Merck & Co., Inc. 10-K

Item 8. Financial Statements and Supplementary Data. (a) Financial Statements The consolidated balance sheet of Merck & Co., Inc. and subsidiaries as of December 31, 2023 and 2022, and the related consolidated statements of income, of comprehensive (loss) income, of equity and of cash flows for each of the three years in the period ended December 31, 2023, the notes to consolidated financial statements, and the report dated February 26, 2024 of PricewaterhouseCoopers LLP, independent registered public accounting firm, are as follows: Consolidated Statement of Income Merck & Co., Inc. and Subsidiaries Years Ended December 31 ($ in millions except per share amounts) 2023 2022 2021 Sales $ 60,115 $ 59,283 $ 48,704 Costs, Expenses and Other Cost of sales 16,126 17,411 13,626 Selling, general and administrative 10,504 10,042 9,634 Research and development 30,531 13,548 12,245 Restructuring costs 599 337 661 Other (income) expense, net 466 1,501 ( 1,341 ) 58,226 42,839 34,825 Income from Continuing Operations Before Taxes 1,889 16,444 13,879 Taxes on Income from Continuing Operations 1,512 1,918 1,521 Net Income from Continuing Operations 377 14,526 12,358 Less: Net Income Attributable to Noncontrolling Interests 12 7 13 Net Income from Continuing Operations Attributable to Merck & Co., Inc. 365 14,519 12,345 Income from Discontinued Operations, Net of Taxes and Amounts Attributable to Noncontrolling Interests — — 704 Net Income Attributable to Merck & Co., Inc. $ 365 $ 14,519 $ 13,049 Basic Earnings per Common Share Attributable to Merck & Co., Inc. Common Shareholders Income from Continuing Operations $ 0.14 $ 5.73 $ 4.88 Income from Discontinued Operations — — 0.28 Net Income $ 0.14 $ 5.73 $ 5.16 Earnings per Common Share Assuming Dilution Attributable to Merck & Co., Inc. Common Shareholders Income from Continuing Operations $ 0.14 $ 5.71 $ 4.86 Income from Discontinued Operations — — 0.28 Net Income $ 0.14 $ 5.71 $ 5.14 Consolidated Statement of Comprehensive (Loss) Income Merck & Co., Inc. and Subsidiaries Years Ended December 31 ($ in millions) 2023 2022 2021 Net Income Attributable to Merck & Co., Inc. $ 365 $ 14,519 $ 13,049 Other Comprehensive (Loss) Income Net of Taxes: Net unrealized (loss) gain on derivatives, net of reclassifications ( 97 ) ( 71 ) 410 Benefit plan net (loss) gain and prior service (cost) credit, net of amortization ( 385 ) 335 1,769 Cumulative translation adjustment 89 ( 603 ) ( 423 ) ( 393 ) ( 339 ) 1,756 Comprehensive (Loss) Income Attributable to Merck & Co., Inc. $ ( 28 ) $ 14,180 $ 14,805 The accompanying notes are an integral part of these consolidated financial statements. 71 Table of C o ntent s Consolidated Balance Sheet Merck & Co., Inc. and Subsidiaries December 31 ($ in millions except per share amounts) 2023 2022 Assets Current Assets Cash and cash equivalents $ 6,841 $ 12,694 Short-term investments 252 498 Accounts receivable (net of allowance for doubtful accounts of $ 88 in 2023 and $ 72 in 2022) 10,349 9,450 Inventories (excludes inventories of $ 3,348 in 2023 and $ 2,938 in 2022 classified in Other assets - see Note 8) 6,358 5,911 Other current assets 8,368 7,169 Total current assets 32,168 35,722 Investments 252 1,015 Property, Plant and Equipment (at cost) Land 326 295 Buildings 14,966 13,166 Machinery, equipment and office furnishings 17,763 16,760 Construction in progress 8,262 9,186 41,317 39,407 Less: accumulated depreciation 18,266 17,985 23,051 21,422 Goodwill 21,197 21,204 Other Intangibles, Net 18,011 20,269 Other Assets 11,996 9,528 $ 106,675 $ 109,160 Liabilities and Equity Current Liabilities Loans payable and current portion of long-term debt $ 1,372 $ 1,946 Trade accounts payable 3,922 4,264 Accrued and other current liabilities 15,766 14,159 Income taxes payable 2,649 1,986 Dividends payable 1,985 1,884 Total current liabilities 25,694 24,239 Long-Term Debt 33,683 28,745 Deferred Income Taxes 871 1,795 Other Noncurrent Liabilities 8,792 8,323 Merck & Co., Inc. Stockholders’ Equity Common stock, $ 0.50 par value Authorized - 6,500,000,000 shares Issued - 3,577,103,522 shares in 2023 and 2022 1,788 1,788 Other paid-in capital 44,509 44,379 Retained earnings 53,895 61,081 Accumulated other comprehensive loss ( 5,161 ) ( 4,768 ) 95,031 102,480 Less treasury stock, at cost: 1,045,470,249 shares in 2023 and 1,039,269,638 shares in 2022 57,450 56,489 Total Merck & Co., Inc. stockholders’ equity 37,581 45,991 Noncontrolling Interests 54 67 Total equity 37,635 46,058 $ 106,675 $ 109,160 The accompanying notes are an integral part of this consolidated financial statement. 72 Table of C o ntent s Consolidated Statement of Equity Merck & Co., Inc. and Subsidiaries Years Ended December 31 ($ in millions except per share amounts) Common Stock Other Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Non- controlling Interests Total Balance January 1, 2021 $ 1,788 $ 39,588 $ 47,362 $ ( 6,634 ) $ ( 56,787 ) $ 87 $ 25,404 Net income attributable to Merck & Co., Inc. — — 13,049 — — — 13,049 Other comprehensive income, net of taxes — — — 1,756 — — 1,756 Cash dividends declared on common stock ($ 2.64 per share) — — ( 6,715 ) — — — ( 6,715 ) Treasury stock shares purchased — — — — ( 840 ) — ( 840 ) Spin-off of Organon & Co. — 4,643 — 449 — ( 1 ) 5,091 Net income attributable to noncontrolling interests — — — — — 16 16 Distributions attributable to noncontrolling interests — — — — — ( 29 ) ( 29 ) Share-based compensation plans and other — 7 — — 518 — 525 Balance December 31, 2021 1,788 44,238 53,696 ( 4,429 ) ( 57,109 ) 73 38,257 Net income attributable to Merck & Co., Inc. — — 14,519 — — — 14,519 Other comprehensive loss, net of taxes — — — ( 339 ) — — ( 339 ) Cash dividends declared on common stock ($ 2.80 per share) — — ( 7,134 ) — — — ( 7,134 ) Net income attributable to noncontrolling interests — — — — — 7 7 Distributions attributable to noncontrolling interests — — — — — ( 13 ) ( 13 ) Share-based compensation plans and other — 141 — — 620 — 761 Balance December 31, 2022 1,788 44,379 61,081 ( 4,768 ) ( 56,489 ) 67 46,058 Net income attributable to Merck & Co., Inc. — — 365 — — — 365 Other comprehensive loss, net of taxes — — — ( 393 ) — — ( 393 ) Cash dividends declared on common stock ($ 2.96 per share) — — ( 7,551 ) — — — ( 7,551 ) Treasury stock shares purchased — — — — ( 1,346 ) — ( 1,346 ) Net income attributable to noncontrolling interests — — — — — 12 12 Distributions attributable to noncontrolling interests — — — — — ( 25 ) ( 25 ) Share-based compensation plans and other — 130 — — 385 — 515 Balance December 31, 2023 $ 1,788 $ 44,509 $ 53,895 $ ( 5,161 ) $ ( 57,450 ) $ 54 $ 37,635 The accompanying notes are an integral part of this consolidated financial statement. 73 Table of C o ntent s Consolidated Statement of Cash Flows Merck & Co., Inc. and Subsidiaries Years Ended December 31 ($ in millions) 2023 2022 2021 Cash Flows from Operating Activities of Continuing Operations Net income from continuing operations $ 377 $ 14,526 $ 12,358 Adjustments to reconcile net income from continuing operations to net cash provided by operating activities of continuing operations: Amortization 2,044 2,085 1,636 Depreciation 1,828 1,824 1,578 Intangible asset impairment charges 792 1,749 302 (Income) loss from investments in equity securities, net ( 340 ) 1,419 ( 1,940 ) Charge for the acquisition of Prometheus Biosciences, Inc. 10,217 — — Charge for the acquisition of Imago BioSciences, Inc. 1,192 — — Charge for the acquisition of Pandion Therapeutics, Inc. — — 1,556 Deferred income taxes ( 1,899 ) ( 1,568 ) 187 Share-based compensation 645 541 479 Other 355 1,301 805 Net changes in assets and liabilities: Accounts receivable ( 1,148 ) ( 644 ) ( 2,033 ) Inventories ( 816 ) ( 161 ) ( 674 ) Trade accounts payable ( 380 ) ( 289 ) 405 Accrued and other current liabilities 1,783 ( 50 ) 277 Income taxes payable 214 380 ( 540 ) Noncurrent liabilities 456 ( 545 ) 484 Other ( 2,314 ) ( 1,473 ) ( 1,758 ) Net Cash Provided by Operating Activities of Continuing Operations 13,006 19,095 13,122 Cash Flows from Investing Activities of Continuing Operations Capital expenditures ( 3,863 ) ( 4,388 ) ( 4,448 ) Purchases of securities and other investments ( 955 ) ( 1,204 ) ( 1 ) Proceeds from sale of Seagen Inc. common stock 1,145 — — Proceeds from sales of securities and other investments 1,658 721 1,026 Acquisition of Prometheus Biosciences, Inc., net of cash acquired ( 10,705 ) — — Acquisition of Imago BioSciences Inc., net of cash acquired ( 1,327 ) — — Acquisition of Acceleron Pharma Inc., net of cash acquired — — ( 11,174 ) Acquisition of Pandion Therapeutics, Inc., net of cash acquired — — ( 1,554 ) Other acquisitions, net of cash acquired — ( 121 ) ( 179 ) Other ( 36 ) 32 ( 91 ) Net Cash Used in Investing Activities of Continuing Operations ( 14,083 ) ( 4,960 ) ( 16,421 ) Cash Flows from Financing Activities of Continuing Operations Net change in short-term borrowings — — ( 3,986 ) Payments on debt ( 1,755 ) ( 2,251 ) ( 2,319 ) Proceeds from issuance of debt 5,939 — 7,936 Distribution from Organon & Co. — — 9,000 Purchases of treasury stock ( 1,346 ) — ( 840 ) Dividends paid to stockholders ( 7,445 ) ( 7,012 ) ( 6,610 ) Proceeds from exercise of stock options 125 384 202 Other ( 328 ) ( 240 ) ( 286 ) Net Cash (Used in) Provided by Financing Activities of Continuing Operations ( 4,810 ) ( 9,119 ) 3,097 Cash Flows from Discontinued Operations Net cash provided by operating activities — — 987 Net cash used in investing activities — — ( 134 ) Net cash used in financing activities — — ( 504 ) Net Cash Flows Provided by Discontinued Operations — — 349 Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash 23 ( 410 ) ( 133 ) Net (Decrease) Increase in Cash, Cash Equivalents and Restricted Cash ( 5,864 ) 4,606 14 Cash, Cash Equivalents and Restricted Cash at Beginning of Year (includes $ 79 , $ 71 and $ 103 of restricted cash at January 1, 2023, 2022 and 2021, respectively, included in Other current assets ) 12,773 8,167 8,153 Cash, Cash Equivalents and Restricted Cash at End of Year (includes $ 68 , $ 79 and $ 71 of restricted cash at December 31, 2023, 2022 and 2021, respectively, included in Other current assets ) $ 6,909 $ 12,773 $ 8,167 The accompanying notes are an integral part of this consolidated financial statement. 74 Table of C o ntent s Notes to Consolidated Financial Statements Merck & Co., Inc. and Subsidiaries ($ in millions except per share amounts) 1. Nature of Operations Merck & Co., Inc. (Merck or the Company) is a global health care company that delivers innovative health solutions through its prescription medicines, including biologic therapies, vaccines and animal health products. The Company’s operations are principally managed on a product basis and include two operating segments, Pharmaceutical and Animal Health, both of which are reportable segments. The Pharmaceutical segment includes human health pharmaceutical and vaccine products. Human health pharmaceutical products consist of therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. The Company sells these human health pharmaceutical products primarily to drug wholesalers and retailers, hospitals, government agencies and managed health care providers such as health maintenance organizations, pharmacy benefit managers and other institutions. Human health vaccine products consist of preventive pediatric, adolescent and adult vaccines. The Company sells these human health vaccines primarily to physicians, wholesalers, distributors and government entities. The Animal Health segment discovers, develops, manufactures and markets a wide range of veterinary pharmaceutical and vaccine products, as well as health management solutions and services, for the prevention, treatment and control of disease in all major livestock and companion animal species. The Company also offers an extensive suite of digitally connected identification, traceability and monitoring products. The Company sells its products to veterinarians, distributors, animal producers, farmers and pet owners. Spin-Off of Organon & Co. On June 2, 2021, Merck completed the spin-off of products from its women’s health, biosimilars and established brands businesses into a new, independent, publicly traded company named Organon & Co. (Organon) through a distribution of Organon’s publicly traded stock to Company shareholders. The established brands included in the transaction consisted of dermatology, non-opioid pain management, respiratory, select cardiovascular products, as well as the rest of Merck’s diversified brands franchise. The historical results of the businesses that were contributed to Organon in the spin-off have been reflected as discontinued operations in the Company’s consolidated financial statements through the date of the spin-off (see Note 5). 2. Summary of Accounting Policies Principles of Consolidation — The consolidated financial statements include the accounts of the Company and all of its subsidiaries in which a controlling interest is maintained. Intercompany balances and transactions are eliminated. Controlling interest is determined by majority ownership interest and the absence of substantive third-party participating rights or, in the case of variable interest entities, by majority exposure to expected losses, residual returns or both. For those consolidated subsidiaries where Merck ownership is less than 100%, the outside shareholders’ interests are shown as Noncontrolling interests in equity. Investments in affiliates over which the Company has significant influence but not a controlling interest, such as interests in entities owned equally by the Company and a third party that are under shared control, are carried on the equity method basis. Acquisitions — In a business combination, the acquisition method of accounting requires that the assets acquired and liabilities assumed be recorded as of the date of the acquisition at their respective fair values with limited exceptions. Assets acquired and liabilities assumed in a business combination that arise from contingencies are generally recognized at fair value. If fair value cannot be determined, the asset or liability is recognized if probable and reasonably estimable; if these criteria are not met, no asset or liability is recognized. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Accordingly, the Company may be required to value assets at fair value measures that do not reflect the Company’s intended use of those assets. Any excess of the purchase price (consideration transferred) over the estimated fair values of net assets acquired is recorded as goodwill. Transaction costs and costs to restructure the acquired company are expensed as incurred. The operating results of the acquired business are reflected in the Company’s consolidated financial statements after the date of the acquisition. If the Company determines the assets acquired do not meet the definition of a business under the acquisition method of accounting, the transaction will be accounted for as an acquisition of assets rather than a business combination and, therefore, no goodwill will be recorded. In an asset acquisition, acquired in-process research and development (IPR&D) with no alternative future use is charged to expense and contingent consideration is not recognized at the acquisition date. 75 Table of C o ntent s Foreign Currency Translation — The net assets of international subsidiaries where the local currencies have been determined to be the functional currencies are translated into U.S. dollars using current exchange rates and results of operations are translated at average exchange rates. The U.S. dollar effects that arise from translating the net assets of these subsidiaries at changing rates are recorded in Other Comprehensive Income (OCI) and remain in Accumulated other comprehensive loss ( AOCL ) until either the sale or complete or substantially complete liquidation of the subsidiary. For those subsidiaries that operate in highly inflationary economies and for those subsidiaries where the U.S. dollar has been determined to be the functional currency, non-monetary foreign currency assets and liabilities are translated using historical rates, while monetary assets and liabilities are translated at current rates, with the U.S. dollar effects of rate changes included in Other (income) expense, net . Cash Equivalents — Cash equivalents are comprised of certain highly liquid investments with original maturities of less than three months. Inventories — Inventories are valued at the lower of cost or net realizable value. The cost of a substantial majority of U.S. human health inventories is determined using the last-in, first-out (LIFO) method for both financial reporting and tax purposes. The cost of all other inventories is determined using the first-in, first-out (FIFO) method. Inventories consist of currently marketed products, as well as certain inventories produced in preparation for product launches that are considered by the Company to be probable of obtaining regulatory approval. In evaluating the recoverability of inventories produced in preparation for product launches, the Company considers the likelihood that revenue will be obtained from the future sale of the related inventory together with the status of the product during the research and regulatory approval process. Investments — Investments in marketable debt securities classified as available-for-sale are reported at fair value. Fair values of the Company’s investments in marketable debt securities are determined using quoted market prices in active markets for identical assets or quoted prices for similar assets or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Changes in fair value that are not impairment related are reported net of taxes in OCI . The Company considers available evidence in evaluating potential impairments of its investments in marketable debt securities, including the extent to which fair value is less than cost, whether an allowance for credit loss is required, as well as adverse factors that could affect the value of the securities. An impairment has occurred if the Company does not expect to recover the entire amortized cost basis of the marketable debt security. If the Company does not intend to sell the impaired debt security, and it is not more likely than not it will be required to sell the debt security before the recovery of its amortized cost basis, the amount of the impairment recognized in earnings, recorded in Other (income) expense, net is limited to the portion attributed to credit loss. The remaining portion of the impairment related to other factors is recognized in OCI . Realized gains and losses for debt securities are included in Other (income) expense, net . Investments in publicly traded equity securities are reported at fair value determined using quoted market prices in active markets for identical assets or quoted prices for similar assets or other inputs that are observable or can be corroborated by observable market data. Changes in fair value are included in Other (income) expense, net . Unrealized gains and losses from investments that are directly owned are determined at the end of the reporting period. Gains and losses from ownership interests in investment funds, which are accounted for as equity method investments, are reported on a one quarter lag. Investments in equity securities without readily determinable fair values are recorded at cost, plus or minus subsequent observable price changes in orderly transactions for identical or similar investments, minus impairments. Such adjustments are recognized in Other (income) expense, net . Realized gains and losses for equity securities are included in Other (income) expense, net . Revenue Recognition — Recognition of revenue requires evidence of a contract, probable collection of sales proceeds and completion of substantially all performance obligations. Merck acts as the principal in substantially all of its customer arrangements and therefore records revenue on a gross basis. The majority of the Company’s contracts related to the Pharmaceutical and Animal Health segments have a single performance obligation - the promise to transfer goods. Shipping is considered immaterial in the context of the overall customer arrangement and damages or loss of goods in transit are rare. Therefore, shipping is not deemed a separately recognized performance obligation. The vast majority of revenues from sales of products are recognized at a point in time when control of the goods is transferred to the customer, which the Company has determined is when title and risks and rewards of ownership transfer to the customer and the Company is entitled to payment. The Company recognizes revenue from the sales of vaccines to the Federal government for placement into vaccine stockpiles in accordance with Securities and Exchange Commission (SEC) Interpretation, Commission Guidance Regarding Accounting for Sales of Vaccines and BioTerror Countermeasures to the Federal Government for Placement into the Pediatric Vaccine Stockpile or the Strategic National Stockpile . This interpretation allows companies to recognize revenue for sales of vaccines into U.S. government stockpiles even though these sales might not meet the criteria for revenue recognition under other 76 Table of C o ntent s accounting guidance. For certain services in the Animal Health segment, revenue is recognized over time, generally ratably over the contract term as services are provided. These service revenues are not material. The nature of the Company’s business gives rise to several types of variable consideration including discounts and returns, which are estimated at the time of sale generally using the expected value method, although the most likely amount method is used for prompt pay discounts. In the U.S., sales discounts are issued to customers at the point-of-sale, through an intermediary wholesaler (known as chargebacks), or in the form of rebates. Additionally, sales are generally made with a limited right of return under certain conditions. Revenues are recorded net of provisions for sales discounts and returns, which are established at the time of sale. In addition, if collection of accounts receivable is expected to be in excess of one year, sales are recorded net of time value of money discounts, which have not been material. The U.S. provision for aggregate customer discounts covering chargebacks and rebates was $ 12.5 billion in 2023, $ 12.3 billion in 2022 and $ 12.3 billion in 2021. Chargebacks are discounts that occur when a contracted customer purchases through an intermediary wholesaler. The wholesaler then charges the Company back for the difference between the price initially paid by the wholesaler and the contract price agreed to between Merck and the customer. The provision for chargebacks is based on expected sell-through levels by the Company’s wholesale customers to contracted customers, as well as estimated wholesaler inventory levels. Rebates are amounts owed based upon definitive contractual agreements or legal requirements with private sector and public sector (Medicaid and Medicare Part D) benefit providers after the final dispensing of the product to a benefit plan participant. The provision for rebates is based on expected patient usage, as well as inventory levels in the distribution channel to determine the contractual obligation to the benefit providers. The Company uses historical customer segment utilization mix, sales forecasts, changes to product mix and price, inventory levels in the distribution channel, government pricing calculations and prior payment history in order to estimate the expected provision. Amounts accrued for aggregate customer discounts are evaluated on a quarterly basis through comparison of information provided by the wholesalers, health maintenance organizations, pharmacy benefit managers, federal and state agencies, and other customers to the amounts accrued. The accrued balances relative to the provisions for chargebacks and rebates included in Accounts receivable and Accrued and other current liabilities were $ 188 million and $ 2.3 billion, respectively, at December 31, 2023 and were $ 178 million and $ 2.7 billion, respectively, at December 31, 2022. Outside of the U.S., variable consideration in the form of discounts and rebates are a combination of commercially-driven discounts in highly competitive product classes, discounts required to gain or maintain reimbursement, or legislatively mandated rebates. In certain European countries, legislatively mandated rebates are calculated based on an estimate of the government’s total unbudgeted spending and the Company’s specific payback obligation. Rebates may also be required based on specific product sales thresholds. The Company applies an estimated factor against its actual invoiced sales to represent the expected level of future discount or rebate obligations associated with the sale. The Company maintains a returns policy that allows its U.S. pharmaceutical customers to return product within a specified period prior to and subsequent to the expiration date (generally, three to six months before and 12 months after product expiration). The estimate of the provision for returns is based upon historical experience with actual returns. Additionally, the Company considers factors such as levels of inventory in the distribution channel, product dating and expiration period, whether products have been discontinued, entrance in the market of generic or other competition, changes in formularies or launch of over-the-counter products, among others. Outside of the U.S., returns are only allowed in certain countries on a limited basis. Merck’s payment terms for U.S. pharmaceutical customers are typically 36 days from receipt of invoice and for U.S. animal health customers are typically 30 days from receipt of invoice; however, certain products have longer payment terms, including Keytruda , which has payment terms of 90 days. Payment terms for vaccines sales in the U.S. typically range from 30 to 60 days. Outside of the U.S., payment terms are typically 30 days to 90 days, although certain markets have longer payment terms. See Note 19 for disaggregated revenue disclosures. Depreciation — Depreciation is provided over the estimated useful lives of the assets, principally using the straight-line method. For tax purposes, accelerated tax methods are used. The estimated useful lives primarily range from 25 to 45 years for Buildings , and from 3 to 15 years for Machinery, equipment and office furnishings . Depreciation expense was $ 1.8 billion in 2023, $ 1.8 billion in 2022 and $ 1.6 billion in 2021. 77 Table of C o ntent s Advertising and Promotion Costs — Advertising and promotion costs are expensed as incurred. The Company recorded advertising and promotion expenses of $ 2.3 billion in 2023, $ 2.2 billion in 2022 and $ 2.0 billion in 2021. Software Capitalization — The Company capitalizes certain costs incurred in connection with obtaining or developing internal-use software including external direct costs of material and services, and payroll costs for employees directly involved with the software development. These costs are included in Property, plant and equipment . In addition, the Company capitalizes certain costs incurred to implement a cloud computing arrangement that is considered a service agreement, which are included in Other Assets . Capitalized software costs are being amortized over periods ranging from 2 to 10 years, with the longer lives generally associated with enterprise-wide projects implemented over multiple years. Costs incurred during the preliminary project stage and post-implementation stage, as well as maintenance and training costs, are expensed as incurred. Goodwill — Goodwill represents the excess of the consideration transferred over the fair value of net assets of businesses acquired. Goodwill is assigned to reporting units and evaluated for impairment at least annually, or more frequently if impairment indicators exist, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company concludes it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative fair value test is performed. If the carrying value of a reporting unit is greater than its fair value, a goodwill impairment charge will be recorded for the difference (up to the carrying value of goodwill). Acquired Intangibles — Intangibles acquired in a business combination include product rights, trade names and patents, licenses and other, which are initially recorded at fair value, assigned an estimated useful life, and amortized primarily on a straight-line basis over their estimated useful lives ranging from 2 to 24 years. The Company periodically evaluates whether current facts or circumstances indicate that the carrying values of its acquired intangibles may not be recoverable. If such circumstances are determined to exist, an estimate of the undiscounted future cash flows of these assets, or appropriate asset groupings, is compared to the carrying value to determine whether an impairment exists. If the asset is determined to be impaired, the loss is measured based on the difference between the carrying value of the intangible asset and its fair value, which is determined based on the net present value of estimated future cash flows. Acquired In-Process Research and Development — IPR&D that the Company acquires in conjunction with the acquisition of a business represents the fair value assigned to incomplete research projects which, at the time of acquisition, have not reached technological feasibility. The amounts are capitalized and are accounted for as indefinite-lived intangible assets, subject to impairment testing until completion or abandonment of the projects. Upon successful completion of each IPR&D project, Merck will make a determination as to the then-useful life of the intangible asset, generally determined by the period in which the substantial majority of the cash flows are expected to be generated, and begin amortization. The Company evaluates IPR&D for impairment at least annually, or more frequently if impairment indicators exist, by performing a quantitative test that compares the fair value of the IPR&D intangible asset with its carrying value. If the fair value is less than the carrying amount, an impairment loss is recognized in operating results. Contingent Consideration — Certain of the Company’s acquisitions involve the potential for future payment of consideration that is contingent upon the achievement of performance milestones, including product development milestones and royalty payments on future product sales. If the transaction is accounted for as a business combination, the fair value of contingent consideration liabilities is determined at the acquisition date using unobservable inputs. These inputs include the estimated amount and timing of projected cash flows, the probability of success (achievement of the contingent event) and the risk-adjusted discount rate used to present value the probability-weighted cash flows. Subsequent to the acquisition date, at each reporting period until the contingency is resolved, the contingent consideration liability is remeasured at current fair value with changes (either expense or income) recorded in earnings. Significant events that increase or decrease the probability of achieving development and regulatory milestones or that increase or decrease projected cash flows will result in corresponding increases or decreases in the fair values of the related contingent consideration obligations. Research and Development — Research and development is expensed as incurred. Nonrefundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made. Research and development expenses include restructuring costs and IPR&D impairment charges. In addition, research and development expenses include expense or income related to changes in the estimated fair value measurement of liabilities for contingent consideration associated with IPR&D assets. Research and 78 Table of C o ntent s development expenses also include upfront and milestone payments related to asset acquisitions and licensing transactions involving clinical development programs that have not yet received regulatory approval. Collaborative Arrangements — Merck has entered into collaborative arrangements that provide the Company with varying rights to develop, produce and market products together with its collaborative partners. When Merck is the principal on sales transactions with third parties, the Company recognizes sales, cost of sales and selling, general and administrative expenses on a gross basis. Profit sharing amounts it pays to its collaborative partners are recorded within Cost of sales . When the collaborative partner is the principal on sales transactions with third parties, the Company records profit sharing amounts received from its collaborative partners as alliance revenue (within Sales ). Alliance revenue is recorded net of cost of sales and includes an adjustment to share commercialization costs between the partners in accordance with the collaboration agreement. The adjustment is determined by comparing the commercialization costs Merck has incurred directly and reported within Selling, general and administrative expenses with the costs the collaborative partner has incurred. Research and development costs Merck incurs related to collaborations are recorded within Research and development expenses. Cost reimbursements to the collaborative partner or payments received from the collaborative partner to share these costs pursuant to the terms of the collaboration agreements are recorded as increases or decreases to Research and development expenses. In addition, the terms of the collaboration agreements may require the Company to make payments based upon the achievement of certain developmental, regulatory approval or commercial milestones. Upfront and milestone payments payable by Merck to collaborative partners prior to regulatory approval are expensed as incurred and included in Research and development expenses. Payments due to collaborative partners upon or subsequent to regulatory approval are capitalized and amortized to Cost of sales over the estimated useful life of the corresponding intangible asset, provided that future cash flows support the amounts capitalized. Sales-based milestones payable by Merck to collaborative partners are accrued and capitalized, subject to cumulative amortization catch-up, when determined to be probable of being achieved by the Company. The amortization catch-up is calculated either from the time of the first regulatory approval for indications that were unapproved at the time the collaboration was formed, or from the time of the formation of the collaboration for approved products. The related intangible asset that is recognized is amortized to Cost of sales over its remaining useful life, subject to impairment testing. Share-Based Compensation — The Company expenses all share-based payments to employees over the requisite service period based on the grant-date fair value of the awards. Restructuring Costs — The Company records liabilities for costs associated with exit or disposal activities in the period in which the liability is incurred. In accordance with existing benefit arrangements, future employee termination costs to be incurred in conjunction with involuntary separations are accrued when such separations are probable and estimable. When accruing these costs, the Company will recognize the amount within a range of costs that is the best estimate within the range. When no amount within the range is a better estimate than any other amount, the Company recognizes the minimum amount within the range. Costs for one-time termination benefits in which the employee is required to render service until termination in order to receive the benefits are recognized ratably over the future service period. Contingencies and Legal Defense Costs — The Company records accruals for contingencies and legal defense costs expected to be incurred in connection with a loss contingency when it is probable that a liability has been incurred and the amount can be reasonably estimated. Taxes on Income — Deferred taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting based on enacted tax laws and rates. The Company evaluates tax positions to determine whether the benefits of tax positions are more likely than not of being sustained upon audit based on the technical merits of the tax position. For tax positions that are more likely than not of being sustained upon audit, the Company recognizes the amount of the benefit that is greater than 50% likely of being realized upon ultimate settlement in the financial statements. For tax positions that are not more likely than not of being sustained upon audit, the Company does not recognize any portion of the benefit in the financial statements. The Company recognizes interest and penalties associated with uncertain tax positions as a component of Taxes on Income from Continuing Operations . The Company accounts for the tax effects of the tax on global intangible low-taxed income (GILTI) of certain foreign subsidiaries in the income tax provision in the period the tax arises. The Company’s policy for releasing disproportionate income tax effects from AOCL is to utilize the item-by-item approach. Reclassifications — Certain reclassifications have been made to prior year amounts to conform to the current year presentation. 79 Table of C o ntent s Use of Estimates — The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the U.S. (GAAP) and, accordingly, include certain amounts that are based on management’s best estimates and judgments. Estimates are used when accounting for amounts recorded in connection with acquisitions, including initial fair value determinations of assets and liabilities in a business combination (primarily IPR&D, other intangible assets and contingent consideration), as well as subsequent fair value measurements. Additionally, estimates are used in determining such items as provisions for sales discounts, rebates and returns, depreciable and amortizable lives, recoverability of inventories, including those produced in preparation for product launches, amounts recorded for contingencies, environmental liabilities, accruals for contingent sales-based milestone payments and other reserves, pension and other postretirement benefit plan assumptions, share-based compensation assumptions, restructuring costs, impairments of long-lived assets (including intangible assets and goodwill) and investments, and taxes on income. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates. Recently Adopted Accounting Standards — 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. The adoption of this guidance did not have an impact on the Company’s consolidated financial statements for prior acquisitions; however, the impact in future periods will be dependent upon the contract assets and contract liabilities acquired in future business combinations. 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 Company adopted the guidance effective July 1, 2023. There was no impact to the Company’s consolidated financial statements upon adoption. Recently Issued Accounting Standards 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. In November 2023, the FASB issued guidance intended to improve reportable segment disclosure requirements, primarily through expanded disclosures for significant segment expenses. The guidance is effective for annual periods beginning in 2024, and interim periods beginning in 2025. Early adoption is permitted. The guidance will result in incremental disclosures to the Company’s segment reporting disclosures. In December 2023, the FASB issued guidance intended to improve the transparency of income tax disclosures by requiring consistent categories and disaggregation of information in the effective income tax rate reconciliation and income taxes paid disclosures by jurisdiction. The guidance also includes other amendments to improve the effectiveness of income tax disclosures by removing certain previously required disclosures. The guidance is effective for 2025 annual reporting. Early adoption is permitted. The Company is currently evaluating the impact of adoption on the disclosures within its consolidated financial statements. 3. 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; 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. Recent Transactions In February 2024, Merck entered into a definitive agreement to acquire the aqua business of Elanco Animal Health Incorporated (Elanco) for $ 1.3 billion in cash. The Elanco aqua business to be acquired consists of an 80 Table of C o ntent s innovative portfolio of medicines and vaccines, nutritionals and supplements for aquatic species; two related aqua manufacturing facilities in Canada and Vietnam; as well as a research facility in Chile. Upon closing, the acquisition will broaden Merck Animal Health’s aqua portfolio with products, such as Clynav, a new generation DNA-based vaccine that protects Atlantic salmon against pancreas disease, and Imvixa, an anti-parasitic sea lice treatment. This acquisition also brings a portfolio of water treatment products for warm water production, complementing Merck Animal Health’s warm water vaccine portfolio. In addition to these products, the DNA-based vaccine technology that is a part of the business has the potential to accelerate the development of novel vaccines to address the unmet needs of the aqua industry. The acquisition is expected to be completed by mid-2024, subject to approvals from regulatory authorities and other customary closing conditions. The transaction will be accounted for as an acquisition of a business. In January 2024, Merck entered into an agreement to acquire Harpoon Therapeutics, Inc. (Harpoon), a clinical-stage immunotherapy company developing a novel class of T-cell engagers designed to harness the power of the body’s immune system to treat patients suffering from cancer and other diseases. Under the terms of the agreement, Merck will acquire all outstanding shares of Harpoon for $ 23 per share in cash, for an approximate total equity value of $ 680 million. Harpoon’s lead candidate, HPN328, is a T-cell engager targeting delta-like ligand 3 (DLL3), an inhibitory canonical Notch ligand that is expressed at high levels in small-cell lung cancer and neuroendocrine tumors. HPN328 is currently being evaluated in a Phase 1/2 clinical trial as a monotherapy in patients with advanced cancers associated with expression of DLL3 and also in combination with atezolizumab in patients with certain types of small-cell lung cancer. Closing of the acquisition is expected in the first half of 2024, but is subject to certain conditions, including approval of the merger by Harpoon’s stockholders, the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act, and other customary conditions. If the proposed transaction closes, the Company anticipates it will be accounted for as an acquisition of an asset since HPN328 accounts for substantially all of the fair value of the gross assets to be acquired (excluding cash and deferred income taxes). The Company expects to record a charge of approximately $ 650 million to Research and development expenses upon closing. 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 4 for additional information related to this collaboration. 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. 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, tulisokibart, 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. Tulisokibart is being developed for the treatment of immune-mediated diseases including ulcerative colitis, Crohn’s disease, and other autoimmune conditions. A Phase 3 clinical trial evaluating tulisokibart for ulcerative colitis commenced in 2023. The transaction was accounted for as an acquisition of an asset since tulisokibart 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 a charge of $ 10.2 billion to Research and development expenses in 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 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 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 shares in January 2023. 81 Table of C o ntent s 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 clinical trials for the treatment of essential thrombocythemia, myelofibrosis, and polycythemia vera, in addition to other indications. A Phase 3 clinical trial evaluating bomedemstat for the treatment of certain patients with essential thrombocythemia is underway. 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 a charge of $ 1.2 billion to Research and development expenses in 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). See Note 4 for additional information related to this collaboration. 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 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 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 3 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 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 development of the investigational ADC. Merck made an upfront payment of $ 35 million, which was recorded in Research and development expenses in 2022. Kelun-Biotech is also eligible to receive future contingent milestone payments aggregating up to $ 82 million in developmental milestones, $ 334 million 82 Table of C o ntent s 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 3 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 2022. Additionally, Merck made an additional payment of $ 25 million upon technology transfer in 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 December 31, 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. 2021 Transactions In November 2021, Merck acquired Acceleron Pharma Inc. (Acceleron), a publicly traded biopharmaceutical company, for total consideration of $ 11.5 billion. Acceleron’s development work focused on evaluating the transforming growth factor (TGF)-beta superfamily of proteins that is known to play a central role in the regulation of cell growth, differentiation and repair. Acceleron’s lead therapeutic candidate, sotatercept (MK-7962), has a novel mechanism of action with the potential to improve short-term and/or long-term clinical outcomes in patients with pulmonary arterial hypertension (PAH). Sotatercept is under priority review in the U.S. and is also under review in the European Union (EU) for the treatment of certain adult patients with PAH. Under a previous agreement assumed by Merck, Bristol-Myers Squibb Company (BMS) was granted an exclusive license to develop and commercialize sotatercept outside of the pulmonary hypertension (PH) field (for which Merck would be eligible to receive contingent milestones and royalty payments), however, Merck retains the worldwide exclusive rights to develop and commercialize sotatercept in the PH field. The agreement provides for Merck to pay 22 % royalties on future sales of sotatercept in the PH field to BMS. In addition to sotatercept, Acceleron’s portfolio included Reblozyl (luspatercept), which is being developed and commercialized through a global collaboration with BMS. See Note 4 for additional information related to this collaboration. The transaction was accounted for as a business combination. The Company incurred $ 280 million of costs directly related to the acquisition of Acceleron, consisting primarily of share-based compensation payments to settle non-vested equity awards attributable to postcombination service, severance, as well as investment banking and legal fees. These costs were included in Selling, general and administrative expenses and Research and development costs in 2021. The estimated fair value of assets acquired and liabilities assumed from Acceleron (inclusive of measurement period adjustments) is as follows: November 19, 2021 Cash and cash equivalents $ 340 Investments 285 Identifiable intangible assets: (1) IPR&D - sotatercept 6,380 Product rights - Reblozyl ( 12 year useful life) 3,830 Deferred income tax liabilities, net ( 1,814 ) Other assets and liabilities, net 82 Total identifiable net assets 9,103 Goodwill (2) 2,411 Consideration transferred $ 11,514 (1) The estimated fair value of the identifiable intangible assets related to sotatercept and Reblozyl were determined using an income approach, specifically the multi-period excess earnings method. The future probability-weighted net cash flows were discounted to present value utilizing a discount rate of 7.5 % for sotatercept and 6.0 % for Reblozyl. Actual cash flows are likely to be different than those assumed. (2) The goodwill recognized is largely attributable to anticipated synergies expected to arise after the acquisition and was allocated to the Pharmaceutical segment. The goodwill is not deductible for tax purposes. 83 Table of C o ntent s In April 2021, Merck acquired Pandion Therapeutics, Inc. (Pandion), a clinical-stage biotechnology company developing novel therapeutics designed to address the unmet needs of patients living with autoimmune diseases. Pandion’s development work focused on advancing a pipeline of precision immune modulators targeting critical immune control nodes. Total consideration paid of $ 1.9 billion included $ 147 million of costs primarily comprised of share-based compensation payments to settle equity awards. The transaction was accounted for as an acquisition of an asset. Merck recorded net assets of $ 156 million (primarily cash) and a charge of $ 1.7 billion to Research and development expenses in 2021 related to the transaction. There are no future contingent payments associated with the acquisition. In March 2021, Merck and Gilead Sciences, Inc. (Gilead) entered into an agreement to jointly develop and commercialize long-acting treatments in HIV that combine Merck’s investigational nucleoside reverse transcriptase translocation inhibitor, islatravir, and Gilead’s investigational capsid inhibitor, lenacapavir. There was no upfront payment made by either party upon entering into the agreement. The initial focus of the collaboration has been on long-acting oral formulations and long-acting injectable formulations of these combination products, with other formulations potentially added to the collaboration as mutually agreed. The parties continue to study a long-acting oral formulation of these combination products but have terminated the studies of long-acting injectable formulations of these combination products. Furthermore, Merck and Gilead subsequently amended the agreement to include the joint development and commercialization of a long-acting injectable formulation of lenacapavir with GS-1614, a development candidate resulting from a collaboration between Scripps Research and Gilead that is a novel prodrug of islatravir. Under the terms of the agreement, Merck and Gilead will share operational responsibilities, as well as development, commercialization and marketing costs, and any future revenues. Global development and commercialization costs will be shared 60 % Gilead and 40 % Merck across the oral and injectable formulation programs. For long-acting oral products, Gilead will lead commercialization in the U.S. and Merck will lead commercialization in the EU and the rest of the world. For long-acting injectable products, Merck will lead commercialization in the U.S. and Gilead will lead commercialization in the EU and the rest of the world. Gilead and Merck will co-promote in the U.S. and certain other major markets. Merck and Gilead will share global product revenues equally until product revenues surpass certain pre-agreed per formulation revenue tiers. Upon passing $ 2.0 billion a year in net product sales for the oral combination, the revenue split will adjust to 65 % Gilead and 35 % Merck for any revenues above the threshold. Upon passing $ 3.5 billion a year in net product sales for the injectable combination, the revenue split will adjust to 65 % Gilead and 35 % Merck for any revenues above the threshold. Beyond the potential combinations of investigational lenacapavir and investigational islatravir, Gilead will have the option to license certain of Merck’s investigational oral integrase inhibitors to develop in combination with lenacapavir. Reciprocally, Merck will have the option to license certain of Gilead’s investigational oral integrase inhibitors to develop in combination with islatravir. Each company may exercise its option for an investigational oral integrase inhibitor of the other company following completion of the first Phase 1 clinical trial of that integrase inhibitor. Upon exercise of an option, the companies will split development costs and revenues, unless the non-exercising company decides to opt-out. In December 2021, the U.S. Food and Drug Administration (FDA) placed full or partial clinical holds on investigational new drug applications for certain oral, implant and injectable formulations of islatravir based on observations of decreases in total lymphocyte and CD4+ T-cell counts in some participants receiving islatravir in clinical studies. In 2023, the Phase 2 clinical trial evaluating an oral once-weekly combination of a lower dose of islatravir and lenacapavir in virologically suppressed adults completed enrollment. The investigational new drug application for the islatravir + lenacapavir once-weekly treatment regimen remains under a partial clinical hold for any studies that would use islatravir doses higher than the doses considered for the revised clinical program. The Company remains committed to developing compounds for long-acting HIV prevention and believes in the potential of the nucleoside reverse transcriptase translocation inhibitor (NRTTI) mechanism. 4. Collaborative Arrangements Merck has entered into collaborative arrangements that provide the Company with varying rights to develop, produce and market products together with its collaborative partners. Both parties in these arrangements are active participants and exposed to significant risks and rewards dependent on the commercial success of the activities of the collaboration. Merck’s more significant collaborative arrangements are discussed below. 84 Table of C o ntent s 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. Independently, Merck and AstraZeneca will develop and commercialize Lynparza in combinations with their respective PD-1 and PD-L1 medicines, Keytruda and Imfinzi. The companies are also jointly developing and commercializing AstraZeneca’s Koselugo (selumetinib) for multiple indications. Under the terms of the agreement, AstraZeneca and Merck will share the development and commercialization costs for Lynparza and Koselugo monotherapy and non-PD-L1/PD-1 combination therapy opportunities. Profits from Lynparza and Koselugo product sales generated through monotherapies or combination therapies are shared equally. AstraZeneca is the principal on Lynparza and Koselugo sales transactions. Merck records its share of Lynparza and Koselugo product sales, net of cost of sales and commercialization costs, as alliance revenue, and its share of development costs associated with the collaboration as part of Research and development expenses. Reimbursements received from AstraZeneca for research and development expenses are recognized as reductions to Research and development costs. As part of the agreement, Merck made an upfront payment to AstraZeneca and also made payments over a multi-year period for certain license options. In addition, the agreement provides for contingent payments from Merck to AstraZeneca related to the successful achievement of sales-based and regulatory milestones. Merck made a sales-based milestone payment to AstraZeneca of $ 400 million in 2022 (which had been previously accrued for). Additionally, in 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 December 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 2022. 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. Lynparza received regulatory approvals triggering capitalized milestone payments of $ 105 million and $ 250 million in 2023 and 2022, respectively, from Merck to AstraZeneca. In January 2024, Merck made an additional $ 245 million regulatory milestone payment to AstraZeneca. 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 $ 1.5 billion at December 31, 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. Summarized financial information related to this collaboration is as follows: Years Ended December 31 2023 2022 2021 Alliance revenue - Lynparza $ 1,199 $ 1,116 $ 989 Alliance revenue - Koselugo 97 54 29 Total alliance revenue $ 1,296 $ 1,170 $ 1,018 Cost of sales (1) 311 492 167 Selling, general and administrative 192 185 178 Research and development 79 106 120 December 31 2023 2022 Receivables from AstraZeneca included in Other current assets $ 341 $ 303 Payables to AstraZeneca included in Accrued and other current liabilities (2) 256 123 Payables to AstraZeneca included in Other Noncurrent Liabilities (2) 600 600 (1) Represents amortization of capitalized milestone payments. Amount in 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. (Eisai) announced a strategic collaboration for the worldwide co-development and co-commercialization of Lenvima (lenvatinib), an orally available tyrosine kinase inhibitor 85 Table of C o ntent s discovered by Eisai. Under the agreement, Merck and Eisai will develop and commercialize Lenvima jointly, both as monotherapy and in combination with Keytruda . Eisai records Lenvima product sales globally (Eisai is the principal on Lenvima sales transactions) and Merck and Eisai share applicable profits equally. Merck records its share of Lenvima product sales, net of cost of sales and commercialization costs, as alliance revenue. Expenses incurred during co-development are shared by the two companies in accordance with the collaboration agreement and reflected in Research and development expenses. Certain expenses incurred solely by Merck or Eisai are not shareable under the collaboration agreement, including costs incurred in excess of agreed upon caps and costs related to certain combination studies of Keytruda and Lenvima. Under the agreement, Merck made an upfront payment to Eisai and also made payments over a multi-year period for certain option rights. In addition, the agreement provides for contingent payments from Merck to Eisai related to the successful achievement of sales-based and regulatory milestones. Merck made sales-based milestone payments to Eisai aggregating $ 125 million, $ 600 million and $ 200 million in 2023, 2022 and 2021, respectively. In 2023, Merck determined it was probable that sales of Lenvima in the future would trigger $ 250 million of sales-based milestone payments from Merck to Eisai. Accordingly, Merck recorded $ 250 million of liabilities (of which $ 125 million was subsequently paid in 2023 as noted above and $ 125 million remained accrued at December 31, 2023) and corresponding increases to the intangible asset related to Lenvima. Merck also recognized $ 154 million of cumulative amortization catch-up expense related to the recognition of these milestones in 2023. 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 and 2021, Lenvima received regulatory approvals triggering capitalized milestone payments of $ 50 million and $ 75 million, respectively, from Merck to Eisai. 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 $ 683 million at December 31, 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. Summarized financial information related to this collaboration is as follows: Years Ended December 31 2023 2022 2021 Alliance revenue - Lenvima $ 960 $ 876 $ 704 Cost of sales (1) 381 212 195 Selling, general and administrative 189 158 127 Research and development 66 136 173 December 31 2023 2022 Receivables from Eisai included in Other current assets $ 226 $ 214 Payables to Eisai included in Accrued and other current liabilities (2) 125 — (1) Represents amortization of capitalized milestone payments. Amount in 2023 includes $ 154 million of cumulative amortization catch-up expense as noted above. (2) Represents an accrued milestone payment. Bayer AG 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). The two companies have implemented a joint development and commercialization strategy. The collaboration also includes development of Bayer’s Verquvo (vericiguat), which was approved in the U.S., the EU and Japan in 2021 and has since been approved in several other markets. Under the agreement, Bayer commercializes Adempas in the Americas, while Merck commercializes in the rest of the world. For Verquvo, Merck commercializes in the U.S. and Bayer commercializes in the rest of the world. Both companies share in development costs and profits on sales. Merck records sales of Adempas and Verquvo in its marketing territories, as well as alliance revenue. Alliance revenue represents Merck’s share of profits from sales of Adempas and Verquvo in Bayer’s marketing territories, which are product sales net of cost of sales and commercialization costs. Cost of sales includes Bayer’s share of profits from sales in Merck’s marketing territories. 86 Table of C o ntent s In addition, the agreement provided for contingent payments from Merck to Bayer related to the successful achievement of sales-based milestones. In 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 $ 526 million and $ 52 million, respectively, at December 31, 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. Summarized financial information related to this collaboration is as follows: Years Ended December 31 2023 2022 2021 Alliance revenue - Adempas/Verquvo $ 367 $ 341 $ 342 Net sales of Adempas recorded by Merck 255 238 252 Net sales of Verquvo recorded by Merck 36 22 7 Total sales $ 658 $ 601 $ 601 Cost of sales (1) 224 210 424 Selling, general and administrative 131 153 126 Research and development 90 75 53 December 31 2023 2022 Receivables from Bayer included in Other current assets $ 156 $ 143 Payables to Bayer included in Accrued and other current liabilities 80 80 (1) Includes amortization of intangible assets. Amount in 2021 includes $ 153 million of cumulative amortization catch-up expense. Ridgeback Biotherapeutics LP 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. 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. The agreement also provides for Merck to reimburse Ridgeback for a portion of certain third-party contingent milestone payments and royalties on net sales, which is part of the profit-sharing calculation. Merck is the principal on sales transactions, recognizing sales and related costs, with profit-sharing amounts recorded within Cost of sales . Profits from the collaboration are split equally between the partners. Reimbursements from Ridgeback for its share of research and development costs (deducted from Ridgeback’s share of profits) are reflected as decreases to Research and development expenses. Summarized financial information related to this collaboration is as follows: Years Ended December 31 2023 2022 2021 Net sales of Lagevrio recorded by Merck $ 1,428 $ 5,684 $ 952 Cost of sales (1) 852 3,038 502 Selling, general and administrative 97 147 37 Research and development 60 88 137 December 31 2023 2022 Payables to Ridgeback included in Accrued and other current liabilities (2) $ 113 $ 348 (1) Includes royalty expense, amortization of capitalized milestone payments and inventory reserves. (2) Includes accrued royalties. Amount at December 31, 2022 also includes an accrued milestone payment . 87 Table of C o ntent s Bristol-Myers Squibb Company Reblozyl (luspatercept-aamt) is a first-in-class erythroid maturation recombinant fusion protein obtained as part of Merck’s November 2021 acquisition of Acceleron that is being commercialized through a global collaboration with 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. BMS is the principal on sales transactions for Reblozyl; however, Merck co-promotes Reblozyl (and will co-promote all future products approved under this collaboration) in North America, which is reimbursed by BMS. Merck receives a 20 % sales royalty from BMS which could increase to a maximum of 24 % based on sales levels. This royalty will be reduced by 50 % upon the earlier of patent expiry or generic entry on an indication-by-indication basis in each market. 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 2022, also includes the receipt of a regulatory approval milestone payment of $ 20 million. Merck recorded alliance revenue related to this collaboration of $ 212 million in 2023, $ 166 million in 2022 and $ 17 million in 2021. Moderna, Inc. 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, which resulted in a $ 250 million payment that was charged to Research and development expenses in 2022. V940 (mRNA-4157) is currently being evaluated in combination with Keytruda in multiple Phase 3 clinical trials. Merck and Moderna will share costs and any profits equally under this worldwide collaboration. Merck records its share of development costs associated with the collaboration as part of Research and development expenses. Any reimbursements received from Moderna for research and development expenses will be recognized as reductions to Research and development costs. Summarized financial information related to this collaboration is as follows: Years Ended December 31 2023 2022 Selling, general and administrative $ 5 $ — Research and development (1) 218 288 December 31 2023 2022 Payables to Moderna included in Accrued and other current liabilities $ 63 $ 7 (1) Expenses in 2022 include the $ 250 million option payment noted above. 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. If Merck does not make the continuation payments on the dates noted for either patritumab deruxtecan or raludotatug deruxtecan, the rights for the applicable program will revert to Daiichi Sankyo and the non-refundable upfront payments already paid will be retained by 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 5 % 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 and 50 % of excess allowable research and development expenses; the companies will share equally all 88 Table of C o ntent s other 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 recorded an aggregate pretax charge of $ 5.5 billion to Research and development expenses in 2023 for the $ 4.0 billion of upfront payments and the $ 1.5 billion of continuation payments. Merck determined it was appropriate to expense the $ 1.0 billion refundable portion of the consideration because the significant number of clinical studies currently underway and planned in the near future, as well as certain studies in advanced stages, makes it highly likely that the programs will continue to progress and incur substantial expenses, and therefore the likelihood of the programs terminating before the end of the refundable period is remote. Merck also determined that it was appropriate to expense the continuation payments upon execution of the agreement because such payments do not result in the Company gaining any additional intellectual property rights. In addition, the significant number of ongoing and planned clinical studies and the short-term nature of the option period makes the likelihood of Merck not making these payments remote. 5. Spin-Off of Organon & Co. On June 2, 2021, Merck completed the spin-off of Organon through a distribution of Organon’s publicly traded stock to Company shareholders. In connection with the spin-off, each Merck shareholder received one-tenth of a share of Organon’s common stock for each share of Merck common stock held by such shareholder. The distribution has been treated as tax free to Merck and its shareholders for U.S. federal income tax purposes. Indebtedness of $ 9.5 billion principal amount, consisting of term loans and senior notes, was issued in 2021 in connection with the spin-off and assumed by Organon. Merck is no longer the obligor of any Organon debt or financing arrangements. Cash proceeds of $ 9.0 billion were distributed by Organon to Merck in connection with the spin-off. Also in connection with the spin-off, Merck and Organon entered into a separation and distribution agreement and also entered into various other agreements to effect the spin-off and provide a framework for the relationship between Merck and Organon after the spin-off, including a transition services agreement (TSA), manufacturing and supply agreements (MSAs), trademark license agreements, intellectual property license agreements, an employee matters agreement, a tax matters agreement and certain other commercial agreements. Under the TSA, Merck is providing Organon various services and, similarly, Organon is providing Merck various services. 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 continued to market, import and distribute such products until such time as the relevant licenses and permits transferred to Organon. Under such interim operating agreements and in accordance with the separation and distribution agreement, Merck continued operations in the affected markets on behalf of Organon, with Organon receiving all of the economic benefits and burdens of such activities. As of December 31, 2023, only one jurisdiction remains under an interim operating agreement. Additionally, Merck and Organon entered into a number of MSAs pursuant to which Merck is (a) manufacturing and supplying certain active pharmaceutical ingredients for Organon, (b) manufacturing and supplying certain formulated pharmaceutical products for Organon, and (c) packaging and labeling certain finished pharmaceutical products for Organon. Similarly, Organon and Merck entered into a number of MSAs pursuant to which Organon is (a) manufacturing and supplying certain formulated pharmaceutical products for Merck, and (b) packaging and labeling certain finished pharmaceutical products for Merck. The terms of the MSAs range in initial duration from four years to ten years . The amounts included in the consolidated statement of income for the above MSAs include sales of $ 394 million, $ 383 million and $ 219 million in 2023, 2022 and 2021, respectively, and related cost of sales of $ 422 million, $ 404 million and $ 195 million in 2023, 2022 and 2021, respectively. Amounts included in the consolidated statement of income for the TSAs were immaterial in 2023, 2022 and 2021. The amounts due from Organon under all of the above agreements were $ 632 million and $ 511 million at December 31, 2023 and 2022, respectively, and are reflected in Other current assets . The amounts due to Organon under these agreements were $ 598 million and $ 345 million at December 31, 2023 and 2022, respectively, and are included in Accrued and other current liabilities . The results of the women’s health, biosimilars and established brands businesses (previously included in the Pharmaceutical segment) that were contributed to Organon in the spin-off, as well as interest expense related to the debt issuance in 2021, have been reflected as discontinued operations in the Company’s consolidated statement of income as Income from Discontinued Operations, Net of Taxes and Amounts Attributable to Noncontrolling Interests for periods prior to the spin-off on June 2, 2021. Merck incurred separation costs of $ 556 million in 2021 related to the spin-off of Organon, which are also included in Income from Discontinued Operations, Net of Taxes and 89 Table of C o ntent s Amounts Attributable to Noncontrolling Interests . These costs primarily relate to professional fees for separation activities within finance, tax, legal and information technology functions, as well as investment banking fees. Details of Income from Discontinued Operations, Net of Taxes and Amounts Attributable to Noncontrolling Interests are as follows: Year Ended December 31 2021 (1) Sales $ 2,512 Costs, Expenses and Other Cost of sales 789 Selling, general and administrative 877 Research and development 103 Restructuring costs 1 Other (income) expense, net ( 15 ) 1,755 Income from discontinued operations before taxes 757 Tax provision 50 Income from discontinued operations, net of taxes 707 Less: Income of discontinued operations attributable to noncontrolling interests 3 $ 704 (1) Reflects amounts through the June 2, 2021 spin-off date. 6. Restructuring 2024 Restructuring Program In January 2024, the Company approved a new restructuring program (2024 Restructuring Program) intended to continue the optimization of the Company’s Human Health global manufacturing network as the future pipeline shifts to new modalities and also optimize the Animal Health global manufacturing network to improve supply reliability and increase efficiency. The actions contemplated under the 2024 Restructuring Program are expected to be substantially completed by the end of 2031, with the cumulative pretax costs to be incurred by the Company to implement the program estimated to be approximately $ 4.0 billion. Approximately 60 % of the cumulative pretax costs will be non-cash, relating primarily to the accelerated depreciation of facilities to be closed or divested. The remainder of the costs will result in cash outlays, relating primarily to facility shut-down costs. The Company recorded total pretax costs of $ 190 million in 2023 related to the 2024 Restructuring Program. 2019 Restructuring Program In 2019, Merck approved a global restructuring program (2019 Restructuring Program) as part of a worldwide initiative focused on optimizing the Company’s manufacturing and supply network, as well as reducing its global real estate footprint. The Company recorded total pretax costs of $ 743 million in 2023, $ 666 million in 2022 and $ 868 million in 2021 related to the 2019 Restructuring Program. Since inception of the 2019 Restructuring Program through December 31, 2023, Merck recorded total pretax accumulated costs of approximately $ 4.1 billion. Approximately 70 % of the cumulative pretax costs were cash outlays, primarily related to employee separation expense and facility shut-down costs. Approximately 30 % of the cumulative pretax costs were non-cash, relating primarily to the accelerated depreciation of facilities to be closed or divested. The actions under the 2019 Restructuring Program are substantially complete. For segment reporting, restructuring charges are unallocated expenses. 90 Table of C o ntent s The following table summarizes the charges related to the restructuring programs by type of cost: Separation Costs Accelerated Depreciation Other Exit Costs Total Year Ended December 31, 2023 2024 Restructuring Program Cost of sales $ — $ — $ 62 $ 62 Restructuring costs 115 — 13 128 115 — 75 190 2019 Restructuring Program Cost of sales — 131 18 149 Selling, general and administrative — 9 113 122 Research and development — — 1 1 Restructuring costs 339 — 132 471 339 140 264 743 $ 454 $ 140 $ 339 $ 933 Year Ended December 31, 2022 2019 Restructuring Program Cost of sales $ — $ 72 $ 133 $ 205 Selling, general and administrative — 19 75 94 Research and development — 29 1 30 Restructuring costs 212 — 125 337 $ 212 $ 120 $ 334 $ 666 Year Ended December 31, 2021 2019 Restructuring Program Cost of sales $ — $ 52 $ 108 $ 160 Selling, general and administrative — 12 7 19 Research and development — 27 1 28 Restructuring costs 451 — 210 661 $ 451 $ 91 $ 326 $ 868 Separation costs are associated with actual headcount reductions, as well as involuntary headcount reductions which were probable and could be reasonably estimated. Accelerated depreciation costs primarily relate to manufacturing, research and administrative facilities and equipment to be sold or closed as part of the programs. Accelerated depreciation costs represent the difference between the depreciation expense to be recognized over the revised useful life of the asset, based upon the anticipated date the site will be closed or divested or the equipment disposed of, and depreciation expense as determined utilizing the useful life prior to the restructuring actions. All the sites have and will continue to operate up through the respective closure dates and, since future undiscounted cash flows are sufficient to recover the respective book values, Merck is recording accelerated depreciation over the revised useful life of the site assets. Anticipated site closure dates, particularly related to manufacturing locations, have been and may continue to be adjusted to reflect changes resulting from regulatory or other factors. Other exit costs in 2023, 2022 and 2021 include asset abandonment, facility shut-down and other related costs, as well as pretax gains and losses resulting from the sales of facilities and related assets. Additionally, other activity includes certain employee-related costs associated with pension and other postretirement benefit plans (see Note 14) and share-based compensation. 91 Table of C o ntent s The following table summarizes the charges and spending relating to restructuring program activities by program: Separation Costs Accelerated Depreciation Other Exit Costs Total 2024 Restructuring Program Restructuring reserves January 1, 2023 $ — $ — $ — $ — Expenses 115 — 75 190 (Payments) receipts, net — — ( 13 ) ( 13 ) Non-cash activity — — ( 62 ) ( 62 ) Restructuring reserves December 31, 2023 $ 115 $ — $ — $ 115 2019 Restructuring Program Restructuring reserves January 1, 2022 $ 596 $ — $ 41 $ 637 Expenses 212 120 334 666 (Payments) receipts, net ( 329 ) — ( 120 ) ( 449 ) Non-cash activity — ( 120 ) ( 221 ) ( 341 ) Restructuring reserves December 31, 2022 479 — 34 513 Expenses 339 140 264 743 (Payments) receipts, net ( 252 ) — ( 145 ) ( 397 ) Non-cash activity — ( 140 ) ( 122 ) ( 262 ) Restructuring reserves December 31, 2023 $ 566 $ — $ 31 $ 597 7. Financial Instruments Derivative Instruments and Hedging Activities The Company manages the impact of foreign exchange rate movements and interest rate movements on its earnings, cash flows and fair values of assets and liabilities through operational means and through the use of various financial instruments, including derivative instruments. A significant portion of the Company’s revenues and earnings in foreign affiliates is exposed to changes in foreign exchange rates. The objectives of and accounting related to the Company’s foreign currency risk management program, as well as its interest rate risk management activities are discussed below. Foreign Currency Risk Management 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. 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. dollar value of future cash flows derived from foreign currency denominated sales, primarily the euro, Japanese yen and Chinese renminbi. To achieve this objective, the Company will hedge a portion of its forecasted foreign currency denominated third-party and intercompany distributor entity sales (forecasted sales) that are expected to occur over its planning cycle, typically no more than two years into the future. The Company will layer in hedges over time, increasing the portion of forecasted sales hedged as it gets closer to the expected date of the forecasted sales. The portion of forecasted sales hedged is based on assessments of cost-benefit profiles that consider natural offsetting exposures, revenue and exchange rate volatilities and correlations, and the cost of hedging instruments. The Company manages its anticipated transaction exposure principally with purchased local currency put options, forward contracts, and purchased collar options. The fair values of these derivative contracts are recorded as either assets (gain positions) or liabilities (loss positions) in the Consolidated Balance Sheet. Changes in the fair value of derivative contracts are recorded each period in either current earnings or OCI depending on whether the derivative is designated as part of a hedge transaction and, if so, the type of hedge transaction. For derivatives that are designated as cash flow hedges, the unrealized gains or losses on these contracts are recorded in AOCL and reclassified into Sales when the hedged anticipated revenue is recognized. For those derivatives which are not designated as cash flow hedges, but serve as economic hedges of forecasted sales, unrealized gains or losses are recorded in Sales each period. The cash flows from both designated and non-designated contracts are reported as operating activities in the Consolidated Statement of Cash Flows. The Company does not enter into derivatives for trading or speculative purposes. 92 Table of C o ntent s The Company manages operating activities and net asset positions at each local subsidiary in order to mitigate the effects of exchange on monetary assets and liabilities. Monetary assets and liabilities denominated in a currency other than the functional currency of a given subsidiary are remeasured at spot rates in effect on the balance sheet date with the effects of changes in spot rates reported in Other (income) expense, net . The Company also uses a balance sheet risk management program to mitigate the exposure of such assets and liabilities from the effects of volatility in foreign exchange. Merck principally utilizes forward exchange contracts to offset the effects of exchange on exposures when it is deemed economical to do so based on a cost-benefit analysis that considers the magnitude of the exposure, the volatility of the exchange rate and the cost of the hedging instrument (primarily the euro, Swiss franc, Japanese yen, and Chinese renminbi). The forward contracts are not designated as hedges and are marked to market through Other (income) expense, net . Accordingly, fair value changes in the forward contracts help mitigate the changes in the value of the remeasured assets and liabilities attributable to changes in foreign currency exchange rates, except to the extent of the spot-forward differences. These differences are not significant due to the short-term nature of the contracts, which typically have average maturities at inception of less than six months . The cash flows from these contracts are reported as operating activities in the Consolidated Statement of Cash Flows. The Company also uses forward exchange contracts to hedge a portion of its net investment in foreign operations against movements in exchange rates. 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 , 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). Changes in fair value of the excluded components are recognized in OCI . The Company recognizes in earnings the initial value of the excluded components on a straight-line basis over the life of the derivative instrument, rather than using the mark-to-market approach. The cash flows from these contracts are reported as investing activities in the Consolidated Statement of Cash Flows. Foreign exchange risk is also managed through the use of foreign currency debt. The Company’s senior unsecured euro-denominated notes have been designated as, and are effective as, economic hedges of the net investment in a foreign operation. 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: 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 Years Ended December 31 2023 2022 2021 2023 2022 2021 Net Investment Hedging Relationships Foreign exchange contracts $ — $ ( 48 ) $ ( 49 ) $ 1 $ ( 1 ) $ ( 13 ) Euro-denominated notes 105 ( 162 ) ( 296 ) — — — (1) No amounts were reclassified from AOCL into income related to the sale of a subsidiary. Interest Rate Risk Management The Company may use interest rate swap contracts on certain investing and borrowing transactions to manage its net exposure to interest rate changes and to reduce its overall cost of borrowing. The Company does not use leveraged swaps and, in general, does not leverage any of its investment activities that would put principal at risk. At December 31, 2023, the Company was a party to four 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. Par Value of Debt Number of Interest Rate Swaps Held Total Swap Notional Amount 4.50 % notes due 2033 $ 1,500 4 $ 1,000 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 changes in the notes attributable to changes in the SOFR swap rate are recorded in interest expense along with the offsetting fair 93 Table of C o ntent s value changes in the swap contracts. The cash flows from these contracts are reported as operating activities in the Consolidated Statement of Cash Flows. The table below presents the location of amounts recorded in the Consolidated Balance Sheet related to cumulative basis adjustments for fair value hedges as of December 31: Carrying Amount of Hedged Liabilities Cumulative Amount of Fair Value Hedging Adjustment Increase (Decrease) Included in the Carrying Amount 2023 2022 2023 2022 Balance Sheet Caption Long-Term Debt $ 1,056 $ — $ 56 $ — 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 as of December 31: 2023 2022 Fair Value of Derivative U.S. Dollar Notional Fair Value of Derivative U.S. Dollar Notional Asset Liability Asset Liability Derivatives Designated as Hedging Instruments Balance Sheet Caption Interest rate swap contracts Other Noncurrent Assets $ 57 $ — $ 1,000 $ — $ — $ — Foreign exchange contracts Other current assets 106 — 6,138 220 — 4,824 Foreign exchange contracts Other Assets 26 — 1,929 27 — 1,609 Foreign exchange contracts Accrued and other current liabilities — 76 3,680 — 101 2,691 Foreign exchange contracts Other Noncurrent Liabilities — 1 7 — 1 91 $ 189 $ 77 $ 12,754 $ 247 $ 102 $ 9,215 Derivatives Not Designated as Hedging Instruments Balance Sheet Caption Foreign exchange contracts Other current assets $ 153 $ — $ 9,693 $ 186 $ — $ 8,540 Foreign exchange contracts Accrued and other current liabilities — 162 8,104 — 307 10,926 $ 153 $ 162 $ 17,797 $ 186 $ 307 $ 19,466 $ 342 $ 239 $ 30,551 $ 433 $ 409 $ 28,681 As noted above, the Company records its derivatives on a gross basis in the Consolidated Balance Sheet. The Company has master netting agreements with several of its financial institution counterparties (see Concentrations of Credit Risk below). 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 at December 31: 2023 2022 Asset Liability Asset Liability Gross amounts recognized in the consolidated balance sheet $ 342 $ 239 $ 433 $ 409 Gross amounts subject to offset in master netting arrangements not offset in the consolidated balance sheet ( 215 ) ( 215 ) ( 220 ) ( 220 ) Cash collateral received/posted ( 3 ) — ( 66 ) ( 19 ) Net amounts $ 124 $ 24 $ 147 $ 170 94 Table of C o ntent s 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: Years Ended December 31 2023 2022 2021 2023 2022 2021 2023 2022 2021 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) $ 60,115 $ 59,283 $ 48,704 $ 466 $ 1,501 $ ( 1,341 ) $ ( 393 ) $ ( 339 ) $ 1,756 Loss (gain) on fair value hedging relationships: Interest rate swap contracts Hedged items — — — 56 ( 13 ) ( 40 ) — — — Derivatives designated as hedging instruments — — — ( 57 ) 4 1 — — — Impact of cash flow hedging relationships: Foreign exchange contracts Amount of gain recognized in OCI on derivatives — — — — — — 114 684 333 Increase (decrease) in Sales as a result of AOCL reclassifications 249 773 ( 194 ) — — — ( 249 ) ( 773 ) 194 Interest rate contracts Amount of gain recognized in Other (income) expense, net on derivatives — — — ( 1 ) ( 2 ) ( 2 ) — — — Amount of gain (loss) recognized in OCI on derivatives — — — — — — 13 ( 2 ) ( 2 ) (1) Interest expense is a component of Other (income) expense, net. The table below provides information regarding the income statement effects of derivatives not designated as hedging instruments: Amount of Derivative Pretax (Gain) Loss Recognized in Income Years Ended December 31 2023 2022 2021 Derivatives Not Designated as Hedging Instruments Income Statement Caption Foreign exchange contracts (1) Other (income) expense, net $ ( 6 ) $ ( 49 ) $ 313 Foreign exchange contracts (2) Sales 5 ( 37 ) 9 (1) These derivative contracts primarily mitigate changes in the value of remeasured foreign currency denominated monetary assets and liabilities attributable to changes in foreign currency exchange rates. Amount in 2021 includes a loss on forward exchange contracts entered into in conjunction with the spin-off of Organon. (2) These derivative contracts serve as economic hedges of forecasted transactions. At December 31, 2023, the Company estimates $ 40 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 . The amount ultimately reclassified to Sales may differ as foreign exchange rates change. Realized gains and losses are ultimately determined by actual exchange rates at maturity. 95 Table of C o ntent s Investments in Debt and Equity Securities Information on investments in debt and equity securities at December 31 is as follows: 2023 2022 Amortized Cost Gross Unrealized Fair Value Amortized Cost Gross Unrealized Fair Value Gains Losses Gains Losses Commercial paper $ 252 $ — $ — $ 252 $ 498 $ — $ — $ 498 U.S. government and agency securities 72 — — 72 68 — — 68 Corporate notes and bonds 13 — — 13 3 — — 3 Total debt securities $ 337 $ — $ — $ 337 $ 569 $ — $ — $ 569 Publicly traded equity securities (1) 764 1,284 Total debt and publicly traded equity securities $ 1,101 $ 1,853 (1) Unrealized net gains of $ 411 million were recorded in Other (income) expense, net in 2023 on equity securities still held at December 31, 2023. Unrealized net losses of $ 462 million were recorded in Other (income) expense, net in 2022 on equity securities still held at December 31, 2022. At both December 31, 2023 and 2022, the Company also had $ 832 million 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 2023, the Company recorded unrealized gains of $ 10 million and unrealized losses of $ 61 million related to certain of these equity investments still held at December 31, 2023. During 2022, the Company recorded unrealized gains of $ 56 million and unrealized losses of $ 12 million related to certain of these equity investments still held at December 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 December 31, 2023 were $ 299 million and $ 80 million, respectively. At December 31, 2023, 2022 and 2021, the Company also had $ 417 million, $ 598 million and $ 1.7 billion, respectively, recorded in Other Assets for equity securities held through ownership interests in investment funds. Losses (gains) recorded in Other (income) expense, net relating to these investment funds were $ 106 million, $ 1.0 billion and $( 1.4 ) billion for the years ended December 31, 2023, 2022 and 2021, respectively. Fair Value Measurements Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company uses a fair value hierarchy which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. There are three levels of inputs used to measure fair value with Level 1 having the highest priority and Level 3 having the lowest: Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 — Unobservable inputs that are supported by little or no market activity. Level 3 assets or liabilities are those whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques with significant unobservable inputs, as well as assets or liabilities for which the determination of fair value requires significant judgment or estimation. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument. 96 Table of C o ntent s Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis Financial assets and liabilities measured at fair value on a recurring basis at December 31 are summarized below: Fair Value Measurements Using Fair Value Measurements Using Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total 2023 2022 Assets Investments Commercial paper $ — $ 252 $ — $ 252 $ — $ 498 $ — $ 498 Publicly traded equity securities 252 — — 252 1,015 — — 1,015 252 252 — 504 1,015 498 — 1,513 Other assets (1) U.S. government and agency securities 72 — — 72 68 — — 68 Corporate notes and bonds 13 — — 13 3 — — 3 Publicly traded equity securities (2) 512 — — 512 269 — — 269 597 — — 597 340 — — 340 Derivative assets (3) Forward exchange contracts — 202 — 202 — 218 — 218 Purchased currency options — 83 — 83 — 215 — 215 Interest rate swaps — 57 — 57 — — — — — 342 — 342 — 433 — 433 Total assets $ 849 $ 594 $ — $ 1,443 $ 1,355 $ 931 $ — $ 2,286 Liabilities Other liabilities Contingent consideration $ — $ — $ 354 $ 354 $ — $ — $ 456 $ 456 Derivative liabilities (3) Forward exchange contracts — 239 — 239 — 402 — 402 Written currency options — — — — — 7 — 7 — 239 — 239 — 409 — 409 Total liabilities $ — $ 239 $ 354 $ 593 $ — $ 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 December 31, 2023 includes securities with a total fair value of $ 177 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 December 31, 2023 and 2022, Cash and cash equivalents included $ 6.0 billion and $ 11.3 billion of cash equivalents, respectively, (which would be considered Level 2 in the fair value hierarchy). Contingent Consideration Summarized information about the changes in the fair value of liabilities for contingent consideration associated with business combinations is as follows: 2023 2022 Fair value January 1 $ 456 $ 777 Changes in estimated fair value (1) 15 ( 146 ) Payments ( 117 ) ( 119 ) Other — ( 56 ) Fair value December 31 (2) $ 354 $ 456 (1) Recorded in Cost of sales, Research and development expenses, and Other (income) expense, net . Includes cumulative translation adjustments. (2) At December 31, 2023 and 2022, $ 263 million and $ 368 million, respectively, 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 December 31, 2023 includes $ 128 million recorded as a current liability for amounts expected to be paid within the next 12 months. 97 Table of C o ntent s The payments of contingent consideration in both years relate to the Sanofi Pasteur MSD liabilities described above. Other Fair Value Measurements 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 December 31, 2023, was $ 32.0 billion compared with a carrying value of $ 35.1 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. Concentrations of Credit Risk On an ongoing basis, the Company monitors concentrations of credit risk associated with corporate and government issuers of securities and financial institutions with which it conducts business. Credit exposure limits are established to limit a concentration with any single issuer or institution. 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, 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. The Company also continues to monitor global economic conditions, including the volatility associated with international sovereign economies, and associated impacts on the financial markets and its business. The Company’s customers with the largest accounts receivable balances are: McKesson Corporation, Cencora, Inc. and Cardinal Health, Inc., which represented approximately 21 %, 20 % and 14 %, respectively, of total accounts receivable at December 31, 2023. The accounts receivable balance at December 31, 2023 for Chongqing Zhifei Biological Products Co., Ltd. (Zhifei), the sole distributor for the Company’s vaccines products in China, is not significant as China is part of the Company’s factoring program discussed below; however, vaccine sales distributed by Zhifei represent a substantial portion of total sales in China. The Company monitors the creditworthiness of its customers to which it grants credit terms in the normal course of business. Bad debts have been minimal. The Company does not normally require collateral or other security to support credit sales. The Company has accounts receivable factoring agreements with financial institutions in certain countries to sell accounts receivable. The Company factored $ 3.0 billion and $ 2.5 billion of accounts receivable as of December 31, 2023 and 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 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, generally within thirty days after receipt. At December 31, 2023 and 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 net cash flows related to these collections are reported as financing activities in the Consolidated Statement of Cash Flows. The cost of factoring such accounts receivable was de minimis . Derivative financial instruments are executed under International Swaps and Derivatives Association master agreements. The master agreements with several of the Company’s financial institution counterparties also include credit support annexes. 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 $ 3 million and $ 66 million at December 31, 2023 and 2022, respectively. The obligation to return such collateral is recorded in Accrued and other current liabilities . Cash collateral advanced by the Company to various counterparties was $ 19 million at December 31, 2022. 98 Table of C o ntent s 8. Inventories Inventories at December 31 consisted of: 2023 2022 Finished goods $ 1,954 $ 1,841 Raw materials and work in process 8,037 7,063 Supplies 277 238 10,268 9,142 Decrease to LIFO cost ( 562 ) ( 293 ) $ 9,706 $ 8,849 Recognized as: Inventories $ 6,358 $ 5,911 Other Assets 3,348 2,938 Inventories valued under the LIFO method comprised approximately $ 3.1 billion at both December 31, 2023 and 2022, after reflecting the decrease to LIFO cost. Amounts recognized as Other Assets are comprised almost entirely of raw materials and work in process inventories. At December 31, 2023 and 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 $ 790 million and $ 516 million at December 31, 2023 and 2022, respectively, of inventories produced in preparation for product launches. 9. Goodwill and Other Intangibles The following table summarizes goodwill activity by segment: Pharmaceutical Animal Health Total Balance January 1, 2022 $ 17,997 $ 3,267 $ 21,264 Other (1) ( 61 ) 1 ( 60 ) Balance December 31, 2022 (2) 17,936 3,268 21,204 Other (1) ( 14 ) 7 ( 7 ) Balance December 31, 2023 (2) $ 17,922 $ 3,275 $ 21,197 (1) Includes cumulative translation adjustments on goodwill balances. (2) Accumulated goodwill impairment losses were $ 531 million at both December 31, 2023 and 2022. Other acquired intangibles at December 31 consisted of: 2023 2022 Gross Carrying Amount Accumulated Amortization Net Gross Carrying Amount Accumulated Amortization Net Product rights $ 23,643 $ 17,765 $ 5,878 $ 23,555 $ 16,745 $ 6,810 IPR&D 6,816 — 6,816 7,661 — 7,661 Trade names 2,881 776 2,105 2,879 635 2,244 Licenses and other 8,263 5,051 3,212 7,651 4,097 3,554 $ 41,603 $ 23,592 $ 18,011 $ 41,746 $ 21,477 $ 20,269 Some of the more significant acquired intangibles included in product rights, on a net basis, related to human health marketed products at December 31, 2023 were Reblozyl, $ 3.2 billion; Zerbaxa , $ 333 million; and Sivextro , $ 106 million. Additionally, the Company had $ 4.2 billion of net acquired intangibles related to animal health at December 31, 2023, of which $ 2.0 billion related to product rights and $ 2.1 billion was attributable to trade names, primarily related to Allflex. At December 31, 2023, IPR&D primarily relates to MK-7962 (sotatercept), $ 6.4 billion, obtained through the acquisition of Acceleron in 2021 (see Note 3) and MK-1026 (nemtabrutinib), $ 418 million, obtained through the acquisition of ArQule, Inc. (ArQule) in 2020 (see below). Some of the more significant net intangible assets included in licenses and other above at December 31, 2023 include Lynparza, $ 1.5 billion, related to a collaboration with AstraZeneca; Lenvima, $ 683 million, related to a collaboration with Eisai; and Adempas, $ 526 million, related to a collaboration with Bayer. See Note 4 for additional information related to the intangible assets associated with these collaborations. 99 Table of C o ntent s IPR&D that the Company acquires through business combinations represents the fair value assigned to incomplete research projects which, at the time of acquisition, have not reached technological feasibility. Amounts capitalized as IPR&D are accounted for as indefinite-lived intangible assets, subject to impairment testing until completion or abandonment of the projects. Upon successful completion of each IPR&D project, the Company will make a separate determination as to the then-useful life of the asset and begin amortization. In 2023, the Company recorded a $ 779 million IPR&D impairment charge within Research and development expenses related to MK-7264, gefapixant, a non-narcotic, oral selective P2X3 receptor antagonist, in development for the treatment of refractory chronic cough or unexplained chronic cough in adults. In December 2023, the FDA issued a Complete Response Letter (CRL) regarding the resubmission of Merck’s New Drug Application (NDA) for gefapixant. In the CRL, the FDA concluded that Merck’s application did not meet substantial evidence of effectiveness for treating refractory chronic cough and unexplained chronic cough. The CRL was not related to the safety of gefapixant. The marketing application for gefapixant was based on results from the COUGH-1 and COUGH-2 clinical trials. In January 2022, the FDA issued a CRL regarding Merck’s original NDA for gefapixant. In that CRL, the FDA requested additional information related to the cough counting system that was used to assess efficacy. Receipt of the second CRL from the FDA constituted a triggering event that required the evaluation of the gefapixant intangible asset for impairment. The Company estimated the current fair value of gefapixant utilizing an income approach, which calculates the present value of projected future cash flows. The market participant assumptions used to derive the forecasted cash flows were updated to reflect revised market launch plans, resulting in a reduction in the estimated fair value. The revised estimated fair value of gefapixant when compared with its related carrying value resulted in the impairment charge noted above. The remaining intangible asset balance related to Lyfnua (gefapixant) of $ 53 million is now included in product rights in the table above as of December 31, 2023 and will be amortized over its expected useful life as supported by projected future cash flows in the markets where it is approved including Japan and the EU. In 2022, the Company recorded $ 1.7 billion of intangible asset impairment charges within Research and development expenses, of which $ 1.6 billion represents IPR&D impairment charges related to nemtabrutinib (MK-1026), an oral, reversible, non-covalent Bruton’s tyrosine kinase (BTK) inhibitor currently being evaluated for the treatment of hematological malignancies that was obtained through the 2020 acquisition of ArQule. Following discussions with regulatory authorities in the third quarter, 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 current fair value of nemtabrutinib utilizing an income approach which calculates 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 a $ 807 million impairment charge recorded in the third quarter of 2022. 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. 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 Company also recorded an $ 80 million intangible asset impairment charge in 2022 related to derazantinib resulting from the termination of the out-licensing agreement and the decision by Merck not to pursue development of derazantinib. In 2021, the Company recorded a $ 275 million IPR&D impairment charge within Research and development expenses related to nemtabrutinib. As part of Merck’s annual impairment assessment of IPR&D intangible assets, the Company estimated the current fair value of nemtabrutinib utilizing projected future cash flows. The market participant assumptions used to derive the forecasted cash flows were updated to reflect the current competitive landscape for nemtabrutinib, including increased expected development costs for additional clinical trial data needed to develop nemtabrutinib, as well as a delay in the anticipated launch date for nemtabrutinib, which collectively reduced the projected future cash flows and estimated fair value. Additionally, the discount rate utilized to determine the current fair value of the asset was reduced to 8.5 % to reflect the current risk profile of the asset. The revised estimated fair value of nemtabrutinib when compared with its related carrying value resulted in the IPR&D impairment charge noted above. 100 Table of C o ntent s The IPR&D projects that remain in development are subject to the inherent risks and uncertainties in drug development and it is possible that the Company will not be able to successfully develop and complete the IPR&D programs and profitably commercialize the underlying product candidates. The Company may recognize additional non-cash impairment charges in the future related to marketed products or pipeline programs and such charges could be material. Aggregate amortization expense primarily recorded within Cost of sales was $ 2.0 billion in 2023, $ 2.1 billion in 2022 and $ 1.6 billion in 2021. The estimated aggregate amortization expense for each of the next five years is as follows: 2024, $ 1.8 billion; 2025, $ 1.7 billion; 2026, $ 1.6 billion; 2027, $ 1.4 billion; 2028, $ 1.1 billion. 10. Loans Payable, Long-Term Debt and Leases Loans Payable Loans payable at December 31, 2023 included $ 1.3 billion of notes due in 2024 and $ 69 million of long-dated notes that are subject to repayment at the option of the holders. Loans payable at December 31, 2022 included $ 1.7 billion of notes due in 2023 and $ 197 million of long-dated notes that are subject to repayment at the option of the holders. The weighted-average interest rate of commercial paper borrowings was 5.14 % and 0.65 % for the years ended December 31, 2023 and 2022, respectively. Long-Term Debt Long-term debt at December 31 consisted of: 2023 2022 2.75 % notes due 2025 $ 2,498 $ 2,496 2.15 % notes due 2031 1,988 1,986 2.75 % notes due 2051 1,980 1,979 3.70 % notes due 2045 1,979 1,978 3.40 % notes due 2029 1,740 1,738 4.50 % notes due 2033 1,547 — 1.70 % notes due 2027 1,495 1,494 2.90 % notes due 2061 1,484 1,483 5.00 % notes due 2053 1,481 — 4.00 % notes due 2049 1,473 1,471 4.15 % notes due 2043 1,240 1,239 1.45 % notes due 2030 1,238 1,237 2.45 % notes due 2050 1,214 1,213 1.875 % euro-denominated notes due 2026 1,103 1,060 0.75 % notes due 2026 996 995 1.90 % notes due 2028 995 994 5.15 % notes due 2063 987 — 3.90 % notes due 2039 986 985 2.35 % notes due 2040 985 984 4.30 % notes due 2030 745 — 4.90 % notes due 2044 740 — 6.50 % notes due 2033 707 711 1.375 % euro-denominated notes due 2036 548 527 2.50 % euro-denominated notes due 2034 548 526 4.05 % notes due 2028 497 — 3.60 % notes due 2042 492 492 6.55 % notes due 2037 406 408 5.75 % notes due 2036 339 339 5.95 % debentures due 2028 307 307 5.85 % notes due 2039 271 271 6.40 % debentures due 2028 250 250 6.30 % debentures due 2026 135 135 2.90 % notes due 2024 — 749 0.50 % euro-denominated notes due 2024 — 531 Other 289 167 $ 33,683 $ 28,745 Other (as presented in the table above) includes borrowings at variable rates that resulted in effective interest rates of 4.82 % and 1.40 % for 2023 and 2022, respectively. 101 Table of C o ntent s With the exception of the 6.30 % debentures due 2026, the notes listed in the table above are redeemable in whole or in part, at Merck’s option at any time, at varying redemption prices. Effective as of November 3, 2009, the Company executed a full and unconditional guarantee of the then existing debt of its subsidiary Merck Sharp & Dohme Corp. (MSD) and MSD executed a full and unconditional guarantee of the then existing debt of the Company (excluding commercial paper), including for payments of principal and interest. These guarantees do not extend to debt issued subsequent to that date. 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 (see Note 3), 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. Certain of the Company’s borrowings require that Merck comply with covenants and, at December 31, 2023, the Company was in compliance with these covenants. The aggregate maturities of long-term debt for each of the next five years are as follows: 2024, $ 1.4 billion; 2025, $ 2.5 billion; 2026, $ 2.2 billion; 2027, $ 1.5 billion; 2028, $ 2.1 billion. Interest payments related to these debt obligations are as follows: 2024, $ 1.2 billion; 2025, $ 1.1 billion; 2026, $ 1.1 billion; 2027, $ 1.0 billion; 2028, $ 1.0 billion. The Company has a $ 6.0 billion credit facility that matures in May 2028. The facility provides backup liquidity for the Company’s commercial paper borrowing facility and is to be used for general corporate purposes. The Company has not drawn funding from this facility. Leases The Company has operating leases primarily for manufacturing facilities, research and development facilities, corporate offices, employee housing, vehicles and certain equipment. The Company determines if an arrangement is a lease at inception. When evaluating contracts for embedded leases, the Company exercises judgment to determine if there is an explicit or implicit identified asset in the contract and if Merck controls the use of that asset. Embedded leases, primarily associated with contract manufacturing organizations, are immaterial. The lease term includes options to extend or terminate the lease when it is reasonably certain that Merck will exercise that option. Real estate leases for facilities have an average remaining lease term of approximately seven years , which include options to extend the leases for up to five years where applicable. Vehicle leases are generally in effect for four years . The Company elected to exclude short-term leases (leases with an initial term of 12 months or less) from the lease assets and liabilities on the balance sheet. Lease expense for operating lease payments is recognized on a straight-line basis over the term of the lease. Operating lease assets and liabilities are recognized based on the present value of lease payments over the lease term. Since the Company’s leases do not have a readily determinable implicit discount rate, the Company uses its incremental borrowing rate to calculate the present value of lease payments by asset class. On a quarterly basis, an updated incremental borrowing rate is determined based on the average remaining lease term of each asset class and the Company’s pretax cost of debt for that same term. The updated rates for each asset class are applied prospectively to new leases. The Company does not separate lease components (e.g., payments for rent, real estate taxes and insurance costs) from non-lease components (e.g. common-area maintenance costs) in the event that the agreement contains both. Merck includes both the lease and non-lease components for purposes of calculating the right-of-use asset and related lease liability (if the non-lease components are fixed). For vehicle leases and employee housing, the Company applies a portfolio approach to account for the operating lease assets and liabilities. Certain of the Company’s lease agreements contain variable lease payments that are adjusted periodically for inflation or for actual operating expense true-ups compared with estimated amounts; however, these amounts are immaterial. Sublease income and activity related to sale and leaseback transactions are immaterial. Merck’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. Operating lease cost was $ 339 million in 2023, $ 334 million in 2022 and $ 343 million in 2021. Cash paid for amounts included in the measurement of operating lease liabilities was $ 347 million in 2023, $ 335 million in 2022 and $ 340 million in 2021. Operating lease assets obtained in exchange for lease obligations were $ 122 million in 2023, $ 57 million in 2022 and $ 117 million in 2021. 102 Table of C o ntent s Supplemental balance sheet information related to operating leases is as follows: December 31 2023 2022 Assets Other Assets (1) $ 1,437 $ 1,346 Liabilities Accrued and other current liabilities 285 281 Other Noncurrent Liabilities 928 1,013 $ 1,213 $ 1,294 Weighted-average remaining lease term (years) 7.0 7.0 Weighted-average discount rate 3.3 % 3.1 % (1) Includes prepaid leases that have no related lease liability. Maturities of operating leases liabilities are as follows: 2024 $ 325 2025 268 2026 222 2027 139 2028 109 Thereafter 326 Total lease payments 1,389 Less: Imputed interest 176 $ 1,213 At December 31, 2023, the Company had entered into additional real estate operating leases that had not yet commenced; the obligations associated with these leases total $ 188 million. 11. Contingencies and Environmental Liabilities The Company is involved in various claims and legal proceedings of a nature considered normal to its business, including product liability, intellectual property, and commercial litigation, as well as certain additional matters including governmental and environmental matters. In the opinion of the Company, it is unlikely that the resolution of these matters will be material to the Company’s financial condition, results of operations or cash flows. Given the nature of the litigation discussed below and the complexities involved in these matters, the Company is unable to reasonably estimate a possible loss or range of possible loss for such matters until the Company knows, among other factors, (i) what claims, if any, will survive dispositive motion practice, (ii) the extent of the claims, including the size of any potential class, particularly when damages are not specified or are indeterminate, (iii) how the discovery process will affect the litigation, (iv) the settlement posture of the other parties to the litigation and (v) any other factors that may have a material effect on the litigation. The Company records accruals for contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. These accruals are adjusted periodically as assessments change or additional information becomes available. For product liability claims, a portion of the overall accrual is actuarially determined and considers such factors as past experience, number of claims reported and estimates of claims incurred but not yet reported. Individually significant contingent losses are accrued when probable and reasonably estimable. Legal defense costs expected to be incurred in connection with a loss contingency are accrued when probable and reasonably estimable. The Company’s decision to obtain insurance coverage is dependent on market conditions, including cost and availability, existing at the time such decisions are made. The Company has evaluated its risks and has determined that the cost of obtaining product liability insurance outweighs the likely benefits of the coverage that is available and, as such, has no insurance for most product liabilities. 103 Table of C o ntent s Product Liability Litigation Gardasil/Gardasil 9 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 Vaccine, Recombinant). As of December 31, 2023, approximately 140 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. In August 2022, the Judicial Panel on Multidistrict Litigation ordered that Gardasil/Gardasil 9 product liability cases pending in federal courts nationwide be transferred to Judge Robert J. 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. Governmental Proceedings Inflation Reduction Act As previously disclosed, in June 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 Matters As previously disclosed, in April 2019, Merck received a set of investigative interrogatories from the California Attorney General’s Office pursuant to its investigation of conduct and agreements that allegedly affected or delayed competition to Lantus in the insulin market. The interrogatories seek information concerning Merck’s development of an insulin glargine product, and its subsequent termination, as well as Merck’s patent litigation against Sanofi S.A. concerning Lantus and the resolution of that litigation. Merck is cooperating with the California Attorney General’s investigation. As previously disclosed, in June 2020, Merck received a Civil Investigative Demand (CID) from the U.S. Department of Justice. The CID requests answers to interrogatories, as well as various documents, regarding temperature excursions at a third-party storage facility containing certain Merck products. Merck is cooperating with the government’s investigation and intends to produce information and/or documents as necessary in response to the CID. As previously disclosed, from time to time, the Company’s subsidiaries in China receive inquiries regarding their operations from various Chinese governmental agencies. Some of these inquiries may be related to matters involving other multinational pharmaceutical companies, as well as Chinese entities doing business with such companies. The Company’s policy is to cooperate with these authorities and to provide responses as appropriate. As previously disclosed, from time to time, the Company receives inquiries and is the subject of preliminary investigation activities from competition and other governmental authorities in markets outside the U.S. These authorities may include regulators, administrative authorities, and law enforcement and other similar officials, and these preliminary investigation activities may include site visits, formal or informal requests or demands for documents or materials, inquiries or interviews and similar matters. Certain of these preliminary inquiries or activities may lead to the commencement of formal proceedings. Should those proceedings be determined adversely to the Company, monetary fines and/or remedial undertakings may be required. Commercial and Other Litigation Zetia Antitrust Litigation As previously disclosed, Merck, 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 (ezetimibe) 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. 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 2023. On October 18, 2023, the court granted final approval of the indirect purchaser class settlement. 104 Table of C o ntent s In 2020 and 2021, United Healthcare Services, Inc. (United Healthcare), Humana Inc. (Humana), Centene Corporation and others (Centene), and Kaiser Foundation Health Plan, Inc. (Kaiser) (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 were transferred to the Eastern District of Virginia to proceed with the Zetia MDL. In February 2022, the Insurer Plaintiffs filed amended complaints. In March 2022, the Merck Defendants, jointly with other defendants, moved to dismiss certain aspects of the Insurer Plaintiffs’ complaints, including any claims for Vytorin damages. On December 4, 2023, prior to a decision on the motion to dismiss, the U.S. Judicial Panel on Multidistrict Litigation remanded the four Insurer Plaintiff cases to the transferor courts in the Northern District of California (Kaiser), the District of Minnesota (United Healthcare), and the District of New Jersey (Humana and Centene). RotaTeq Antitrust Litigation As previously disclosed, in March 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. In May 2023, MSD moved to dismiss the complaint. On November 20, 2023, the court granted in part and denied in part the motion to dismiss, dismissing plaintiff’s Idaho and Utah consumer law claims and allowing all other claims to proceed. 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 July 2, 2014, allowed the second plaintiff to serve as a class representative, and modified the list of conditions in the class definition. The Company sought leave to appeal to the Supreme Court of Canada, which was denied. The case is proceeding in the Superior Court. 340B Program Litigation As previously disclosed, Merck has filed a complaint in the U.S. District Court for the District of Columbia to challenge the letter Merck received from the Health Resources and Services Administration (HRSA) in May 2022 regarding Merck’s 340B Program integrity initiative. HRSA’s letter to Merck asserts that Merck is in violation of the 340B statute. HRSA further claims that continued failure to provide the 340B price to covered entities using contract pharmacies may result in civil monetary penalties for each instance of alleged overcharging, in addition to repayment for any instance of overcharging. The letter is very similar to letters HRSA has sent to other manufacturers, which letters have been held to be unlawful by multiple federal courts. Merck disagrees with HRSA’s assertion. Merck remains committed to the 340B Program and to providing 340B discounts to eligible covered entities. Merck’s 340B Program integrity initiative is consistent with the requirements of the 340B statute and is intended to ensure the integrity and sustainability of the 340B statute by reducing prohibited duplicate discounts and diversion and putting patients back at the center of the program. Merck continues to offer all of the Company’s covered outpatient drugs to all 340B covered entities for purchase at or below the 340B ceiling price. In September 2022, the court stayed the case pending the D.C. Circuit’s ruling in Novartis Pharmaceuticals Corp. v. Johnson and United Therapeutics Corp. v. Johnson . 105 Table of C o ntent s 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. The U.S. 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. government. 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 now complete, and the parties have 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 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. On November 17, 2023, the Third Circuit granted the Company’s petition for permission to appeal the antitrust decision. Merck KGaA Litigation As previously disclosed, in January 2016, to protect its long-established brand rights in the U.S., the Company filed a lawsuit against Merck KGaA, Darmstadt, Germany (KGaA), historically operating as the EMD Group in the U.S., alleging it improperly uses the name “Merck” in the U.S. KGaA has filed suit against the Company in a number of jurisdictions outside of the U.S. alleging, among other things, unfair competition, trademark infringement and/or corporate name infringement. In certain of those jurisdictions, KGaA also alleges breach of the parties’ coexistence agreement. The litigation is ongoing in the U.S. with no trial date set, and also ongoing in jurisdictions outside of the U.S. Patent Litigation From time to time, generic manufacturers of pharmaceutical products file abbreviated New Drug Applications (ANDAs) with the FDA seeking to market generic forms of the Company’s products prior to the expiration of relevant patents owned by the Company. To protect its patent rights, the Company may file patent infringement lawsuits against such generic companies. Similar lawsuits defending the Company’s patent rights may exist in other countries. The Company intends to vigorously defend its patents, which it believes are valid, against infringement by companies attempting to market products prior to the expiration of such patents. As with any litigation, there can be no assurance of the outcomes, which, if adverse, could result in significantly shortened periods of exclusivity for these products and, with respect to products acquired through acquisitions accounted for as business combinations, potentially significant intangible asset impairment charges. Bridion — As previously disclosed, between January and November 2020, the Company received multiple Paragraph IV Certification Letters under the Hatch-Waxman Act notifying the Company that generic drug companies have filed applications to the FDA seeking pre-patent expiry approval to sell generic versions of Bridion (sugammadex) Injection. In March, April and December 2020, the Company filed patent infringement lawsuits in the U.S. 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. The West Virginia case was jointly dismissed with prejudice in August 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 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. The U.S. District Court for the District of New Jersey held a one-day trial in December 2022 on this remaining PTE calculation defense. The court ordered a post-trial briefing on this defense and held closing arguments in February 2023. 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 106 Table of C o ntent s 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. As previously disclosed, in June 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 five-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. In July 2023, defendants filed a notice of appeal with the United States Court of Appeals for the Federal Circuit. The appeal is currently pending. On February 5, 2024, the Company received another Paragraph IV Certification Letter under the Hatch-Waxman Act notifying the Company that Hikma Pharmaceuticals USA Inc. has filed an application to the FDA seeking pre-patent expiry approval to sell a generic version of Bridion Injection. The Company is currently considering its options. Januvia, Janumet, Janumet XR — As previously disclosed, the FDA granted pediatric exclusivity with respect to Januvia (sitagliptin), Janumet (sitagliptin/metformin HCl), and Janumet XR (sitagliptin and metformin HCl extended-release), which provides a further six months of exclusivity in the U.S. beyond the expiration of all patents listed in the FDA’s Orange Book. Adding this exclusivity to the term of the key patent protection extended exclusivity on these products to January 2023. However, Januvia , Janumet , and Janumet XR contain sitagliptin phosphate monohydrate and the Company has another patent covering certain phosphate salt and polymorphic forms of sitagliptin that expires in May 2027, including pediatric exclusivity (2027 salt/polymorph patent). As previously disclosed, beginning in 2019, a number of generic drug companies filed ANDAs seeking approval of generic forms of Januvia and Janumet along with paragraph IV certifications challenging the validity of the 2027 salt/polymorph patent. The Company responded by filing infringement suits which have all been settled. The Company has settled with a total 26 generic companies providing that these generic companies can bring their generic versions of Januvia and Janumet to the market in the U.S. 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. In March 2021, the Company filed a patent infringement lawsuit in the U.S. District Court for the District of Delaware against Zydus Worldwide DMCC, Zydus Pharmaceuticals (USA) Inc., and Cadila Healthcare Ltd. (collectively, Zydus). In that lawsuit, the Company alleged infringement of the 2027 salt/polymorph patent based on the filing of Zydus’s NDA seeking approval of a form of sitagliptin that is a different from than that used in Januvia . 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. In January 2023, the Company received a Paragraph IV Certification Letter under the Hatch-Waxman Act notifying the Company that Zydus filed an ANDA 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 . In November 2023, the Company received a Paragraph IV Certification Letter under the Hatch-Waxman Act notifying the Company that Zydus filed an ANDA seeking approval of sitagliptin/metformin HCl Extended Release tablets. In January 2024, the parties reached settlement enabling Zydus to seek final approval of a non-automatically substitutable version containing a different form of sitagliptin than that used in Janumet XR . As a result of these 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 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 on April 15, 2024 with a decision later in 107 Table of C o ntent s 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. Those countries include Belgium, Czech Republic, Ireland, Finland, France, Slovakia and Switzerland. 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. On October 6, 2023, the Company filed a patent infringement lawsuit against Sawai Pharmaceuticals Co., Ltd. and Medisa Shinyaku Co., Ltd (collectively, Defendants) in the Tokyo District Court seeking an injunction to stop the manufacture, sale and offer for sale of the Defendants’ sitagliptin dihydrogen phosphate product, while the Company’s patents and patent term extensions are in force. The lawsuit is in response to the Defendants’ application for marketing authorization to sell a generic sitagliptin dihydrogen phosphate product, in the anhydrate form, which was approved on August 15, 2023. Merck asserts that the Defendants’ activity infringes a patent term extension associated with Merck’s patent directed to the sitagliptin compound patent. Keytruda — As previously disclosed, the Company filed a complaint against The Johns Hopkins University (JHU) in November 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 . Merck and JHU partnered to design and conduct a clinical study administering Keytruda to cancer patients having tumors that had the genetic biomarker known as microsatellite instability-high (MSI-H). After the conclusion of the study, JHU secured U.S. patents citing the joint research study. 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. JHU answered the complaint in April and May 2023, denying Merck’s claims, and counterclaiming for willful infringement of nine issued U.S. patents, including a demand for damages. On November 30, 2023, the Company filed an inter partes review with the United States Patent & Trademark Office Patent Trial and Appeal Board, challenging the validity of the patent claims of one of the asserted patents in the case. Lynparza — In December 2022, AstraZeneca Pharmaceuticals LP received a Paragraph IV Certification Letter under the Hatch-Waxman Act notifying AstraZeneca that Natco Pharma Limited (Natco) has filed an application to the FDA seeking pre-patent expiry approval to sell generic versions of Lynparza (olaparib) tablet. In February 2023, AstraZeneca and the Company filed a patent infringement lawsuit in the U.S. District Court for the District of New Jersey/Delaware against Natco. This lawsuit, which asserts one or more patents covering olaparib, automatically stays FDA approval of the generic application until June 2025 or until an adverse court decision, if any, whichever may occur earlier. In December 2023, AstraZeneca Pharmaceuticals LP received a second Paragraph IV Certification Letter under the Hatch-Waxman Act notifying AstraZeneca that Sandoz Inc. has filed an application to the FDA seeking pre-patent expiry approval to sell generic versions of Lynparza (olaparib) tablet. In February 2024, AstraZeneca and the Company filed a patent infringement lawsuit in the U.S. District Court for the District of New Jersey against Sandoz. This lawsuit, which asserts one or more patents covering olaparib, automatically stays FDA approval of the generic application until June 2026 or until an adverse court decision, if any, whichever may occur earlier. Other Litigation There are various other pending legal proceedings involving the Company, principally product liability and intellectual property lawsuits. 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. Legal Defense Reserves Legal defense costs expected to be incurred in connection with a loss contingency are accrued when probable and reasonably estimable. Some of the significant factors considered in the review of these legal defense reserves are as follows: the actual costs incurred by the Company; the development of the Company’s legal defense strategy and structure in light of the scope of its litigation; the number of cases being brought against the Company; the costs and outcomes of completed trials and the most current information regarding anticipated timing, progression, and related costs of pre-trial activities and trials in the associated litigation. The amount of legal defense reserves as of December 31, 2023 and 2022 of approximately $ 210 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. The Company will continue to monitor its legal defense costs and review the adequacy of the associated reserves and may determine to 108 Table of C o ntent s increase the reserves at any time in the future if, based upon the factors set forth, it believes it would be appropriate to do so. Environmental Matters The Company and its subsidiaries are parties to a number of proceedings brought under the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund, and other federal and state equivalents. These proceedings seek to require the operators of hazardous waste disposal facilities, transporters of waste to the sites and generators of hazardous waste disposed of at the sites to clean up the sites or to reimburse the government for cleanup costs. The Company has been made a party to these proceedings as an alleged generator of waste disposed of at the sites. In each case, the government alleges that the defendants are jointly and severally liable for the cleanup costs. Although joint and several liability is alleged, these proceedings are frequently resolved so that the allocation of cleanup costs among the parties more nearly reflects the relative contributions of the parties to the site situation. The Company’s potential liability varies greatly from site to site. For some sites the potential liability is de minimis and for others the final costs of cleanup have not yet been determined. While it is not feasible to predict the outcome of many of these proceedings brought by federal or state agencies or private litigants, in the opinion of the Company, such proceedings should not ultimately result in any liability which would have a material adverse effect on the financial condition, results of operations or liquidity of the Company. The Company has taken an active role in identifying and accruing for these costs and such amounts do not include any reduction for anticipated recoveries of cleanup costs from former site owners or operators or other recalcitrant potentially responsible parties. In management’s opinion, the liabilities for all environmental matters that are probable and reasonably estimable have been accrued and totaled $ 42 million and $ 39 million at December 31, 2023 and 2022, respectively. These liabilities are undiscounted, do not consider potential recoveries from other parties and will be paid out over the periods of remediation for the applicable sites, which are expected to occur primarily over the next 15 years. Although it is not possible to predict with certainty the outcome of these matters, or the ultimate costs of remediation, management does not believe that any reasonably possible expenditures that may be incurred in excess of the liabilities accrued should exceed approximately $ 40 million in the aggregate. Management also does not believe that these expenditures should result in a material adverse effect on the Company’s financial condition, results of operations or liquidity for any year. 12. Equity The Merck certificate of incorporation authorizes 6,500,000,000 shares of common stock and 20,000,000 shares of preferred stock. Capital Stock A summary of common stock and treasury stock transactions (shares in millions) is as follows: 2023 2022 2021 Common Stock Treasury Stock Common Stock Treasury Stock Common Stock Treasury Stock Balance January 1 3,577 1,039 3,577 1,049 3,577 1,047 Purchases of treasury stock — 13 — — — 11 Issuances (1) — ( 7 ) — ( 10 ) — ( 9 ) Balance December 31 3,577 1,045 3,577 1,039 3,577 1,049 (1) Issuances primarily reflect activity under share-based compensation plans. 13. Share-Based Compensation Plans The Company has share-based compensation plans under which the Company grants restricted stock units (RSUs) and performance share units (PSUs) to certain management level employees. In addition, employees and non-employee directors may be granted options to purchase shares of Company common stock at the fair market value at the time of grant. These plans were approved by the Company’s shareholders. At December 31, 2023, 81 million shares collectively were authorized for future grants under the Company’s share-based compensation plans. These awards are settled with treasury shares. Employee stock options are granted to purchase shares of Company stock at the fair market value at the time of grant. These awards generally vest one-third each year over a three-year period, with a contractual term of 7 - 10 years. RSUs are stock awards that are granted to employees and entitle the holder to shares of common stock 109 Table of C o ntent s as the awards vest. The fair value of the stock option and RSU awards is determined and fixed on the grant date based on the Company’s stock price. PSUs are stock awards where the ultimate number of shares issued will be contingent on the Company’s performance against a pre-set objective or set of objectives. The fair value of each PSU is determined on the date of grant based on the Company’s stock price. For RSUs and PSUs, dividends declared during the vesting period are payable to the employees only upon vesting. Over the PSU performance period, the number of shares of stock that are expected to be issued will be adjusted based on the probability of achievement of a performance target and final compensation expense will be recognized based on the ultimate number of shares issued. RSU and PSU distributions will be in shares of Company stock after the end of the vesting or performance period, subject to the terms applicable to such awards. PSU awards generally vest after three years . RSU awards generally vest one-third each year over a three-year period. Total pretax share-based compensation cost recorded in 2023, 2022 and 2021 was $ 645 million, $ 541 million and $ 498 million, respectively. The amount in 2021 includes $ 479 million related to continuing operations. Income tax benefits for share-based compensation expense recognized in 2023, 2022 and 2021 were $ 96 million, $ 78 million and $ 69 million, respectively. The Company uses the Black-Scholes option pricing model for determining the fair value of option grants. In applying this model, the Company uses both historical data and current market data to estimate the fair value of its options. The Black-Scholes model requires several assumptions including expected dividend yield, risk-free interest rate, volatility, and term of the options. The expected dividend yield is based on historical patterns of dividend payments. The risk-free interest rate is based on the rate at grant date of zero-coupon U.S. Treasury Notes with a term equal to the expected term of the option. Expected volatility is estimated using a blend of historical and implied volatility. The historical component is based on historical monthly price changes. The implied volatility is obtained from market data on the Company’s traded options. The expected life represents the amount of time that options granted are expected to be outstanding, based on historical and forecasted exercise behavior. The weighted average exercise price of options granted in 2023, 2022 and 2021 was $ 117.89 , $ 87.10 and $ 75.99 per option, respectively. The weighted average fair value of options granted in 2023, 2022 and 2021 was $ 21.69 , $ 15.45 and $ 9.80 per option, respectively, and were determined using the following assumptions: Years Ended December 31 2023 2022 2021 Expected dividend yield 3.1 % 3.1 % 3.1 % Risk-free interest rate 3.4 % 3.0 % 1.0 % Expected volatility 22.4 % 22.5 % 20.9 % Expected life (years) 5.8 5.9 5.9 Summarized information relative to stock option plan activity (options in thousands) is as follows: Number of Options Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value Outstanding January 1, 2023 13,719 $ 70.55 Granted 1,826 117.89 Exercised ( 1,934 ) 64.57 Forfeited ( 84 ) 111.37 Outstanding December 31, 2023 13,527 $ 77.54 6.2 $ 442 Vested and expected to vest December 31, 2023 13,119 $ 76.63 6.1 $ 438 Exercisable December 31, 2023 9,451 $ 68.97 5.2 $ 379 Additional information pertaining to stock option plans is provided in the table below: Years Ended December 31 2023 2022 2021 Total intrinsic value of stock options exercised $ 95 $ 225 $ 106 Fair value of stock options vested 30 30 27 Cash received from the exercise of stock options 125 384 202 110 Table of C o ntent s A summary of nonvested RSU and PSU activity (shares in thousands) is as follows: RSUs PSUs Number of Shares Weighted Average Grant Date Fair Value Number of Shares Weighted Average Grant Date Fair Value Nonvested January 1, 2023 12,700 $ 81.25 2,021 $ 78.60 Granted 6,438 117.46 685 108.97 Vested ( 5,921 ) 79.35 ( 683 ) 73.03 Forfeited ( 675 ) 93.06 ( 57 ) 89.66 Nonvested December 31, 2023 12,542 $ 100.10 1,966 $ 90.80 Expected to vest December 31, 2023 11,171 $ 99.17 1,847 $ 89.91 At December 31, 2023, there was $ 990 million of total pretax unrecognized compensation expense related to nonvested stock options, RSU and PSU awards which will be recognized over a weighted average period of 1.9 years. For segment reporting, share-based compensation costs are unallocated expenses. 14. Pension and Other Postretirement Benefit Plans The Company has defined benefit pension plans covering eligible employees in the U.S. and in certain of its international subsidiaries. In addition, the Company provides medical benefits, principally to its eligible U.S. retirees and their dependents, through its other postretirement benefit plans. The Company uses December 31 as the year-end measurement date for all of its pension plans and other postretirement benefit plans. Net Periodic Benefit Cost The net periodic benefit cost (credit) for pension and other postretirement benefit plans (including certain costs reported as part of discontinued operations) consisted of the following components: Pension Benefits U.S. International Other Postretirement Benefits Years Ended December 31 2023 2022 2021 2023 2022 2021 2023 2022 2021 Service cost $ 326 $ 372 $ 403 $ 196 $ 283 $ 328 $ 32 $ 48 $ 48 Interest cost 526 457 404 299 145 123 63 46 45 Expected return on plan assets ( 735 ) ( 753 ) ( 755 ) ( 517 ) ( 383 ) ( 416 ) ( 64 ) ( 86 ) ( 79 ) Amortization of unrecognized prior service (credit) cost ( 1 ) ( 32 ) ( 38 ) 2 ( 14 ) ( 16 ) ( 49 ) ( 57 ) ( 63 ) Net loss (gain) amortization — 128 298 ( 3 ) 96 142 ( 42 ) ( 43 ) ( 42 ) Termination benefits 3 2 56 — 1 5 — — 37 Curtailments 8 12 16 ( 1 ) — ( 26 ) ( 1 ) ( 1 ) ( 29 ) Settlements 28 239 216 ( 5 ) 1 8 — — — Net periodic benefit cost (credit) $ 155 $ 425 $ 600 $ ( 29 ) $ 129 $ 148 $ ( 61 ) $ ( 93 ) $ ( 83 ) Net periodic benefit cost (credit) for pension and other postretirement benefit plans in 2021 includes expenses for curtailments, settlements and termination benefits provided to certain employees in connection with the spin-off of Organon. In connection with restructuring actions (see Note 6), termination charges were recorded in 2023, 2022 and 2021 on pension and other postretirement benefit plans related to expanded eligibility for certain employees exiting Merck. Also, in connection with these restructuring activities, curtailments and settlements were recorded on certain pension plans. Lump sum payments to U.S. pension plan participants also contributed to the settlements recorded during 2023, 2022 and 2021. The components of net periodic benefit cost (credit) other than the service cost component are included in Other (income) expense, net (see Note 15), 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 is related to restructuring actions or in Income from Discontinued Operations, Net of Taxes and Amounts Attributable to Noncontrolling Interests if related to the spin-off of Organon (each as noted above). 111 Table of C o ntent s Obligations and Funded Status Summarized information about the changes in plan assets and benefit obligations, the funded status and the amounts recorded at December 31 is as follows: Pension Benefits Other Postretirement Benefits U.S. International 2023 2022 2023 2022 2023 2022 Fair value of plan assets January 1 $ 9,094 $ 13,067 $ 8,473 $ 12,195 $ 947 $ 1,292 Actual return on plan assets 1,077 ( 3,129 ) 832 ( 2,793 ) 115 ( 306 ) Company contributions 307 293 249 155 74 46 Effects of exchange rate changes — — 283 ( 848 ) — — Benefits paid ( 497 ) ( 219 ) ( 256 ) ( 250 ) ( 95 ) ( 90 ) Settlements ( 177 ) ( 918 ) ( 53 ) ( 16 ) ( 2 ) — Other — — 34 30 6 5 Fair value of plan assets December 31 $ 9,804 $ 9,094 $ 9,562 $ 8,473 $ 1,045 $ 947 Benefit obligation January 1 $ 9,854 $ 13,999 $ 7,755 $ 11,575 $ 1,157 $ 1,541 Service cost 326 372 196 283 32 48 Interest cost 526 457 299 145 63 46 Actuarial losses (gains) (1) 403 ( 3,851 ) 766 ( 3,283 ) ( 58 ) ( 392 ) Benefits paid ( 497 ) ( 219 ) ( 256 ) ( 250 ) ( 95 ) ( 90 ) Effects of exchange rate changes — — 288 ( 732 ) 1 ( 1 ) Plan amendments — — 14 4 — — Curtailments 8 12 ( 1 ) — — — Termination benefits 3 2 — 1 — — Settlements ( 177 ) ( 918 ) ( 53 ) ( 16 ) ( 2 ) — Other — — 34 28 6 5 Benefit obligation December 31 $ 10,446 $ 9,854 $ 9,042 $ 7,755 $ 1,104 $ 1,157 Funded status December 31 $ ( 642 ) $ ( 760 ) $ 520 $ 718 $ ( 59 ) $ ( 210 ) Recognized as: Other Assets $ — $ 5 $ 1,019 $ 1,052 $ 107 $ — Accrued and other current liabilities ( 49 ) ( 59 ) ( 19 ) ( 19 ) ( 8 ) ( 8 ) Other Noncurrent Liabilities ( 593 ) ( 706 ) ( 480 ) ( 315 ) ( 158 ) ( 202 ) (1) Actuarial losses (gains) primarily reflect changes in discount rates. At December 31, 2023 and 2022, the accumulated benefit obligation was $ 19.1 billion and $ 17.2 billion, respectively, for all pension plans, of which $ 10.3 billion and $ 9.7 billion, respectively, related to U.S. pension plans. 112 Table of C o ntent s Information related to the funded status of selected pension plans at December 31 is as follows: U.S. International 2023 2022 2023 2022 Pension plans with a projected benefit obligation in excess of plan assets Projected benefit obligation $ 10,446 $ 9,186 $ 2,961 $ 2,779 Fair value of plan assets 9,804 8,421 2,462 2,445 Pension plans with an accumulated benefit obligation in excess of plan assets Accumulated benefit obligation $ 9,700 $ 9,081 $ 1,791 $ 1,226 Fair value of plan assets 9,186 8,421 1,336 948 Plan Assets Entities are required to use a fair value hierarchy which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. There are three levels of inputs used to measure fair value with Level 1 having the highest priority and Level 3 having the lowest: Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 — Unobservable inputs that are supported by little or no market activity. The Level 3 assets are those whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques with significant unobservable inputs, as well as instruments for which the determination of fair value requires significant judgment or estimation. At December 31, 2023 and 2022, $ 788 million and $ 765 million, respectively, or approximately 4 % of the Company’s pension investments were categorized as Level 3 assets. If the inputs used to measure the financial assets fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument. 113 Table of C o ntent s The fair values of the Company’s pension plan assets at December 31 by asset category are as follows: Fair Value Measurements Using Fair Value Measurements Using Level 1 Level 2 Level 3 NAV (1) Total Level 1 Level 2 Level 3 NAV (1) Total 2023 2022 U.S. Pension Plans Cash and cash equivalents $ 34 $ — $ — $ 124 $ 158 $ 38 $ — $ — $ 109 $ 147 Investment funds Developed markets equities 224 — — 2,573 2,797 211 — — 2,443 2,654 Emerging markets equities — — — 740 740 — — — 707 707 Real estate — — — 113 113 — — — 131 131 Equity securities Developed markets 2,071 — — — 2,071 1,956 — — — 1,956 Fixed income securities Government and agency obligations — 2,307 — — 2,307 — 2,047 — — 2,047 Corporate obligations — 1,485 — — 1,485 — 1,438 — — 1,438 Mortgage and asset-backed securities — 21 — — 21 — 22 — — 22 Other investments (liabilities) Derivatives 109 — — — 109 ( 12 ) — — — ( 12 ) Other — — 3 — 3 — — 4 — 4 Plan assets at fair value $ 2,438 $ 3,813 $ 3 $ 3,550 $ 9,804 $ 2,193 $ 3,507 $ 4 $ 3,390 $ 9,094 International Pension Plans Cash and cash equivalents $ 98 $ — $ — $ 20 $ 118 $ 57 $ 8 $ — $ 13 $ 78 Investment funds Developed markets equities 507 3,257 — 106 3,870 375 2,957 — 90 3,422 Government and agency obligations 234 3,123 — 166 3,523 177 2,656 — 130 2,963 Corporate obligations 23 8 — 166 197 8 9 — 129 146 Emerging markets equities 44 — — 66 110 52 — — 59 111 Other fixed income obligations 9 8 — 3 20 10 7 — 4 21 Real estate — — — 10 10 — 1 — 10 11 Equity securities Developed markets 278 — — — 278 263 — — — 263 Fixed income securities Government and agency obligations — 423 — — 423 — 450 — — 450 Corporate obligations — 160 — — 160 — 157 — — 157 Mortgage and asset-backed securities — 61 — — 61 — 69 — — 69 Other investments Insurance contracts (2) — 1 785 2 788 — 18 761 1 780 Other 4 — — — 4 1 1 — — 2 Plan assets at fair value $ 1,197 $ 7,041 $ 785 $ 539 $ 9,562 $ 943 $ 6,333 $ 761 $ 436 $ 8,473 (1) Certain investments that were measured at net asset value (NAV) per share or its equivalent have not been classified in the fair value hierarchy. The NAV amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the fair value of plan assets at December 31, 2023 and 2022. (2) The plans’ Level 3 investments in insurance contracts are generally valued using a crediting rate that approximates market returns and invest in underlying securities whose market values are unobservable and determined using pricing models, discounted cash flow methodologies, or similar techniques. 114 Table of C o ntent s The table below provides a summary of the changes in fair value, including transfers in and/or out, of all financial assets measured at fair value using significant unobservable inputs (Level 3) for the Company’s pension plan assets: 2023 2022 Insurance Contracts Other Total Insurance Contracts Other Total U.S. Pension Plans Balance January 1 $ — $ 4 $ 4 $ — $ 6 $ 6 Actual return on plan assets: Relating to assets still held at December 31 — ( 2 ) ( 2 ) — ( 3 ) ( 3 ) Relating to assets sold during the year — 2 2 — 2 2 Purchases and sales, net — ( 1 ) ( 1 ) — ( 1 ) ( 1 ) Balance December 31 $ — $ 3 $ 3 $ — $ 4 $ 4 International Pension Plans Balance January 1 $ 761 $ — $ 761 $ 937 $ — $ 937 Actual return on plan assets: Relating to assets still held at December 31 77 — 77 ( 147 ) — ( 147 ) Purchases and sales, net ( 53 ) — ( 53 ) ( 39 ) — ( 39 ) Transfers into Level 3 — — — 10 — 10 Balance December 31 $ 785 $ — $ 785 $ 761 $ — $ 761 The fair values of the Company’s other postretirement benefit plan assets at December 31 by asset category are as follows: Fair Value Measurements Using Fair Value Measurements Using Level 1 Level 2 Level 3 NAV (1) Total Level 1 Level 2 Level 3 NAV (1) Total 2023 2022 Cash and cash equivalents $ — $ — $ — $ 13 $ 13 $ 1 $ — $ — $ 9 $ 10 Investment funds Developed markets equities 24 — — 277 301 22 — — 257 279 Emerging markets equities — — — 80 80 — — — 74 74 Real estate — — — 12 12 — — — 14 14 Equity securities — Developed markets 223 — — — 223 206 — — — 206 Fixed income securities Government and agency obligations — 245 — — 245 — 226 — — 226 Corporate obligations — 157 — — 157 — 137 — — 137 Mortgage and asset-backed securities — 2 — — 2 — 2 — — 2 Other Investments (liabilities) Derivatives 12 — — — 12 ( 1 ) — — — ( 1 ) Plan assets at fair value $ 259 $ 404 $ — $ 382 $ 1,045 $ 228 $ 365 $ — $ 354 $ 947 (1) Certain investments that were measured at net asset value (NAV) per share or its equivalent have not been classified in the fair value hierarchy. The NAV amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the fair value of plan assets at December 31, 2023 and 2022. The Company has established investment guidelines for its U.S. pension and other postretirement plans to create an asset allocation that is expected to deliver a rate of return sufficient to meet the long-term obligation of each plan, given an acceptable level of risk. The target investment portfolio of the Company’s U.S. pension and other postretirement benefit plans is allocated 25 % to 40 % in U.S. equities, 10 % to 20 % in international equities, 35 % to 45 % in fixed-income investments, and up to 8 % in cash and other investments. The portfolio’s equity weighting is consistent with the long-term nature of the plans’ benefit obligations. The expected annual standard deviation of returns of the target portfolio, which approximates 11 %, reflects both the equity allocation and the diversification benefits among the asset classes in which the portfolio invests. For international pension plans, the targeted investment portfolio varies based on the duration of pension liabilities and local government rules and regulations. 115 Table of C o ntent s Although a significant percentage of plan assets are invested in U.S. equities, concentration risk is mitigated through the use of strategies that are diversified within management guidelines. Expected Contributions Contributions during 2024 are expected to be approximately $ 260 million for U.S. pension plans, approximately $ 190 million for international pension plans and approximately $ 65 million for other postretirement benefit plans. Expected Benefit Payments Expected benefit payments are as follows: U.S. Pension Benefits International Pension Benefits Other Postretirement Benefits 2024 $ 676 $ 278 $ 81 2025 689 265 82 2026 703 285 83 2027 723 300 83 2028 750 314 84 2029 — 2033 4,236 1,810 442 Expected benefit payments are based on the same assumptions used to measure the benefit obligations and include estimated future employee service. Amounts Recognized in Other Comprehensive Income (Loss) Net gain/loss amounts reflect differences between expected and actual returns on plan assets as well as the effects of changes in actuarial assumptions. Net gain/loss amounts in excess of certain thresholds are amortized into net periodic benefit cost over the average remaining service life of employees. The following amounts were reflected as components of OCI : Pension Plans Other Postretirement Benefit Plans U.S. International Years Ended December 31 2023 2022 2021 2023 2022 2021 2023 2022 2021 Net (loss) gain arising during the period $ ( 69 ) $ ( 42 ) $ 813 $ ( 438 ) $ 116 $ 772 $ 110 $ — $ 156 Prior service cost arising during the period — — — ( 16 ) ( 4 ) ( 4 ) — — — $ ( 69 ) $ ( 42 ) $ 813 $ ( 454 ) $ 112 $ 768 $ 110 $ — $ 156 Net loss (gain) amortization included in benefit cost $ — $ 128 $ 298 $ ( 3 ) $ 96 $ 142 $ ( 42 ) $ ( 43 ) $ ( 42 ) Prior service (credit) cost amortization included in benefit cost ( 1 ) ( 32 ) ( 38 ) 2 ( 14 ) ( 16 ) ( 49 ) ( 57 ) ( 63 ) Settlements and curtailments 36 251 232 ( 6 ) 1 ( 18 ) ( 1 ) ( 1 ) ( 29 ) $ 35 $ 347 $ 492 $ ( 7 ) $ 83 $ 108 $ ( 92 ) $ ( 101 ) $ ( 134 ) 116 Table of C o ntent s Actuarial Assumptions The Company reassesses its benefit plan assumptions on a regular basis. The weighted average assumptions used in determining U.S. pension and other postretirement benefit plan and international pension plan information are as follows: U.S. Pension and Other Postretirement Benefit Plans International Pension Plans December 31 2023 2022 2021 2023 2022 2021 Net periodic benefit cost Discount rate 5.50 % 3.00 % 2.70 % 3.90 % 1.50 % 1.10 % Expected rate of return on plan assets 7.00 % 6.70 % 6.70 % 5.00 % 3.70 % 3.80 % Salary growth rate 4.60 % 4.60 % 4.60 % 3.20 % 2.90 % 2.80 % Interest crediting rate 5.30 % 5.00 % 4.70 % 3.30 % 3.00 % 3.00 % Benefit obligation Discount rate 5.30 % 5.50 % 3.00 % 3.40 % 3.90 % 1.50 % Salary growth rate 4.60 % 4.60 % 4.60 % 3.20 % 3.20 % 2.90 % Interest crediting rate 5.30 % 5.30 % 5.00 % 3.40 % 3.30 % 3.00 % For both the pension and other postretirement benefit plans, the discount rate is evaluated on measurement dates and modified to reflect the prevailing market rate of a portfolio of high-quality fixed-income debt instruments that would provide the future cash flows needed to pay the benefits included in the benefit obligation as they come due. The expected rate of return for both the pension and other postretirement benefit plans represents the average rate of return to be earned on plan assets over the period the benefits included in the benefit obligation are to be paid and is determined on a plan basis. The expected rate of return for each plan is developed considering long-term historical returns data, current market conditions, and actual returns on the plan assets. Using this reference information, the long-term return expectations for each asset category and a weighted-average expected return for each plan’s target portfolio is developed according to the allocation among those investment categories. The expected portfolio performance reflects the contribution of active management as appropriate. For 2024, the expected rate of return for the Company’s U.S. pension and other postretirement benefit plans will be 7.75 %, as compared to 7.00 % in 2023. The health care cost trend rate assumptions for other postretirement benefit plans are as follows: December 31 2023 2022 Health care cost trend rate assumed for next year 7.8 % 7.8 % Rate to which the cost trend rate is assumed to decline 4.5 % 4.5 % Year that the trend rate reaches the ultimate trend rate 2038 2038 Savings Plans The Company also maintains defined contribution savings plans in the U.S. The Company matches a percentage of each employee’s contributions consistent with the provisions of the plan for which the employee is eligible. Total employer contributions to these plans in 2023, 2022 and 2021 were $ 199 million, $ 175 million and $ 158 million, respectively. 117 Table of C o ntent s 15. Other (Income) Expense, Net Other (income) expense, net, consisted of: Years Ended December 31 2023 2022 2021 Interest income $ ( 365 ) $ ( 157 ) $ ( 36 ) Interest expense 1,146 962 806 Exchange losses 370 237 297 (Income) loss from investments in equity securities, net (1) ( 340 ) 1,419 ( 1,940 ) Net periodic defined benefit plan (credit) cost other than service cost ( 498 ) ( 279 ) ( 212 ) Other, net 153 ( 681 ) ( 256 ) $ 466 $ 1,501 $ ( 1,341 ) (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 2023 includes a $ 572.5 million charge related to settlements with certain plaintiffs in the Zetia antitrust litigation (see Note 11). Interest paid was $ 1.1 billion in 2023, $ 937 million in 2022 and $ 779 million in 2021. 16. Taxes on Income A reconciliation between the effective tax rate for income from continuing operations and the U.S. statutory rate is as follows: 2023 2022 2021 Amount Tax Rate Amount Tax Rate Amount Tax Rate U.S. statutory rate applied to income from continuing operations before taxes $ 397 21.0 % $ 3,453 21.0 % $ 2,915 21.0 % Differential arising from: Acquisition of Prometheus 2,139 113.3 — — — — Acquisition of Imago 253 13.4 — — — — Valuation allowances 70 3.7 108 0.7 102 0.7 Acquisition-related costs, including amortization 42 2.2 ( 3 ) — 8 0.1 Restructuring 41 2.2 11 0.1 61 0.4 Foreign earnings ( 941 ) ( 49.8 ) ( 1,821 ) ( 11.1 ) ( 1,456 ) ( 10.5 ) GILTI and the foreign-derived intangible income deduction ( 80 ) ( 4.3 ) 462 2.8 ( 75 ) ( 0.5 ) R&D tax credit ( 214 ) ( 11.3 ) ( 117 ) ( 0.7 ) ( 113 ) ( 0.8 ) State taxes ( 117 ) ( 6.2 ) ( 110 ) ( 0.7 ) 2 — Inventory donations ( 65 ) ( 3.5 ) ( 52 ) ( 0.3 ) ( 41 ) ( 0.3 ) Tax settlements — — ( 10 ) ( 0.1 ) ( 275 ) ( 2.0 ) Acquisition of Pandion — — — — 356 2.6 Other ( 13 ) ( 0.7 ) ( 3 ) — 37 0.3 $ 1,512 80.0 % $ 1,918 11.7 % $ 1,521 11.0 % Where applicable, the impact of changes in uncertain tax positions is reflected in the reconciling items above. The Company’s remaining transition tax liability under the Tax Cuts and Jobs Act (TCJA) of 2017, which has been reduced by payments and the expected utilization of foreign tax credits, was $ 1.5 billion at December 31, 2023, of which $ 976 million is included in Income taxes payable and the remainder of $ 518 million is included in Other Noncurrent Liabilities . As a result of the transition tax under the TCJA, the Company is no longer indefinitely reinvested with respect to its undistributed earnings from foreign subsidiaries and has provided a deferred tax liability for foreign withholding taxes that would apply. The Company remains indefinitely reinvested with respect to its 118 Table of C o ntent s financial statement basis in excess of tax basis of its foreign subsidiaries. A determination of the deferred tax liability with respect to this basis difference is not practicable. The foreign earnings tax rate differentials in the tax rate reconciliation above primarily reflect the impacts of operations in jurisdictions with different tax rates than the U.S., particularly Ireland and Switzerland, as well as Singapore and Puerto Rico which operate under tax incentive grants (which begin to expire in 2025), thereby yielding a favorable impact on the effective tax rate compared with the U.S. statutory rate of 21%. The Company has an additional Cantonal tax holiday in Switzerland that provides for a tax rate reduction and is effective through 2032. Income from continuing operations before taxes consisted of: Years Ended December 31 2023 2022 2021 Domestic $ ( 15,622 ) $ 1,011 $ 1,854 Foreign 17,511 15,433 12,025 $ 1,889 $ 16,444 $ 13,879 Taxes on income from continuing operations consisted of: Years Ended December 31 2023 2022 2021 Current provision Federal $ 928 $ 2,265 $ 74 Foreign 2,435 1,164 1,273 State 48 57 ( 13 ) 3,411 3,486 1,334 Deferred provision Federal ( 1,559 ) ( 1,510 ) 240 Foreign ( 233 ) 71 ( 77 ) State ( 107 ) ( 129 ) 24 ( 1,899 ) ( 1,568 ) 187 $ 1,512 $ 1,918 $ 1,521 119 Table of C o ntent s Deferred income taxes at December 31 consisted of: 2023 2022 Assets Liabilities Assets Liabilities Product intangibles and licenses $ — $ 1,308 $ — $ 2,575 R&D capitalization 2,099 — 1,341 — Inventory related 86 370 43 423 Accelerated depreciation — 626 — 666 Equity investments — 73 — 92 Pensions and other postretirement benefits 323 249 372 284 Compensation related 357 — 335 — Unrecognized tax benefits 147 — 91 — Net operating losses and other tax credit carryforwards 868 — 912 — Other 713 214 520 267 Subtotal 4,593 2,840 3,614 4,307 Valuation allowance ( 656 ) ( 599 ) Total deferred taxes $ 3,937 $ 2,840 $ 3,015 $ 4,307 Net deferred income taxes $ 1,097 $ 1,292 Recognized as: Other Assets $ 1,968 $ 503 Deferred Income Taxes $ 871 $ 1,795 The Company has net operating loss (NOL) carryforwards in several jurisdictions. As of December 31, 2023, $ 292 million of deferred tax assets on NOL carryforwards relate to foreign jurisdictions. Valuation allowances of $ 266 million have been established on these foreign NOL carryforwards and other foreign deferred tax assets. In addition, the Company has $ 575 million of deferred tax assets relating to various U.S. tax credit carryforwards and NOL carryforwards. Valuation allowances of $ 379 million have been established on these U.S. tax credit carryforwards and NOL carryforwards. Income taxes paid in 2023, 2022 and 2021 (including amounts attributable to discontinued operations in 2021) consisted of: Years Ended December 31 2023 2022 2021 Domestic (1) $ 2,258 $ 1,891 $ 1,211 Foreign 2,080 1,348 1,201 $ 4,338 $ 3,239 $ 2,412 (1) Includes TCJA transition tax payments. Tax benefits relating to stock option exercises were $ 12 million in 2023, $ 45 million in 2022 and $ 21 million in 2021. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: 2023 2022 2021 Balance January 1 $ 1,835 $ 1,529 $ 1,537 Additions related to current year positions 553 344 306 Additions related to prior year positions 91 48 63 Reductions for tax positions of prior years (1) ( 20 ) ( 40 ) ( 230 ) Settlements (1) ( 23 ) ( 6 ) ( 46 ) Lapse of statute of limitations ( 52 ) ( 40 ) ( 58 ) Spin-off of Organon — — ( 43 ) Balance December 31 $ 2,384 $ 1,835 $ 1,529 (1) Amount in 2021 reflects a settlement with the IRS discussed below. 120 Table of C o ntent s If the Company were to recognize the unrecognized tax benefits of $ 2.4 billion at December 31, 2023, the income tax provision would reflect a favorable net impact of $ 2.3 billion. The Company is under examination by numerous tax authorities in various jurisdictions globally. The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits as of December 31, 2023 could decrease by up to approximately $ 25 million in the next 12 months as a result of various audit closures, settlements or the expiration of the statute of limitations. The ultimate finalization of the Company’s examinations with relevant taxing authorities can include formal administrative and legal proceedings, which could have a significant impact on the timing of the reversal of unrecognized tax benefits. The Company believes that its reserves for uncertain tax positions are adequate to cover existing risks or exposures. Interest and penalties associated with uncertain tax positions amounted to an expense (benefit) of $ 131 million in 2023, $ 54 million in 2022 and $( 37 ) million in 2021. These amounts reflect the beneficial impacts of various tax settlements, including the settlement discussed below. Liabilities for accrued interest and penalties were $ 388 million and $ 256 million as of December 31, 2023 and 2022, respectively. In 2021, the Internal Revenue Service (IRS) concluded its examinations of Merck’s 2015-2016 U.S. federal income tax returns. As a result, the Company was required to make a payment of $ 190 million (of which $ 172 million related to continuing operations and $ 18 million related to discontinued operations). The Company’s reserves for unrecognized tax benefits for the years under examination exceeded the adjustments relating to this examination period and therefore the Company recorded a $ 236 million net tax benefit in 2021 (of which $ 207 million related to continuing operations and $ 29 million related to discontinued operations). This net benefit reflects reductions in reserves for unrecognized tax benefits and other related liabilities for tax positions relating to the years that were under examination. The 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. In addition, various state and foreign tax examinations are in progress and for these jurisdictions, the Company’s income tax returns are open for examination for the period 2003 through 2023. 17. Earnings per Share The calculations of earnings per share (shares in millions) are as follows: Years Ended December 31 2023 2022 2021 Net Income from Continuing Operations Attributable to Merck & Co., Inc. $ 365 $ 14,519 $ 12,345 Income from Discontinued Operations, Net of Taxes and Amounts Attributable to Noncontrolling Interests — — 704 Net Income Attributable to Merck & Co., Inc. $ 365 $ 14,519 $ 13,049 Average common shares outstanding 2,537 2,532 2,530 Common shares issuable (1) 10 10 8 Average common shares outstanding assuming dilution 2,547 2,542 2,538 Basic Earnings per Common Share Attributable to Merck & Co., Inc. Common Shareholders: Income from Continuing Operations $ 0.14 $ 5.73 $ 4.88 Income from Discontinued Operations — — 0.28 Net Income $ 0.14 $ 5.73 $ 5.16 Earnings per Common Share Assuming Dilution Attributable to Merck & Co., Inc. Common Shareholders: Income from Continuing Operations $ 0.14 $ 5.71 $ 4.86 Income from Discontinued Operations — — 0.28 Net Income $ 0.14 $ 5.71 $ 5.14 (1) Issuable primarily under share-based compensation plans. In 2023, 2022 and 2021, 5 million, 2 million and 9 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. 121 Table of C o ntent s 18. Other Comprehensive Income (Loss) Changes in each component of other comprehensive income (loss) are as follows: Derivatives Employee Benefit Plans Foreign Currency Translation Adjustment Accumulated Other Comprehensive Loss Balance January 1, 2021, net of taxes $ ( 266 ) $ ( 4,540 ) $ ( 1,828 ) $ ( 6,634 ) Other comprehensive income (loss) before reclassification adjustments, pretax 333 1,737 ( 304 ) 1,766 Tax ( 75 ) ( 332 ) ( 119 ) ( 526 ) Other comprehensive income (loss) before reclassification adjustments, net of taxes 258 1,405 ( 423 ) 1,240 Reclassification adjustments, pretax 192 (1) 466 (2) — 658 Tax ( 40 ) ( 102 ) — ( 142 ) Reclassification adjustments, net of taxes 152 364 — 516 Other comprehensive income (loss), net of taxes 410 1,769 ( 423 ) 1,756 Spin-off of Organon (see Note 5) — 28 421 449 Balance at December 31, 2021, net of taxes 144 ( 2,743 ) ( 1,830 ) ( 4,429 ) Other comprehensive income (loss) before reclassification adjustments, pretax 684 70 ( 584 ) 170 Tax ( 143 ) 12 ( 19 ) ( 150 ) Other comprehensive income (loss) before reclassification adjustments, net of taxes 541 82 ( 603 ) 20 Reclassification adjustments, pretax ( 775 ) (1) 329 (2) — ( 446 ) Tax 163 ( 76 ) — 87 Reclassification adjustments, net of taxes ( 612 ) 253 — ( 359 ) Other comprehensive income (loss), net of taxes ( 71 ) 335 ( 603 ) ( 339 ) Balance at December 31, 2022, net of taxes 73 ( 2,408 ) (3) ( 2,433 ) ( 4,768 ) Other comprehensive income (loss) before reclassification adjustments, pretax 114 ( 413 ) 17 ( 282 ) Tax ( 24 ) 86 63 125 Other comprehensive income (loss) before reclassification adjustments, net of taxes 90 ( 327 ) 80 ( 157 ) Reclassification adjustments, pretax ( 237 ) (1) ( 64 ) (2) 9 ( 292 ) Tax 50 6 — 56 Reclassification adjustments, net of taxes ( 187 ) ( 58 ) 9 ( 236 ) Other comprehensive income (loss), net of taxes ( 97 ) ( 385 ) 89 ( 393 ) Balance at December 31, 2023, net of taxes $ ( 24 ) $ ( 2,793 ) (3) $ ( 2,344 ) $ ( 5,161 ) (1) Primarily relates to foreign currency cash flow hedges that were reclassified from AOCL to Sales (see Note 7). (2) Includes net amortization of prior service cost, actuarial gains and losses, settlements and curtailments included in net periodic benefit cost (see Note 14). (3) Includes pension plan net loss of $ 3.5 billion and $ 3.1 billion at December 31, 2023 and 2022, respectively, and other postretirement benefit plan net gain of $ 500 million and $ 446 million at December 31, 2023 and 2022, respectively, as well as pension plan prior service credit of $ 141 million and $ 152 million at December 31, 2023 and 2022, respectively, and other postretirement benefit plan prior service credit of $ 95 million and $ 135 million at December 31, 2023 and 2022, respectively. 122 Table of C o ntent s 19. Segment Reporting The Company’s operations are principally managed on a product basis and include two operating segments, Pharmaceutical and Animal Health, both of which are reportable segments. The Pharmaceutical segment includes human health pharmaceutical and vaccine products. Human health pharmaceutical products consist of therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. The Company sells these human health pharmaceutical products primarily to drug wholesalers and retailers, hospitals, government agencies and managed health care providers such as health maintenance organizations, pharmacy benefit managers and other institutions. Human health vaccine products consist of preventive pediatric, adolescent and adult vaccines. The Company sells these human health vaccines primarily to physicians, wholesalers, distributors and government entities. A large component of pediatric and adolescent vaccine sales are made to the U.S. Centers for Disease Control and Prevention Vaccines for Children program, which is funded by the U.S. government. Additionally, the Company sells vaccines to the Federal government for placement into vaccine stockpiles. The Animal Health segment discovers, develops, manufactures and markets a wide range of veterinary pharmaceutical and vaccine products, as well as health management solutions and services, for the prevention, treatment and control of disease in all major livestock and companion animal species. The Company also offers an extensive suite of digitally connected identification, traceability and monitoring products. The Company sells its products to veterinarians, distributors, animal producers, farmers and pet owners. 123 Table of C o ntent s Sales of the Company’s products were as follows: Years Ended December 31 2023 2022 2021 U.S. Int’l Total U.S. Int’l Total U.S. Int’l Total Pharmaceutical: Oncology Keytruda $ 15,114 $ 9,897 $ 25,011 $ 12,686 $ 8,251 $ 20,937 $ 9,765 $ 7,421 $ 17,186 Alliance revenue - Lynparza (1) 607 592 1,199 584 532 1,116 515 473 989 Alliance revenue - Lenvima (1) 657 303 960 579 297 876 417 287 704 Welireg 209 10 218 123 — 123 13 — 13 Alliance revenue - Reblozyl (2) 168 43 212 123 43 166 — 17 17 Vaccines Gardasil/Gardasil 9 2,083 6,803 8,886 2,065 4,832 6,897 1,881 3,792 5,673 ProQuad/M-M-R II/Varivax 1,837 531 2,368 1,724 518 2,241 1,629 506 2,135 RotaTeq 493 276 769 508 275 783 473 334 807 Vaxneuvance 561 103 665 163 7 170 3 — 3 Pneumovax 23 127 285 412 346 256 602 547 346 893 Vaqta 119 61 180 95 78 173 100 79 179 Hospital Acute Care Bridion 1,156 686 1,842 922 762 1,685 762 770 1,532 Prevymis 264 341 605 188 240 428 153 218 370 Dificid 274 28 302 241 22 263 166 10 175 Zerbaxa 119 100 218 89 79 169 4 ( 5 ) ( 1 ) Noxafil 32 181 213 51 187 238 60 199 259 Primaxin 1 211 213 1 238 239 2 258 259 Cardiovascular Alliance revenue - Adempas/Verquvo (3) 350 16 367 329 12 341 312 30 342 Adempas — 255 255 — 238 238 — 252 252 Virology Lagevrio 10 1,418 1,428 1,523 4,161 5,684 632 320 952 Isentress/Isentress HD 215 268 483 274 359 633 294 474 769 Neuroscience Belsomra 81 150 231 79 179 258 78 241 318 Immunology Simponi — 710 710 — 706 706 — 825 825 Remicade — 187 187 — 207 207 — 299 299 Diabetes Januvia 1,151 1,039 2,189 1,248 1,565 2,813 1,404 1,920 3,324 Janumet 223 954 1,177 355 1,344 1,700 367 1,597 1,964 Other pharmaceutical (4) 688 1,596 2,283 693 1,628 2,319 824 1,690 2,516 Total Pharmaceutical segment sales 26,539 27,044 53,583 24,989 27,016 52,005 20,401 22,353 42,754 Animal Health: Livestock 700 2,637 3,337 710 2,590 3,300 667 2,628 3,295 Companion Animal 1,104 1,184 2,288 1,112 1,138 2,250 1,091 1,182 2,273 Total Animal Health segment sales 1,804 3,821 5,625 1,822 3,728 5,550 1,758 3,810 5,568 Total segment sales 28,343 30,865 59,208 26,811 30,744 57,555 22,159 26,163 48,322 Other (5) 137 770 907 395 1,333 1,728 266 116 382 $ 28,480 $ 31,635 $ 60,115 $ 27,206 $ 32,077 $ 59,283 $ 22,425 $ 26,279 $ 48,704 U.S. plus international may not equal total due to rounding. (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 4). (2) Alliance revenue for Reblozyl represents royalties and, for 2022, also includes a payment received related to the achievement of a regulatory approval milestone (see Note 4). (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 4). (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 (decreased) sales by $ 244 million, $ 810 million and $( 203 ) million in 2023, 2022 and 2021, respectively, as well as revenue from third-party manufacturing arrangements (including sales to Organon). Other for 2023, 2022 and 2021 also includes $ 118 million, $ 165 million and $ 218 million, respectively, related to upfront and milestone payments received by Merck for out-licensing arrangements. 124 Table of C o ntent s Consolidated sales by geographic area where derived are as follows: Years Ended December 31 2023 2022 2021 United States $ 28,480 $ 27,206 $ 22,425 Europe, Middle East and Africa 13,254 14,493 13,341 China 6,802 5,191 4,378 Japan 3,164 3,629 2,726 Asia Pacific (other than China and Japan) 3,225 3,614 2,407 Latin America 3,086 2,582 2,206 Other 2,104 2,568 1,221 $ 60,115 $ 59,283 $ 48,704 A reconciliation of segment profits to Income from Continuing Operations Before Taxes is as follows: Years Ended December 31 2023 2022 2021 Segment profits: Pharmaceutical segment $ 38,880 $ 36,852 $ 30,977 Animal Health segment 1,737 1,963 1,950 Total segment profits 40,617 38,815 32,927 Other profits 474 1,160 156 Unallocated: Interest income 365 157 36 Interest expense ( 1,146 ) ( 962 ) ( 806 ) Amortization ( 2,044 ) ( 2,085 ) ( 1,636 ) Depreciation ( 1,625 ) ( 1,642 ) ( 1,414 ) Research and development ( 30,008 ) ( 13,011 ) ( 11,692 ) Restructuring costs ( 599 ) ( 337 ) ( 661 ) Charge for Zetia antitrust litigation settlements ( 573 ) — — Other unallocated, net ( 3,572 ) ( 5,651 ) ( 3,031 ) $ 1,889 $ 16,444 $ 13,879 Pharmaceutical segment profits are comprised of segment sales less standard costs, as well as selling, general and administrative expenses directly incurred by the segment. Animal Health segment profits are comprised of segment sales, less all cost of sales, as well as selling, general and administrative expenses and research and development costs directly incurred by the segment. For internal management reporting presented to the chief operating decision maker, Merck does not allocate the remaining cost of sales not included in segment profits as described above, research and development expenses incurred in Merck Research Laboratories, the Company’s research and development division that focuses on human health-related activities, or general and administrative expenses not directly incurred by the segments, nor the cost of financing these activities. Separate divisions maintain responsibility for monitoring and managing these costs, including depreciation related to fixed assets utilized by these divisions and, therefore, they are not included in segment profits. In addition, costs related to restructuring activities, as well as the amortization of intangible assets and amortization of purchase accounting adjustments are not allocated to segments. 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, 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. 125 Table of C o ntent s Equity income from affiliates and depreciation included in segment profits is as follows: Pharmaceutical Animal Health Total Year Ended December 31, 2023 Included in segment profits: Equity income from affiliates $ 111 $ — $ 111 Depreciation 5 198 203 Year Ended December 31, 2022 Included in segment profits: Equity income from affiliates $ 39 $ — $ 39 Depreciation 5 177 182 Year Ended December 31, 2021 Included in segment profits: Equity income from affiliates $ 11 $ — $ 11 Depreciation 6 158 164 Property, plant and equipment, net, by geographic area where located is as follows: December 31 2023 2022 2021 United States $ 13,915 $ 12,891 $ 11,759 Europe, Middle East and Africa 7,562 6,993 6,081 Asia Pacific (other than China and Japan) 1,022 966 857 Latin America 222 225 199 China 193 207 220 Japan 133 135 159 Other 4 5 4 $ 23,051 $ 21,422 $ 19,279 The Company does not disaggregate assets on a products and services basis for internal management reporting and, therefore, such information is not presented. 126 Table of C o ntent s Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Merck & Co., Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheet of Merck & Co., Inc. and its subsidiaries (the “Company”) as of December 31, 2023 and 2022, and the related consolidated statements of income, of comprehensive (loss) income, of equity and of cash flows for each of the three years in the period ended December 31, 2023, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Basis for Opinions The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 127 Table of C o ntent s Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. U.S. Rebate Accruals - Medicaid, Managed Care and Medicare Part D As described in Note 2 to the consolidated financial statements, the Company records certain variable consideration including discounts, which are estimated at the time of sale generally using the expected value method. Amounts accrued for aggregate customer discounts are evaluated on a quarterly basis through comparison of information provided by the wholesalers, health maintenance organizations, pharmacy benefit managers, federal and state agencies, and other customers to the amounts accrued. Certain of these discounts representing a portion of the accrual take the form of rebates, which are amounts owed based upon definitive contractual agreements or legal requirements with private sector (Managed Care) and public sector (Medicaid and Medicare Part D) benefit providers, after the final dispensing of the product to a benefit plan participant. The provision for rebates is based on expected patient usage, as well as inventory levels in the distribution channel to determine the contractual obligation to the benefit providers. Management uses historical customer segment utilization mix, sales forecasts, changes to product mix and price, inventory levels in the distribution channel, government pricing calculations and prior payment history in order to estimate the expected provision. The accrued balance relative to the provision for rebates included in accrued and other current liabilities was $2.3 billion as of December 31, 2023, of which the majority relates to U.S. rebate accruals – Medicaid, Managed Care and Medicare Part D. The principal considerations for our determination that performing procedures relating to U.S. rebate accruals - Medicaid, Managed Care and Medicare Part D is a critical audit matter are the significant judgment by management due to the significant measurement uncertainty involved in developing the rebate accruals, as the accruals are based on assumptions developed using pricing information and historical customer segment utilization mix, and a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating evidence related to these assumptions. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to U.S. rebate accruals - Medicaid, Managed Care and Medicare Part D, including management’s controls over the assumptions used to estimate the corresponding rebate accruals. These procedures also included, among others (i) developing an independent estimate of the rebate accruals by utilizing third party data on historical customer segment utilization mix in the U.S., pricing information, the terms of the specific rebate programs, and the historical trend of actual rebate claims paid, (ii) comparing the independent estimate to the rebate accruals recorded by management, and (iii) testing rebate claims paid, including evaluating those claims for consistency with the contractual terms of the Company’s rebate agreements. PricewaterhouseCoopers LLP Florham Park, New Jersey February 26, 2024 We have served as the Company’s auditor since 2002. 128 Table of C o ntent s Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable.