to Noncontrolling Interests 5 5 12 6

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

Net Income Attributable to Merck & Co., Inc.

$ 4,745 $ 3,248 $ 1,591 $ 11,502

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

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

Common Shareholders $ 1.87 $ 1.28 $ 0.63 $ 4.55

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

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

Common Shareholders $ 1.86 $ 1.28 $ 0.62 $ 4.53

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AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE (LOSS) INCOME

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Unaudited, $ in millions)

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2023 2022 2023 2022

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

Net Income Attributable to Merck & Co., Inc.

$ 4,745 $ 3,248 $ 1,591 $ 11,502

Other Comprehensive (Loss) Income Net of Taxes:

Other Comprehensive Loss Net of Taxes:

Net unrealized gain on derivatives, net of reclassifications 159 338 171 584

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( 16 ) ( 416 ) ( 148 ) ( 314 )

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

Comprehensive Income Attributable to Merck & Co., Inc.

$ 4,729 $ 2,832 $ 1,443 $ 11,188

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(Unaudited, $ in millions except per share amounts)

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Current Assets

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(Unaudited, $ in millions)

Six Months Ended

Nine Months Ended

September 30,

Cash Flows from Operating Activities

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

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

$ 1,603 $ 11,508

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

Amortization 1,582 1,623

Depreciation 1,326 1,394

Intangible asset impairment charges 13 910

(Income) loss from investments in equity securities, net ( 240 ) 1,361

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Share-based compensation 478 396

Other ( 94 ) 1,169

Net changes in assets and liabilities ( 2,349 ) ( 2,435 )

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

Other acquisitions, net of cash acquired — ( 121 )

Other ( 15 ) 149

Net Cash Used in Investing Activities ( 14,136 ) ( 3,212 )

Cash Flows from Financing Activities

Net change in short-term borrowings 1,937 —

Proceeds from issuance of debt 5,939 —

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Other ( 325 ) ( 172 )

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

Net Cash Used in Financing Activities

( 2,565 ) ( 7,565 )

Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash ( 163 ) ( 776 )

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Cash, Cash Equivalents and Restricted Cash at End of Period (includes restricted cash of $ 64

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

and $ 134 at September 30, 2023 and 2022, respectively, included in Other current assets )

$ 8,669 $ 11,279

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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.

In October 2021, the Financial Accounting Standards Board (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.

The Company adopted the guidance effective January 1, 2023.

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

Recently Issued Accounting Standard Not Yet Adopted

In August 2023, the FASB issued amended guidance that requires a newly formed joint venture to recognize and initially measure its assets and liabilities at fair value upon formation.

The amended guidance includes exceptions to fair value measurement that are consistent with the accounting for business combinations guidance.

The amended guidance is effective prospectively for all joint ventures with a formation date on or after January 1, 2025, however existing joint ventures have the option to apply the guidance retrospectively.

Early adoption is permitted for both interim and annual periods.

The Company anticipates there will be no impact to its consolidated financial statements upon adoption.

Acquisitions, Research Collaborations and Licensing Agreements

The Company continues to pursue acquisitions and the establishment of external alliances such as research collaborations and licensing agreements to complement its internal research capabilities.

These arrangements often include upfront payments, as well as expense reimbursements or payments to the third party, and milestone, royalty or profit share arrangements, contingent upon the occurrence of certain future events linked to the success of the asset in development.

These arrangements often include upfront payments;

expense reimbursements or payments to the third party;

milestone, royalty or profit share arrangements contingent upon the occurrence of certain future events linked to the success of the asset in development;

and can also include option and continuation payments.

The Company also reviews its marketed products and pipeline to examine candidates which may provide more value through out-licensing and, as part of its portfolio assessment process, may also divest certain assets.

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.

2023 Transactions

In October 2023, Merck and Daiichi Sankyo entered into a global development and commercialization agreement for three of Daiichi Sankyo’s deruxtecan (DXd) antibody drug conjugate (ADC) candidates:

patritumab deruxtecan (HER3-DXd) (MK-1022), ifinatamab deruxtecan (I-DXd) (MK-2400) and raludotatug deruxtecan (R-DXd) (MK-5909).

See Note 3 for additional information related to this collaboration.

In June 2023, Merck acquired Prometheus Biosciences, Inc.

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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.

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 a charge of $ 10.2 billion to Research and development expenses in the first nine 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.

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

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 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.

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

In October 2023, Merck notified Kelun-Biotech it was terminating two of the seven candidates under the agreement.

Kelun-Biotech remains eligible to receive future contingent payments aggregating up to $ 725 million in development-related payments, $ 1.95 billion in regulatory milestones, and $ 3.9 billion in sales-based milestones if Kelun-Biotech does not retain Chinese mainland, Hong Kong and Macau rights for the option ADCs and all remaining candidates achieve regulatory approval.

In addition, Kelun-Biotech is eligible to receive tiered royalties ranging from a mid-single-digit rate to a low-double-digit rate on future net sales for any commercialized ADC product.

Also, in connection with the agreement, Merck invested $ 100 million in Kelun-Biotech’s Series B preferred shares in January 2023.

Also, in connection with the agreement, Merck invested $ 100 million in Kelun-Biotech’s shares in January 2023.

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 (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)

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 six months of 2023 related to the transaction.

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

There are no future contingent payments associated with the acquisition.

2022 Transactions

In October 2022, Merck and Royalty Pharma plc (Royalty Pharma) entered into a funding arrangement under which Royalty Pharma paid Merck $ 50 million to co-fund Merck’s development costs for a Phase 2b trial of MK-8189, an investigational oral phosphodiesterase 10A (PDE10A) inhibitor, which is being evaluated for the treatment of schizophrenia.

As Royalty Pharma is sharing the risk of technical and regulatory success with Merck, the development funding was recognized by Merck as an obligation to perform contractual services.

Accordingly, the payment received is being recognized by Merck as a reduction to Research and development expenses ratably over the estimated Phase 2b research period.

Under the agreement, Royalty Pharma has no rights to MK-8189 and has no decision-making authority over the program.

If Merck elects to advance MK-8189 into a Phase 3 study, Royalty Pharma has the option to provide additional funding of 50 % of the development costs up to $ 375 million.

Royalty Pharma is eligible to receive royalties on future sales.

If Royalty Pharma elects to provide the additional funding noted above, Royalty Pharma becomes eligible to receive future regulatory milestone payments contingent upon certain marketing approvals, as well as a higher royalty rate.

Merck will record the milestone payments as an expense within Other (income) expense, net upon receipt of the related approvals.

In September 2022, Merck exercised its option to jointly develop and commercialize V940 (mRNA-4157), an investigational individualized neoantigen therapy, pursuant to the terms of an existing collaboration and license agreement with Moderna, Inc.

(Moderna), which resulted in a $ 250 million charge to Research and development expenses in the third quarter and first nine months of 2022.

Merck and Moderna will collaborate on development and commercialization and will share costs and any profits equally under this worldwide collaboration.

V940 (mRNA-4157) is currently being evaluated in combination with Keytruda (pembrolizumab), Merck’s anti-PD-1 therapy, as an adjuvant treatment in patients with resected high-risk (Stage IIB-IV) melanoma in a Phase 3 clinical trial being conducted by Moderna.

In August 2022, Merck and Orna Therapeutics (Orna), a biotechnology company pioneering a new investigational class of engineered circular RNA (oRNA) therapies, entered into a collaboration agreement to discover, develop, and commercialize multiple programs, including vaccines and therapeutics in the areas of infectious disease and oncology.

Under the terms of the agreement, Merck made an upfront payment to Orna of $ 150 million, which was recorded in Research and development expenses in the third quarter and first nine months of 2022.

In addition, Orna is eligible to receive future contingent payments aggregating up to $ 440 million in development-related payments, $ 675 million in regulatory milestones, and $ 2.4 billion in sales-based milestones associated with the progress of the multiple vaccine and therapeutic programs, as well as royalties ranging from a high-single-digit rate to a low-double-digit rate on any approved products derived from the collaboration.

Merck also invested $ 100 million in Orna’s Series B preferred shares in fourth quarter of 2022.

In July 2022, Merck and Orion Corporation (Orion) announced a global co-development and co-commercialization agreement for Orion’s investigational candidate ODM-208 (MK-5684) and other drugs targeting cytochrome P450 11A1 (CYP11A1), an enzyme important in steroid production.

MK-5684 is an oral, non-steroidal inhibitor of CYP11A1 currently being evaluated in a Phase 2 clinical trial for the treatment of patients with metastatic castration-resistant prostate cancer.

Merck made an upfront payment to Orion of $ 290 million, which was recorded in Research and development expenses in the third quarter and first nine months of 2022.

Orion is responsible for the manufacture of clinical and commercial supply of MK-5684.

In addition, the contract provides both parties with an option to convert the initial co-development and co-commercialization agreement into a global exclusive license to Merck.

If the option is exercised, Merck would assume full responsibility for all past development and commercialization expenses associated with the program since inception of the agreement, as well as all future development and commercialization expenses.

In addition, Orion would be eligible to receive milestone payments associated with progress in the development and commercialization of MK-5684, as well as tiered double-digit royalties on sales if the product is approved.

Also in July 2022, Merck and Kelun-Biotech closed a license and collaboration agreement in which Merck gained exclusive worldwide rights for the development, manufacture and commercialization of an investigational ADC (MK-1200) for the treatment of solid tumors.

Under the terms of the agreement, Merck and Kelun-Biotech will collaborate on the early clinical

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

development of the investigational ADC.

Merck made an upfront payment of $ 35 million, which was recorded in Research and development expenses in the third quarter and first nine months of 2022.

Kelun-Biotech is also eligible to receive future contingent milestone payments aggregating up to $ 82 million in developmental milestones, $ 334 million in regulatory milestones, and $ 485 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.

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.

Upon option exercise, Merck made a payment of $ 30 million, which was recorded in Research and development expenses in the first nine months of 2022.

Additionally, Merck agreed to make an additional payment of $ 25 million upon technology transfer, which occurred in the third quarter of 2023 and will be paid in the fourth quarter of 2023.

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 $ 95 million has been paid through September 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.

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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 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.

Accordingly, Merck recorded a $ 600 million liability (which remained accrued at September 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 nine months of 2022.

Additionally, in the first nine 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.

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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).

In 2022, Lynparza received regulatory approvals triggering capitalized milestone payments of $ 250 million from Merck to AstraZeneca (all of which were paid in the first nine 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 intangible asset balance related to Lynparza (which includes capitalized sales-based and regulatory milestone payments) was $ 1.6 billion at September 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

September 30, Nine Months Ended

September 30,

($ in millions) 2023 2022 2023 2022

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Research and development 23 28 65 79

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

($ in millions) September 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 six months of 2022 includes $ 250 million of cumulative amortization catch-up expense as noted above.

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

(2) Includes accrued milestone payments.

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In the first quarter of 2023, Merck determined it was probable that sales of Lenvima in the future would trigger a $ 125 million sales-based milestone payment from Merck to Eisai.

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 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.

Similarly, in the third quarter of 2023 an additional $ 125 million sales-based milestone payment to Eisai was deemed to be probable of payment.

Accordingly, Merck recorded $ 250 million of liabilities for these payments and corresponding increases to the intangible asset related to Lenvima.

Merck also recognized $ 81 million and $ 154 million of cumulative amortization catch-up expense related to the recognition of these milestones in the third quarter and first nine months of 2023, respectively.

The sales-based milestone payment that was accrued in the first quarter of 2023 was paid to Eisai in the second quarter of 2023.

In the first nine 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 $ 2.3 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 six months of 2022).

In 2022, Lenvima received regulatory approvals triggering capitalized milestone payments of $ 50 million from Merck to Eisai (all of which were paid in the first nine 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 $ 756 million at June 30, 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 $ 743 million at September 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

September 30, Nine Months Ended

September 30,

($ in millions) 2023 2022 2023 2022

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Research and development 5 24 61 128

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

($ in millions) September 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 six months of 2023 includes $ 72 million of cumulative amortization catch-up expense as noted above.

Amounts in the third quarter and first nine months of 2023 include $ 81 million and $ 154 million, respectively, of cumulative amortization catch-up expense as noted above.

(2) Represents an accrued milestone payment.

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 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 .

In the first nine 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 $ 533 million and $ 51 million, respectively, at September 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

September 30, Nine Months Ended

September 30,

($ in millions) 2023 2022 2023 2022

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Research and development 26 18 76 52

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

($ in millions) September 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 related molecules.

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

Merck gained exclusive worldwide rights to develop and commercialize Lagevrio and

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

related molecules.

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

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

September 30, Nine Months Ended

September 30,

($ in millions) 2023 2022 2023 2022

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Research and development (2)

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

Receivables from Ridgeback included in Other current assets (3)

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

Payables to Ridgeback included in Accrued and other current liabilities (3)

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(2) Expenses include an allocation for overhead charges.

(3) Includes partner advances.

(3) Includes accrued royalties.

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

Alliance revenue related to this collaboration (recorded within Sales ) consists of royalties and, for the first nine 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 $ 52 million and $ 142 million in the third quarter and first nine months of 2023, respectively, compared with $ 39 million and $ 124 million in the third quarter and first nine months of 2022, respectively.

Daiichi Sankyo

In October 2023, Merck and Daiichi Sankyo entered into a global development and commercialization agreement for three of Daiichi Sankyo’s DXd ADC candidates:

patritumab deruxtecan (HER3-DXd) (MK-1022), ifinatamab deruxtecan (I-DXd) (MK-2400) and raludotatug deruxtecan (R-DXd) (MK-5909).

All three potentially first-in-class DXd ADCs are in various stages of clinical development for the treatment of multiple solid tumors both as monotherapy and/or in combination with other treatments.

The companies will jointly develop and potentially commercialize these ADC candidates worldwide, except in Japan where Daiichi Sankyo will maintain exclusive rights.

Daiichi Sankyo will be solely responsible for manufacturing and supply.

Under the terms of the agreement, Merck made payments to Daiichi Sankyo totaling $ 4.0 billion.

These payments included $ 1.0 billion ($ 500 million each for patritumab deruxtecan and ifinatamab deruxtecan) which may be refundable on a pro-rated basis in the event of early termination of development with respect to either program.

In addition, the agreement provides for a continuation payment of $ 750 million related to patritumab deruxtecan due from Merck in October 2024 and a continuation payment of $ 750 million related to raludotatug deruxtecan due from Merck in October 2025.

Merck may opt out of the collaboration for patritumab deruxtecan and/or raludotatug deruxtecan by electing not to pay the applicable continuation payment.

If Merck opts out of patritumab deruxtecan and/or raludotatug deruxtecan, the non-refundable upfront payments already paid will be retained by Daiichi Sankyo and rights related to such DXd ADCs will be returned to Daiichi Sankyo.

The agreement also provides for contingent payments from Merck to Daiichi Sankyo of up to an additional $ 5.5 billion for each DXd ADC upon the successful achievement of certain sales-based milestones.

Following regulatory approval, Daiichi Sankyo will generally record sales worldwide (Daiichi Sankyo will be the principal on sales transactions) and the companies will equally share expenses as well as profits worldwide except for Japan where Daiichi Sankyo retains exclusive rights and Merck will receive a sales-based royalty.

Merck will record its share of product sales, net of cost of sales and commercialization costs, as alliance revenue.

For raludotatug deruxtecan, Merck will be responsible for 75 % of the first $ 2.0 billion of research and development expenses;

the companies will share equally all other

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

expenses as well as profits worldwide.

Merck will include its share of development costs associated with the collaboration as part of Research and development expenses.

In conjunction with this transaction, Merck will record an aggregate pretax charge of $ 5.5 billion to Research and development expenses in the fourth quarter of 2023 for the $ 4.0 billion upfront payments and the $ 1.5 billion in continuation payments.

Spin-Off of Organon & Co.

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

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

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 .

The amounts included in the condensed consolidated statement of income for the above MSAs include sales of $ 100 million and $ 100 million and related cost of sales of $ 106 million and $ 104 million for the third quarter of 2023 and 2022, respectively, and sales of $ 290 million and $ 293 million and related cost of sales of $ 314 million and $ 312 million for the first nine months of 2023 and 2022, respectively.

Amounts included in the condensed consolidated statement of income for the TSAs were immaterial for the three and nine months ended September 30, 2023 and September 30, 2022.

The amounts due from Organon under all of the above agreements were $ 526 million and $ 511 million at September 30, 2023 and December 31, 2022, respectively, and are reflected in Other current assets .

The amounts due to Organon under these agreements were $ 385 million and $ 345 million at September 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 $ 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.

The Company recorded total pretax costs of $ 199 million and $ 175 million in the third quarter of 2023 and 2022, respectively, and $ 532 million and $ 559 million for the first nine months of 2023 and 2022, respectively, related to restructuring program activities.

Since inception of the Restructuring Program through September 30, 2023, Merck has recorded total pretax accumulated costs of approximately $ 3.9 billion.

For the full year of 2023, the Company expects to record charges of approximately $ 650 million related to the Restructuring Program.

For segment reporting, restructuring charges are unallocated expenses.

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

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

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

Three Months Ended September 30, 2023 Nine Months Ended September 30, 2023

($ in millions) Separation

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$ 95 $ 36 $ 68 $ 199 $ 246 $ 79 $ 207 $ 532

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

Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022

($ in millions) Separation

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Additionally, other activity includes certain employee-related costs associated with pension and other postretirement benefit plans (see Note 12) and share-based compensation.

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

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

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

($ in millions) Separation

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Non-cash activity — ( 79 ) ( 105 ) ( 184 )

Restructuring reserves June 30, 2023 (1)

Restructuring reserves September 30, 2023 (1)

$ 534 $ — $ 33 $ 567

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The Company has established revenue hedging, balance sheet risk management and net investment hedging programs to protect against volatility of future foreign currency cash flows and changes in fair value caused by changes in foreign exchange rates.

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

The objective of the revenue hedging program is to reduce the variability caused by changes in foreign exchange rates that would affect the U.S.

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The forward contracts are designated as hedges of the net investment in a foreign operation.

The unrealized gains or losses on these contracts are recorded in foreign currency translation adjustment within OCI

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

and remain in AOCL until either the sale or complete or substantially complete liquidation of the subsidiary.

The unrealized gains or losses on these contracts are recorded in foreign currency translation adjustment within OCI and remain in AOCL until either the sale or complete or substantially complete liquidation of the subsidiary.

The Company excludes certain portions of the change in fair value of its derivative instruments from the assessment of hedge effectiveness (excluded components).

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

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

Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended September 30, Nine Months Ended September 30,

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

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(1) No amounts were reclassified from AOCL into income related to the sale of a subsidiary.

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

Interest Rate Risk Management

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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.

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

At September 30, 2023, the Company was a party to three pay-floating, receive-fixed interest rate swap contracts designated as fair value hedges of a portion of fixed-rate notes as detailed in the table below.

September 30, 2023

($ in millions)

Par Value of Debt

Number of Interest Rate Swaps Held

Total Swap Notional Amount

4.50 % notes due 2033

$ 1,500 3 $ 750

The interest rate swap contracts are designated hedges of the fair value changes in the notes attributable to changes in the benchmark Secured Overnight Financing Rate (SOFR) swap rate.

The fair value change in the notes attributable to changes in the SOFR swap rate are recorded in interest expense along with the offsetting fair value changes in the swap contracts.

In October 2023, the Company entered into an additional interest rate swap with a notional amount of $ 250 million also related to its 4.50 % notes due 2033.

The cash flows from these contracts are reported as operating activities in the Condensed Consolidated Statement of Cash Flows.

The table below presents the location of amounts recorded on the Condensed Consolidated Balance Sheet related to cumulative basis adjustments for fair value hedges:

Carrying Amount of Hedged Liabilities

Cumulative Amount of Fair Value Hedging Adjustment Increase (Decrease) Included in the Carrying Amount

($ in millions)

September 30, 2023 December 31, 2022 September 30, 2023 December 31, 2022

Balance Sheet Line Item in which Hedged Item is Included

Long-Term Debt

$ 743 $ — $ ( 7 ) $ —

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:

June 30, 2023 December 31, 2022

September 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 Noncurrent Liabilities $ — $ 8 $ 750 $ — $ — $ —

Foreign exchange contracts Other current assets 321 — 8,059 220 — 4,824

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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:

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

($ in millions) Asset Liability Asset Liability

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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 June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

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

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— — — ( 1 ) — — — — ( 1 ) ( 2 ) — —

Amount of gain (loss) recognized in OCI on derivatives

Amount of (loss) gain recognized in OCI on derivatives

— — — — — ( 1 ) — — — — 13 ( 2 )

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Amount of Derivative Pretax (Gain) Loss Recognized in Income

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

Three Months Ended September 30, Nine Months Ended September 30,

($ in millions) 2023 2022 2023 2022

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

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 .

At September 30, 2023, the Company estimates $ 269 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:

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Cost Gross Unrealized Fair

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Total debt and publicly traded equity securities $ 1,993 $ 1,853

(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 .

(1) Unrealized net gains of $ 61 million and $ 327 million were recorded in Other (income) expense, net in the third quarter and first nine months of 2023, respectively, on equity securities still held at September 30, 2023.

Unrealized net losses of $ 221 million and $ 415 million were recorded in Other (income) expense, net in the third quarter and first nine months of 2022, respectively, on equity securities still held at September 30, 2022.

At September 30, 2023 and September 30, 2022, the Company also had $ 863 million and $ 705 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 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.

During the first nine months of 2023 , the Company recorded unrealized gains of $ 7 million and unrealized losses of $ 24 million related to certain of these equity investments still held at September 30, 2023.

During the first nine months of 2022 , the Company recorded unrealized gains of $ 21 million and unrealized losses of $ 12 million related to certain of these equity investments still held at September 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 September 30, 2023 were $ 296 million and $ 40 million, respectively.

At September 30, 2023 and September 30, 2022, the Company also had $ 467 million and $ 655 million, respectively, recorded in Other Assets for equity securities held through ownership interests in investment funds.

Losses recorded in Other (income) expense, net relating to these investment funds were $ 93 million and $ 141 million for the third quarter of 2023 and 2022, respectively, and were $ 66 million and $ 952 million for the first nine 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) June 30, 2023 December 31, 2022

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

Commercial paper $ — $ 168 $ — $ 168 $ — $ 498 $ — $ 498

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

Publicly traded equity securities 1,306 — — 1,306 1,015 — — 1,015

5 unchanged sentences

440 — — 440 269 — — 269

519 — — 519 340 — — 340

Derivative assets (3)

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Written currency options — 8 — 8 — 7 — 7

Interest rate swaps

— 8 — 8 — — — —

— 176 — 176 — 409 — 409

Total liabilities $ — $ 176 $ 345 $ 521 $ — $ 409 $ 456 $ 865

(1) Investments included in other assets are restricted as to use, including for the payment of benefits under employee benefit plans.

(2) Balance at September 30, 2023 includes securities with a total fair value of $ 132 million, which are subject to a contractual sale restriction that expires in July 2024.

(3) 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 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).

As of September 30, 2023 and December 31, 2022, Cash and cash equivalents included $ 7.8 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 — ( 3 )

Fair value June 30 (2)

Fair value September 30 (2)

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

Includes cumulative translation adjustments.

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

(2) At September 30, 2023, $ 255 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 June 30, 2023 includes $ 130 million recorded as a current liability for amounts expected to be paid within the next 12 months.

Balance at September 30, 2023 includes $ 126 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 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.

The estimated fair value of loans payable and long-term debt (including current portion) at September 30, 2023, was $ 29.5 billion compared with a carrying value of $ 34.9 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.

3 unchanged sentences

Cash and investments are placed in instruments that meet high credit quality standards as specified in the Company’s investment policy guidelines.

The majority of the Company’s accounts receivable arise from product sales in the U.S., Europe and China and are primarily due from drug wholesalers and retailers, hospitals and government agencies.

The majority of the Company’s accounts receivable arise from product sales in the U.S., Europe and China and are primarily due from drug wholesalers, distributors and retailers, hospitals and government agencies.

The Company monitors the financial performance and creditworthiness of its customers so that it can properly assess and respond to changes in their credit profile.

1 unchanged sentence

The Company has accounts receivable factoring agreements with financial institutions in certain countries to sell 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 Company factored $ 3.5 billion and $ 2.5 billion of accounts receivable as of September 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 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.

As of September 30, 2023 and December 31, 2022, the Company had collected $ 39 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 net cash flows related to these collections are reported as financing activities in the Condensed Consolidated Statement of Cash Flows.

3 unchanged sentences

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 $ 102 million and $ 66 million at June 30, 2023 and December 31, 2022, respectively.

Cash collateral received by the Company from various counterparties was $ 143 million and $ 66 million at September 30, 2023 and December 31, 2022, respectively.

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

1 unchanged sentence

Inventories consisted of:

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

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

Finished goods $ 1,840 $ 1,841

8 unchanged sentences

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

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.

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

In addition, these amounts included $ 756 million and $ 516 million at September 30, 2023 and December 31, 2022, respectively, of inventories produced in preparation for product launches.

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

Other Intangibles

In the third quarter of 2022, the Company recorded $ 887 million of impairment charges within Research and development expenses related to intangible assets obtained in connection with the 2020 acquisition of ArQule, Inc.

Of this amount, $ 807 million represents an in-process research and development (IPR&D) impairment charge related to nemtabrutinib (MK-1026), a novel, oral BTK inhibitor currently being evaluated for the treatment of B-cell malignancies.

Following discussions with regulatory authorities in the third quarter of 2022, the development period for nemtabrutinib was extended, which constituted a triggering event that required the evaluation of the nemtabrutinib intangible asset for impairment.

The Company estimated the fair value of nemtabrutinib utilizing an income approach which uses Level 3 inputs to calculate the present value of projected future cash flows.

The market participant assumptions used to derive the forecasted cash flows were updated to reflect a delay in the anticipated launch date for nemtabrutinib, which resulted in lower cumulative revenue forecasts and a reduction in the estimated fair value.

The revised estimated fair value of nemtabrutinib when compared with its related carrying value resulted in the IPR&D impairment charge noted above.

In December 2022, regulatory authorities provided additional feedback with respect to clinical study design that led to a further reassessment of the development plan for nemtabrutinib, which was expected to result in changes to the clinical study design, and corresponding delays in the anticipated approval and launch timelines, which constituted a triggering event.

Utilizing an income approach, the forecasted cash flows were updated to reflect a decline in forecasted revenue coupled with an increase in development cost forecasts, which reduced projected cash flows lowering the estimated current fair value of nemtabrutinib.

The revised estimated fair value of nemtabrutinib when compared with its then-related carrying value resulted in a $ 780 million impairment charge, which was recorded in the fourth quarter of 2022.

The remaining IPR&D intangible asset related to nemtabrutinib is $ 418 million.

If the assumptions used to estimate the fair value of nemtabrutinib prove to be incorrect and the development of nemtabrutinib does not progress as anticipated thereby adversely affecting projected future cash flows, the Company may record an additional impairment charge in the future and such charge could be material.

The remaining $ 80 million intangible asset impairment charge in the third quarter of 2022 related to derazantinib and resulted from the termination of the out-licensing agreement and the decision by Merck not to pursue development of derazantinib.

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.

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, including 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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Gardasil/Gardasil 9

Merck is a defendant in product liability lawsuits in the U.S.

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

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

As previously disclosed, Merck is a defendant in product liability lawsuits in the U.S.

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

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

Vaccine, Recombinant).

As of September 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.

4 unchanged sentences

Inflation Reduction Act

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

As previously disclosed, on June 6, 2023, Merck filed a complaint in the U.S.

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

10 unchanged sentences

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

3 unchanged sentences

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

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 financial results for the first nine months of 2023.

On October 18, 2023, the court granted final approval of the indirect purchaser class settlement.

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

(collectively, the Insurer Plaintiffs), each filed a lawsuit in a jurisdiction outside of the Eastern District of Virginia against the Merck Defendants and others, making similar allegations as those made in the Zetia MDL, as well as additional allegations about Vytorin.

These cases have been transferred to the Eastern District of Virginia to proceed with the Zetia MDL and remain pending.

These cases were transferred to the Eastern District of Virginia to proceed with the Zetia MDL and remain pending.

In February 2022, the Insurer Plaintiffs filed amended complaints.

1 unchanged sentence

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

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

9 unchanged sentences

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.

The court entered judgment in favor of the Company

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

and dismissed relators’ amended complaint in full with prejudice.

Relators have appealed 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.

On October 20, 2023, the Company petitioned the Third Circuit for permission to appeal the antitrust decision.

Patent Litigation

12 unchanged sentences

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.

10 unchanged sentences

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.

On July 24, 2023, defendants filed a notice of appeal with the Federal Court of Appeals.

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.

18 unchanged sentences

In total, the Company has settled with 26 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.

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

In March 2021, the Company filed a patent infringement lawsuit in the U.S.

7 unchanged sentences

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 could be available prior to 2026 .

until July 2026 , although Zydus has received FDA approval for a non-automatically substitutable form of sitagliptin that differs from the form in the Company’s sitagliptin products .

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 in the third quarter with a decision in the fourth quarter of 2023.

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 in the fourth quarter of 2023 with a decision in the first quarter of 2024.

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.

1 unchanged sentence

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.

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.

6 unchanged sentences

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.

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

patents, including a demand for damages.

6 unchanged sentences

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 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;

The amount of legal defense reserves as of September 30, 2023 and December 31, 2022 of approximately $ 220 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 June 30,

Three Months Ended September 30,

Common Stock Other

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

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

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

Net income attributable to Merck & Co., Inc.

— — — 3,248 — — — — 3,248

Other comprehensive income, net of taxes — — — — 42 — — — 42

Other comprehensive loss, net of taxes — — — — ( 416 ) — — — ( 416 )

Cash dividends declared on common stock ($ 0.69 per share)

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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.

Distributions attributable to noncontrolling interests — — — — — — — ( 14 ) ( 14 )

Balance at September 30, 2022 3,577 $ 1,788 $ 44,243 $ 59,928 $ ( 4,743 ) 1,044 $ ( 56,758 ) $ 66 $ 44,524

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

Net income attributable to Merck & Co., Inc.

— — — 4,745 — — — — 4,745

Other comprehensive loss, net of taxes

— — — — ( 16 ) — — — ( 16 )

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

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

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,

Balance at September 30, 2023 3,577 $ 1,788 $ 44,358 $ 57,082 $ ( 4,916 ) 1,042 $ ( 57,066 ) $ 54 $ 41,300

Nine Months Ended September 30,

Common Stock Other

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— — — 11,502 — — — — 11,502

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

Other comprehensive loss, net of taxes — — — — ( 314 ) — — — ( 314 )

Cash dividends declared on common stock ($ 2.07 per share)

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Net income attributable to noncontrolling interests — — — — — — — 6 6

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

Distributions attributable to noncontrolling interests — — — — — — — ( 13 ) ( 13 )

Balance at September 30, 2022 3,577 $ 1,788 $ 44,243 $ 59,928 $ ( 4,743 ) 1,044 $ ( 56,758 ) $ 66 $ 44,524

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.

Net income attributable to Merck & Co., Inc.

— — — 1,591 — — — — 1,591

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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

Balance at September 30, 2023 3,577 $ 1,788 $ 44,358 $ 57,082 $ ( 4,916 ) 1,042 $ ( 57,066 ) $ 54 $ 41,300

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

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2023 2022 2023 2022

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Expected return on plan assets ( 182 ) ( 131 ) ( 182 ) ( 93 ) ( 553 ) ( 390 ) ( 576 ) ( 292 )

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

Amortization of unrecognized prior service (credit) cost

— ( 6 ) ( 8 ) ( 3 ) ( 1 ) 5 ( 24 ) ( 10 )

Net (gain) loss amortization — ( 1 ) 10 24 — ( 2 ) 122 73

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

($ in millions) 2023 2022 2023 2022

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Net gain amortization ( 11 ) ( 11 ) ( 31 ) ( 32 )

Curtailments — — ( 1 ) ( 1 )

$ ( 15 ) $ ( 24 ) $ ( 46 ) $ ( 69 )

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In addition, lump sum payments to U.S.

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

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

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

pension plans.

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 third quarter 2023 remeasurement, which was calculated using discount rates and asset values as of September 30, 2023, resulted in a net decrease of $ 34 million to net pension liabilities and a related adjustment to AOCL .

Remeasurements during the first nine months of 2023 resulted in an increase of $ 13 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 13), 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.

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

($ in millions) 2023 2022 2023 2022

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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 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.

Other, net (as reflected in the table above) in the first nine months of 2023 includes a $ 572.5 million charge related to settlements with certain plaintiffs in the Zetia antitrust litigation (see Note 10).

Interest paid for the nine months ended September 30, 2023 and 2022 was $ 678 million and $ 660 million, respectively.

The effective income tax rate of 15.5 % for the third quarter of 2023 reflects the favorable mix of income and expense.

The effective income tax rate of 59.3 % for the first nine months of 2023 includes a 44.0 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 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 effective income tax rates of 9.2 % for the third quarter of 2022 and 11.0 % for the first nine months of 2022 reflect the favorable mix of income and expense, as well as the favorable impact of net unrealized losses from investments in equity securities and intangible asset impairment charges, 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.

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Earnings Per Share

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

The calculations of earnings per share are as follows:

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

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

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

Net Income Attributable to Merck & Co., Inc.

$ 4,745 $ 3,248 $ 1,591 $ 11,502

2 unchanged sentences

Average common shares outstanding assuming dilution 2,546 2,542 2,549 2,540

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

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

Common Shareholders $ 1.87 $ 1.28 $ 0.63 $ 4.55

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

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

Common Shareholders $ 1.86 $ 1.28 $ 0.62 $ 4.53

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

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.

For the third quarter of 2023 and 2022, 6 million and 2 million, respectively, and for the first nine months of 2023 and 2022, 5 million and 5 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)

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

Three Months Ended June 30,

Three Months Ended September 30,

($ in millions) Derivatives Employee

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Comprehensive

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

Balance July 1, 2022, net of taxes $ 390 $ ( 2,465 ) $ ( 2,252 ) $ ( 4,327 )

Other comprehensive income (loss) before reclassification adjustments, pretax 682 ( 294 ) ( 618 ) ( 230 )

5 unchanged sentences

Other comprehensive income (loss), net of taxes 338 ( 186 ) ( 568 ) ( 416 )

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 )

Balance September 30, 2022, net of taxes $ 728 $ ( 2,651 ) $ ( 2,820 ) $ ( 4,743 )

Balance July 1, 2023, net of taxes $ 85 $ ( 2,483 ) $ ( 2,502 ) $ ( 4,900 )

Other comprehensive income (loss) before reclassification adjustments, pretax 247 29 ( 252 ) 24

4 unchanged sentences

Other comprehensive income (loss), net of taxes 159 — ( 175 ) ( 16 )

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

Six Months Ended June 30,

Balance September 30, 2023, net of taxes $ 244 $ ( 2,483 ) $ ( 2,677 ) $ ( 4,916 )

Nine Months Ended September 30,

($ in millions) Derivatives Employee

10 unchanged sentences

Other comprehensive income (loss), net of taxes 584 92 ( 990 ) ( 314 )

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

Balance September 30, 2022, net of taxes $ 728 $ ( 2,651 ) $ ( 2,820 ) $ ( 4,743 )

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

6 unchanged sentences

Other comprehensive income (loss), net of taxes 171 ( 75 ) ( 244 ) ( 148 )

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

Balance September 30, 2023, net of taxes $ 244 $ ( 2,483 ) $ ( 2,677 ) $ ( 4,916 )

(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)

(2) Includes net amortization of prior service cost/credit, actuarial gains and losses, settlements and curtailments included in net periodic benefit cost (see Note 12).

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

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Sales of the Company’s products were as follows:

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

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

51 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 the first six months of 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 nine 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 $ 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.

(5) Other is primarily comprised of miscellaneous corporate revenue, including revenue hedging activities which increased sales by $ 173 million and $ 533 million for the nine months ended September 30, 2023 and 2022, respectively, as well as revenue from third-party manufacturing arrangements (including sales to Organon).

Other for the nine months ended September 30, 2023 and 2022 also includes $ 118 million and $ 156 million, respectively, related to upfront and milestone payments received by Merck for out-licensing arrangements.

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

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

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.

sales by $ 3.1 billion and $ 3.3 billion for the three months ended September 30, 2023 and 2022, respectively, and $ 9.4 billion and $ 9.1 billion for the nine months ended September 30, 2023 and 2022, respectively.

Consolidated sales by geographic area where derived are as follows:

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

($ in millions) 2023 2022 2023 2022

2 unchanged sentences

China 1,694 1,442 5,322 3,957

Asia Pacific (other than China and Japan) 848 1,008 1,694 1,938

Japan 1,081 673 2,514 2,776

Asia Pacific (other than China and Japan) 781 854 2,475 2,792

Latin America 895 684 2,298 1,933

1 unchanged sentence

$ 15,962 $ 14,959 $ 45,485 $ 45,453

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

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

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

($ in millions) 2023 2022 2023 2022

21 unchanged sentences

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