UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 1-6571

Merck & Co., Inc.

One Merck Drive
Whitehouse Station, N.J. 08889-0100
(908) 423-1000

Incorporated in New Jersey		I.R.S. Employer Identification No. 22-1918501

The number of shares of common stock outstanding as of the close of business on April 29, 2011: 3,086,584,896

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

 

 

Part I — Financial Information

Item 1. Financial Statements

MERCK & CO., INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENT OF INCOME
(Unaudited, $ in millions except per share amounts)

		Three Months Ended
		March 31,
		2011				2010
Sales		$	11,580			$	11,422
Costs, Expenses and Other
Materials and production			4,059				5,216
Marketing and administrative			3,164				3,222
Research and development			2,158				2,051
Restructuring costs			(14	)			288
Equity income from affiliates			(138	)			(138	)
Other (income) expense, net			622				167
			9,851				10,806
Income Before Taxes			1,729				616
Taxes on Income			658				286
Net Income		$	1,071			$	330
Less: Net Income Attributable to Noncontrolling Interests			28				31
Net Income Attributable to Merck & Co., Inc.		$	1,043			$	299
Basic Earnings per Common Share Attributable to Merck & Co., Inc. Common Shareholders		$	0.34			$	0.10
Earnings per Common Share Assuming Dilution Attributable to Merck & Co., Inc. Common Shareholders		$	0.34			$	0.09
Dividends Declared per Common Share		$	0.38			$	0.38

The accompanying notes are an integral part of this consolidated financial statement.

MERCK & CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited, $ in millions except per share amounts)

		March 31,				December 31,
		2011				2010
Assets
Current Assets
Cash and cash equivalents		$	11,695			$	10,900
Short-term investments			1,334				1,301
Accounts receivable (net of allowance for doubtful accounts of $111 in 2011 and $104 in 2010)			7,955				7,344
Inventories (excludes inventories of $1,264 in 2011 and $1,194 in 2010 classified in Other assets — see Note 6)			6,057				5,868
Deferred income taxes and other current assets			3,983				3,651
Total current assets			31,024				29,064
Investments			2,084				2,175
Property, Plant and Equipment, at cost, net of depreciation of $14,515 in 2011 and $13,481 in 2010			16,833				17,082
Goodwill			12,207				12,378
Other Intangibles, Net			37,906				39,456
Other Assets			5,811				5,626
		$	105,865			$	105,781
Liabilities and Equity
Current Liabilities
Loans payable and current portion of long-term debt		$	2,202			$	2,400
Trade accounts payable			2,402				2,308
Accrued and other current liabilities			8,555				8,514
Income taxes payable			1,326				1,243
Dividends payable			1,177				1,176
Total current liabilities			15,662				15,641
Long-Term Debt			15,644				15,482
Deferred Income Taxes and Noncurrent Liabilities			17,720				17,853
Merck & Co., Inc. Stockholders’ Equity
Common stock, $0.50 par value Authorized - 6,500,000,000 shares Issued - 3,576,948,356 shares in 2011 and 2010			1,788				1,788
Other paid-in capital			40,690				40,701
Retained earnings			37,400				37,536
Accumulated other comprehensive loss			(3,170	)			(3,216	)
			76,708				76,809
Less treasury stock, at cost 491,657,062 shares in 2011 and 494,841,533 shares in 2010			22,324				22,433
Total Merck & Co., Inc. stockholders’ equity			54,384				54,376
Noncontrolling Interests			2,455				2,429
Total equity			56,839				56,805
		$	105,865			$	105,781

The accompanying notes are an integral part of this consolidated financial statement.

MERCK & CO., INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, $ in millions)

		Three Months Ended
		March 31,
		2011				2010
Cash Flows from Operating Activities
Net income		$	1,071			$	330
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			1,831				1,687
In-process research and development impairment charges			302				27
Equity income from affiliates			(138	)			(138	)
Dividends and distributions from equity affiliates			65				77
Deferred income taxes			(214	)			152
Share-based compensation			93				132
Other			(222	)			161
Net changes in assets and liabilities			(1,067	)			(1,062	)
Net Cash Provided by Operating Activities			1,721				1,366
Cash Flows from Investing Activities
Capital expenditures			(324	)			(343	)
Purchases of securities and other investments			(1,382	)			(2,933	)
Proceeds from sales of securities and other investments			1,524				273
Dispositions of businesses, net of cash divested			306				—
Acquisitions of businesses, net of cash acquired			—				(131	)
(Increase) decrease in restricted assets			—				(25	)
Other			(19	)			11
Net Cash Provided by (Used in) Investing Activities			105				(3,148	)
Cash Flows from Financing Activities
Net change in short-term borrowings			(197	)			2,620
Payments on debt			(4	)			(622	)
Dividends paid to stockholders			(1,175	)			(1,189	)
Proceeds from exercise of stock options			37				195
Other			167				(62	)
Net Cash (Used in) Provided by Financing Activities			(1,172	)			942
Effect of Exchange Rate Changes on Cash and Cash Equivalents			141				(235	)
Net Increase (Decrease) in Cash and Cash Equivalents			795				(1,075	)
Cash and Cash Equivalents at Beginning of Year			10,900				9,311
Cash and Cash Equivalents at End of Period		$	11,695			$	8,236

The accompanying notes are an integral part of this consolidated financial statement.

Notes to Consolidated Financial Statements (unaudited)

1. Basis of Presentation

     The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and disclosures required by accounting principles generally accepted in the United States for complete consolidated financial statements are not included herein. The interim statements should be read in conjunction with the audited financial statements and notes thereto included in Merck & Co., Inc.’s Form 10-K filed on February 28, 2011.

     On November 3, 2009, Merck & Co., Inc. (“Old Merck”) and Schering-Plough Corporation (“Schering-Plough”) completed their previously-announced merger (the “Merger”). In the Merger, Schering-Plough acquired all of the shares of Old Merck, which became a wholly-owned subsidiary of Schering-Plough and was renamed Merck Sharp & Dohme Corp. Schering-Plough continued as the surviving public company and was renamed Merck & Co., Inc. (“New Merck” or the “Company”). However, for accounting purposes only, the Merger was treated as an acquisition with Old Merck considered the accounting acquirer. Accordingly, the accompanying financial statements reflect Old Merck’s stand-alone operations as they existed prior to the completion of the Merger. References in these financial statements to “Merck” for periods prior to the Merger refer to Old Merck and for periods after the completion of the Merger to New Merck.

     The results of operations of any interim period are not necessarily indicative of the results of operations for the full year. In the Company’s opinion, all adjustments necessary for a fair presentation of these interim statements have been included and are of a normal and recurring nature.

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

Recently Adopted Accounting Standards

     In October 2009, the Financial Accounting Standards Board issued new guidance for revenue recognition with multiple deliverables. The Company adopted this guidance prospectively for revenue arrangements entered into or materially modified on or after January 1, 2011. This guidance eliminates the residual method under the current guidance and replaces it with the “relative selling price” method when allocating revenue in a multiple deliverable arrangement. The selling price for each deliverable shall be determined using vendor specific objective evidence of selling price, if it exists, otherwise third-party evidence of selling price shall be used. If neither exists for a deliverable, the vendor shall use its best estimate of the selling price for that deliverable. The effect of adoption on the Company’s financial position and results of operations was not material.

2. Restructuring

Merger Restructuring Program

     In February 2010, the Company commenced actions under a global restructuring program (the “Merger Restructuring Program”) in conjunction with the integration of the legacy Merck and legacy Schering-Plough businesses. This Merger Restructuring Program is intended to optimize the cost structure of the combined company. Additional actions under the program continued during 2010. As part of the restructuring actions taken thus far under the Merger Restructuring Program, the Company expects to reduce its total workforce measured at the time of the Merger by approximately 17% across the Company worldwide. In addition, the Company has eliminated over 2,500 positions which were vacant at the time of the Merger. These workforce reductions will primarily come from the elimination of duplicative positions in sales, administrative and headquarters organizations, as well as from the sale or closure of certain manufacturing and research and development sites and the consolidation of office facilities. During this period, the Company will continue to hire new employees in strategic growth areas of the business as necessary. The Company will continue to pursue productivity efficiencies and evaluate its manufacturing supply chain capabilities on an ongoing basis which may result in future restructuring actions.

     In connection with the Merger Restructuring Program, separation costs under the Company’s existing severance programs worldwide were recorded in the fourth quarter of 2009 to the extent such costs were probable and reasonably estimable. The Company commenced accruing costs related to enhanced termination benefits offered to employees under the Merger Restructuring Program in the first quarter of 2010 when the necessary criteria were met. The Company recorded total pretax restructuring costs of $112 million and $283 million in the first quarter of 2011 and 2010, respectively, related to this program. Since inception of the Merger Restructuring Program through March 31, 2011, Merck has recorded total pretax accumulated costs of approximately $3.4 billion and eliminated approximately 12,300 positions comprised of employee separations, and the elimination of contractors and vacant positions. The restructuring actions taken thus far under the Merger Restructuring Program are expected to be substantially completed by the end of 2012, with the exception of certain manufacturing facilities actions, with the total cumulative pretax costs estimated to be approximately $3.8 billion to $4.6 billion. The Company estimates that approximately two-thirds of the cumulative

Notes to Consolidated Financial Statements (unaudited) (continued)

pretax costs relate to cash outlays, primarily related to employee separation expense. Approximately one-third of the cumulative pretax costs are non-cash, relating primarily to the accelerated depreciation of facilities to be closed or divested.

2008 Global Restructuring Program

     In October 2008, Old Merck announced a global restructuring program (the “2008 Restructuring Program”) to reduce its cost structure, increase efficiency, and enhance competitiveness. As part of the 2008 Restructuring Program, the Company expects to eliminate approximately 7,200 positions — 6,800 active employees and 400 vacancies — across the Company worldwide by the end of 2011. Pretax restructuring costs of $4 million and $65 million were recorded in the first quarter of 2011 and 2010, respectively, related to the 2008 Restructuring Program. Since inception of the 2008 Restructuring Program through March 31, 2011, Merck has recorded total pretax accumulated costs of $1.6 billion and eliminated approximately 5,920 positions comprised of employee separations and the elimination of contractors and vacant positions. The 2008 Restructuring Program is expected to be completed by the end of 2011 with the total cumulative pretax costs estimated to be $1.6 billion to $2.0 billion. The Company estimates that two-thirds of the cumulative pretax costs relate to cash outlays, primarily from employee separation expense. Approximately one-third of the cumulative pretax costs are non-cash, relating primarily to the accelerated depreciation of facilities to be closed or divested.

     For segment reporting, restructuring charges are unallocated expenses.

     The following tables summarize the charges related to Merger Restructuring Program and 2008 Restructuring Program activities by type of cost:

		Three Months Ended March 31, 2011
		Separation				Accelerated
($ in millions)		Costs				Depreciation				Other				Total
Merger Restructuring Program
Materials and production		$	—			$	60			$	—			$	60
Marketing and administrative			—				23				—				23
Research and development			—				42				3				45
Restructuring costs			(37	)			—				21				(16	)
			(37	)			125				24				112
2008 Restructuring Program
Materials and production			—				3				(1	)			2
Restructuring costs			(1	)			—				3				2
			(1	)			3				2				4
		$	(38	)		$	128			$	26			$	116

		Three Months Ended March 31, 2010
		Separation				Accelerated
($ in millions)		Costs				Depreciation				Other				Total
Merger Restructuring Program
Materials and production		$	—			$	25			$	—			$	25
Research and development			—				—				6				6
Restructuring costs			209				—				43				252
			209				25				49				283
2008 Restructuring Program
Materials and production			—				29				—				29
Restructuring costs			19				—				17				36
			19				29				17				65
		$	228			$	54			$	66			$	348

     Separation costs are associated with actual headcount reductions, as well as those headcount reductions which were probable and could be reasonably estimated. In the first quarter of 2011, separation costs for the Merger Restructuring Program include a reduction of separation reserves of approximately $50 million resulting from the Company’s decision in the first quarter to retain approximately 380 employees at its Oss, Netherlands research facility that had previously been expected to be separated. In the first quarter of 2011 and 2010, approximately 750 positions and 5,150 positions, respectively, were eliminated under the Merger Restructuring Program and approximately 120 positions and 535 positions, respectively, were eliminated under the 2008 Restructuring

Notes to Consolidated Financial Statements (unaudited) (continued)

Program. These position eliminations were comprised of actual headcount reductions and the elimination of contractors and vacant positions.

     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 site, based upon the anticipated date the site will be closed or divested, and depreciation expense as determined utilizing the useful life prior to the restructuring actions. All of the sites have and will continue to operate up through the respective closure dates, and since future cash flows were sufficient to recover the respective book values, Merck was required to accelerate depreciation of the site assets rather than write them off immediately.

     Other activity in the first quarter of 2011 and 2010 includes asset abandonment, shut-down and other related costs. Additionally, other activity includes employee-related costs such as curtailment, settlement and termination charges associated with pension and other postretirement benefit plans (see Note 12) and share-based compensation costs.

     The following table summarizes the charges and spending relating to Merger Restructuring Program and 2008 Restructuring Program activities for the three months ended March 31, 2011:

		Separation				Accelerated
($ in millions)		Costs				Depreciation				Other				Total
Merger Restructuring Program
Restructuring reserves January 1, 2011		$	859			$	—			$	64			$	923
Expense			(37	)			125				24				112
(Payments) receipts, net			(159	)			—				(9	)			(168	)
Non-cash activity			—				(125	)			(24	)			(149	)
Restructuring reserves March 31, 2011 (1)		$	663			$	—			$	55			$	718
2008 Restructuring Program
Restructuring reserves January 1, 2011		$	196			$	—			$	—			$	196
Expense			(1	)			3				2				4
(Payments) receipts, net			(9	)			—				(2	)			(11	)
Non-cash activity			—				(3	)			—				(3	)
Restructuring reserves March 31, 2011 (1)		$	186			$	—			$	—			$	186

Legacy Schering-Plough Program

     Prior to the Merger, Schering-Plough commenced a Productivity Transformation Program which was designed to reduce and avoid costs and increase productivity. The Company recorded accelerated depreciation costs included Material and production of $10 million and $3 million for the first quarter of 2011 and 2010, respectively. The remaining reserve associated with this program was $47 million at March 31, 2011.

3. Acquisitions, Divestitures, Research Collaborations and License Agreements

     In April 2011, Merck entered into a definitive agreement under which Merck will acquire Inspire Pharmaceuticals, Inc. (“Inspire”), a specialty pharmaceutical company focused on developing and commercializing ophthalmic products. Under the terms of the agreement, Merck commenced a tender offer for all outstanding common stock of Inspire at a price of $5.00 per share in cash. The transaction has a total cash value of approximately $430 million. The transaction has been unanimously approved by the boards of directors of both companies and Inspire’s board recommended that the company’s shareholders tender their shares pursuant to the tender offer. In addition, Warburg Pincus Private Equity IX, L.P., which owns approximately 28% of the outstanding shares of Inspire, has agreed to tender all of its shares into the offer. The closing of the tender offer will be subject to certain conditions, including the tender of a number of Inspire shares that, together with shares owned by Merck, represent at least a majority of the total number of Inspire’s outstanding shares (assuming the exercise of all options and vesting of restricted stock units), and customary closing conditions. Upon the completion of the tender offer, Merck will acquire all remaining shares of Inspire through a second-step merger. The Company anticipates the transaction will close in the second quarter of 2011.

     In March 2011, the Company sold the Merck BioManufacturing Network, a leading provider of contract manufacturing and development services for the biopharmaceutical industry and wholly owned by Merck, to Fujifilm Corporation (“Fujifilm”). Under

Notes to Consolidated Financial Statements (unaudited) (continued)

the terms of the agreement, Fujifilm will purchase all of the equity interests in two Merck subsidiaries which together own all assets of the Merck BioManufacturing Network comprising facilities located in Research Triangle Park, North Carolina and Billingham, U.K.; and including manufacturing contracts; business support operations and a highly skilled workforce. As part of the agreement with Fujifilm, Merck has committed to certain continued development and manufacturing activities with these two companies. The transaction resulted in a gain of $134 million in the first quarter of 2011 reflected in Other (income) expense, net.

4. Collaborative Arrangements

     The Company continues its strategy of establishing external alliances to complement its substantial internal research capabilities, including research collaborations, licensing preclinical and clinical compounds and technology platforms to drive both near- and long-term growth. The Company supplements its internal research with a licensing and external alliance strategy focused on the entire spectrum of collaborations from early research to late-stage compounds, as well as new technologies across a broad range of therapeutic areas. These arrangements often include upfront payments and royalty or profit share payments, contingent upon the occurrence of certain future events linked to the success of the asset in development, as well as expense reimbursements or payments to the third party.

Cozaar/Hyzaar

     In 1989, Old Merck and E.I. duPont de Nemours and Company (“DuPont”) agreed to form a long-term research and marketing collaboration to develop a class of therapeutic agents for high blood pressure and heart disease, discovered by DuPont, called angiotensin II receptor antagonists, which include Cozaar and Hyzaar. In return, Old Merck provided DuPont marketing rights in the United States and Canada to its prescription medicines, Sinemet and Sinemet CR (the Company has since regained global marketing rights to Sinemet and Sinemet CR). Pursuant to a 1994 agreement with DuPont, the Company has an exclusive licensing agreement to market Cozaar and Hyzaar, which are both registered trademarks of DuPont, in return for royalties and profit share payments to DuPont. The patents that provided market exclusivity in the United States for Cozaar and Hyzaar expired in April 2010. In addition, Cozaar and Hyzaar lost patent protection in a number of major European markets in March 2010.

Remicade/Simponi

     In 1998, a subsidiary of Schering-Plough entered into a licensing agreement with Centocor Ortho Biotech Inc. (“Centocor”), a Johnson & Johnson company, to market Remicade, which is prescribed for the treatment of inflammatory diseases. In 2005, Schering-Plough’s subsidiary exercised an option under its contract with Centocor for license rights to develop and commercialize Simponi (golimumab), a fully human monoclonal antibody. The Company had exclusive marketing rights to both products outside the United States, Japan and certain other Asian markets. In December 2007, Schering-Plough and Centocor revised their distribution agreement regarding the development, commercialization and distribution of both Remicade and Simponi, extending the Company’s rights to exclusively market Remicade to match the duration of the Company’s exclusive marketing rights for Simponi. In addition, Schering-Plough and Centocor agreed to share certain development costs relating to Simponi’s auto-injector delivery system. On October 6, 2009, the European Commission approved Simponi as a treatment for rheumatoid arthritis and other immune system disorders in two presentations — a novel auto-injector and a prefilled syringe. As a result, the Company’s marketing rights for both products extend for 15 years from the first commercial sale of Simponi in the European Union (“EU”) following the receipt of pricing and reimbursement approval within the EU. In April 2011, Merck and Johnson & Johnson reached agreement to amend the distribution rights to Remicade and Simponi. Under the terms of the amended distribution agreement, Merck will relinquish exclusive marketing rights for Remicade and Simponi to Johnson & Johnson in territories including Canada, Central and South America, the Middle East, Africa and Asia Pacific effective July 1, 2011. Merck will retain exclusive marketing rights throughout Europe, Russia and Turkey (“retained territories”). In addition, all profit derived from Merck’s exclusive distribution of the two products in the retained territories will be equally divided between Merck and Johnson & Johnson, beginning July 1, 2011. Under the prior terms of the distribution agreement, the contribution income (profit) split, which is currently at 58% to Merck and 42% percent to Johnson & Johnson, would have declined for Merck and increased for Johnson & Johnson each year until 2014, when it would have been equally divided. Johnson & Johnson also received a one-time payment of $500 million in April 2011, which the Company recorded as charge to Other (income) expense, net in the first quarter of 2011.

5. 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 and accounting related to the Company’s foreign currency risk management program, as well as its interest rate risk management activities are discussed below.

Notes to Consolidated Financial Statements (unaudited) (continued)

Foreign Currency Risk Management

     A significant portion of the Company’s revenues are denominated in foreign currencies. The Company has established revenue hedging and balance sheet risk management programs to protect against volatility of future foreign currency cash flows and changes in fair value caused by volatility in foreign exchange rates.

     The objective of the revenue hedging program is to reduce the potential for longer-term unfavorable changes in foreign exchange to decrease the U.S. dollar value of future cash flows derived from foreign currency denominated sales, primarily the euro and Japanese yen. To achieve this objective, the Company will partially hedge forecasted foreign currency denominated third-party and intercompany distributor entity sales that are expected to occur over its planning cycle, typically no more than three years into the future. The Company will layer in hedges over time, increasing the portion of third-party and intercompany distributor entity sales hedged as it gets closer to the expected date of the forecasted foreign currency denominated sales, such that it is probable the hedged transaction will occur. The portion of 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 hedged anticipated sales are a specified component of a portfolio of similarly denominated foreign currency-based sales transactions, each of which responds to the hedged risk in the same manner. The Company manages its anticipated transaction exposure principally with purchased local currency put options, which provide the Company with a right, but not an obligation, to sell foreign currencies in the future at a predetermined price. If the U.S. dollar strengthens relative to the currency of the hedged anticipated sales, total changes in the options’ cash flows offset the decline in the expected future U.S. dollar cash flows of the hedged foreign currency sales. Conversely, if the U.S. dollar weakens, the options’ value reduces to zero, but the Company benefits from the increase in the value of the anticipated foreign currency cash flows.

     In connection with the Company's revenue hedging program, a purchased collar option strategy may be utilized. With a purchased collar option strategy, the Company writes a local currency call option and purchases a local currency put option. As compared to a purchased put option strategy alone, a purchased collar strategy reduces the upfront costs associated with purchasing puts through the collection of premium by writing call options. If the U.S. dollar weakens relative to the currency of the hedged anticipated sales, the purchased put option value of the collar strategy reduces to zero, but the Company benefit from the increase in the value of its anticipated foreign currency cash flows would be capped at the strike level of the written call. If the U.S. dollar strengthens relative to the currency of the hedged anticipated sales, the written call option value of the collar strategy reduces to zero and the changes in the purchased put cash flows of the collar strategy would offset the decline in the expected future U.S. dollar cash flows of the hedged foreign currency sales.

     The Company may also utilize forward contracts in its revenue hedging program. If the U.S. dollar strengthens relative to the currency of the hedged anticipated sales, the increase in the fair value of the forward contracts offsets the decrease in the expected future U.S. dollar cash flows of the hedged foreign currency sales. Conversely, if the U.S. dollar weakens, the decrease in the fair value of the forward contracts offsets the increase in the value of the anticipated foreign currency cash flows.

     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 Other comprehensive income (“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 effective portion of the unrealized gains or losses on these contracts is recorded in Accumulated other comprehensive income (“AOCI”) and reclassified into Sales when the hedged anticipated revenue is recognized. The hedge relationship is highly effective and hedge ineffectiveness has been de minimis. For those derivatives which are not designated as cash flow hedges, unrealized gains or losses are recorded to Sales each period. The cash flows from these 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.

     The primary objective of the balance sheet risk management program is to mitigate the exposure of foreign currency denominated net monetary assets of foreign subsidiaries where the U.S. dollar is the functional currency from the effects of volatility in foreign exchange that might occur prior to their conversion to U.S. dollars. In these instances, Merck principally utilizes forward exchange contracts, which enable the Company to buy and sell foreign currencies in the future at fixed exchange rates and economically offset the consequences of changes in foreign exchange from the monetary assets. Merck routinely enters into contracts to offset the effects of exchange on exposures denominated in developed country currencies, primarily the euro and Japanese yen. For exposures in developing country currencies, the Company will enter into forward contracts to partially 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. The Company will also minimize the effect of exchange on monetary assets and liabilities by managing operating activities and net asset positions at the local level.

     Foreign currency denominated monetary assets and liabilities of foreign subsidiaries where the U.S. dollar is the functional currency 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 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 one year.

     When applicable, the Company uses forward contracts to hedge the changes in fair value of certain foreign currency denominated available-for-sale securities attributable to fluctuations in foreign currency exchange rates. These derivative contracts are designated as fair value hedges. Accordingly, changes in the fair value of the hedged securities due to fluctuations in spot rates are recorded in Other (income) expense, net, and are offset by the fair value changes in the forward contracts attributable to spot rate fluctuations. Changes in the contracts’ fair value due to spot-forward differences are excluded from the designated hedge relationship and recognized in Other (income) expense, net. These amounts, as well as hedge ineffectiveness, were not significant. The cash flows from these contracts are reported as operating activities in the Consolidated Statement of Cash Flows.

Notes to Consolidated Financial Statements (unaudited) (continued)

     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 on the euro-denominated debt instruments are included in foreign currency translation adjustment within OCI.

     The Company also uses forward exchange contracts to hedge its net investment in foreign operations against adverse movements in exchange rates. The forward contracts are designated as hedges of the net investment in a foreign operation. The Company hedges a portion of the net investment in certain of its foreign operations and measures ineffectiveness based upon changes in spot foreign exchange rates. The effective portion of the unrealized gains or losses on these contracts is recorded in foreign currency translation adjustment within OCI, and remains in OCI until either the sale or complete or substantially complete liquidation of the subsidiary. The cash flows from these contracts are reported as investing activities in the Consolidated Statement of Cash Flows.

Interest Rate Risk Management

     At March 31, 2011, the Company was a party to 22 pay-floating, receive-fixed interest rate swap contracts designated as fair value hedges of fixed-rate notes in which the notional amounts match the amount of the hedged fixed-rate notes. There are two swaps maturing in 2011 with notional amounts of $125 million each that effectively convert the Company’s $250 million, 5.125% fixed-rate notes due 2011 to floating rate instruments. There are nine swaps maturing in 2015: two of which have notional amounts of $250 million each and one of which has a notional amount of $500 million, that effectively convert the Company’s $1.0 billion, 4.75% fixed-rate notes due 2015 to floating rate instruments; five swaps with notional amounts of $150 million each and one with a notional amount of $250 million that effectively convert the Company’s $1.0 billion, 4.0% fixed-rate notes due 2015 to floating rate instruments. There are six swaps maturing in 2016, two of which have notional amounts of $175 million each, and four of which have notional amounts of $125 million each, that effectively convert the Company’s $850 million, 2.25% fixed-rate notes due 2016 to floating rate instruments. There are two swaps maturing in 2017, with notional amounts of $600 million and $400 million that effectively convert the $1.0 billion, 6.0% fixed-rate notes due in 2017 to floating rate instruments. There are three swaps maturing in 2019, two of which have notional amounts of $500 million each, and one of which has a notional amount of $250 million that effectively convert the Company’s $1.25 billion, 5.0% fixed-rate notes due in 2019 to floating rate instruments. The interest rate swap contracts are designated hedges of the fair value changes in the notes attributable to changes in the benchmark London Interbank Offered Rate (“LIBOR”) swap rate. The fair value changes in the notes attributable to changes in the benchmark interest rate are recorded in interest expense and offset by the fair value changes in the swap contracts. The cash flows from these contracts are reported as operating activities in the Consolidated Statement of Cash Flows.

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

				March 31, 2011												December 31, 2010
				Fair Value of Derivative								U.S. Dollar				Fair Value of Derivative								U.S. Dollar
($ in millions)		Balance Sheet Caption		Asset				Liability				Notional				Asset				Liability				Notional
Derivatives Designated as Hedging Instruments
Foreign exchange contracts (current)		Deferred income taxes and other current assets		$	94			$	—			$	3,412			$	167			$	—			$	2,344
Foreign exchange contracts (non-current)		Other assets			263				—				4,329				310				—				3,720
Foreign exchange contracts (current)		Accrued and other current liabilities			—				25				2,071				—				18				1,505
Foreign exchange contracts (non-current)		Deferred income taxes and noncurrent liabilities			—				—				—				—				6				503
Interest rate swaps (current)		Deferred income taxes and other current assets			11				—				250				—				—				—
Interest rate swaps (non-current)		Other assets			85				—				4,250				56				—				1,000
Interest rate swaps (non-current)		Deferred income taxes and noncurrent liabilities			—				10				850				—				7				850
				$	453			$	35			$	15,162			$	533			$	31			$	9,922
Derivatives Not Designated as Hedging Instruments
Foreign exchange contracts (current)		Deferred income taxes and other current assets		$	32			$	—			$	4,100			$	95			$	—			$	6,295
Foreign exchange contracts (current)		Accrued and other current liabilities			—				176				8,712				—				30				4,229
				$	32			$	176			$	12,812			$	95			$	30			$	10,524
				$	485			$	211			$	27,974			$	628			$	61			$	20,446

Notes to Consolidated Financial Statements (unaudited) (continued)

     The table below provides information on the location and pretax gain or loss amounts for derivatives that are: (i) designated in a fair value hedging relationship, (ii) designated in a cash flow hedging relationship, (iii) designated in a foreign currency hedging relationship (net investment hedge) and (iv) not designated in a hedging relationship:

		Three Months Ended
		March 31,
($ in millions)		2011				2010
Derivatives designated in fair value hedging relationships
Interest rate swap contracts
Amount of gain recognized in Other (income) expense, net on derivatives		$	(37	)		$	(21	)
Amount of loss recognized in Other (income) expense, net on hedged item			37				21
Derivatives designated in foreign currency cash flow hedging relationships
Foreign exchange contracts
Amount of loss reclassified from AOCI to Sales			7				19
Amount of loss (gain) recognized in OCI on derivatives			184				(94	)
Derivatives designated in foreign currency net investment hedging relationships
Foreign exchange contracts
Amount of gain recognized in Other (income) expense, net on derivatives (1)			(6	)			—
Amount of loss recognized in OCI on derivatives			1				—
Derivatives not designated in a hedging relationship
Foreign exchange contracts
Amount of loss (gain) recognized in Other (income) expense, net on derivatives (2)			316				(69	)
Amount of gain recognized in Sales on hedged item			—				(67	)

     At March 31, 2011, the Company estimates $81 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 AOCI 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.

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. 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 that may be used to measure fair value:

     Level 1 - Quoted prices in active markets for identical assets or liabilities. The Company’s Level 1 assets include equity securities that are traded in an active exchange market.

     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. The Company’s Level 2 assets and liabilities primarily include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, corporate notes and bonds, U.S. and foreign government and agency securities, certain mortgage-backed and asset-backed securities, municipal securities, commercial paper and derivative contracts whose values are determined using pricing models with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.

     Level 3 - Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation. The Company’s Level 3 assets included certain mortgage-backed securities with limited market activity.

     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.

Notes to Consolidated Financial Statements (unaudited) (continued)

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

     Financial assets and liabilities measured at fair value on a recurring basis are summarized below:

		Fair Value Measurements Using																Fair Value Measurements Using
		Quoted Prices				Significant												Quoted Prices				Significant
		In Active				Other				Significant								In Active				Other				Significant
		Markets for				Observable				Unobservable								Markets for				Observable				Unobservable
		Identical Assets				Inputs				Inputs								Identical Assets				Inputs				Inputs
		(Level 1)				(Level 2)				(Level 3)				Total				(Level 1)				(Level 2)				(Level 3)				Total
($ in millions)						March 31, 2011																December 31, 2010
Assets
Investments
Corporate notes and bonds		$	—			$	1,174			$	—			$	1,174			$	—			$	1,133			$	—			$	1,133
Commercial paper			—				1,095				—				1,095				—				1,046				—				1,046
U.S. government and agency securities			—				384				—				384				—				500				—				500
Municipal securities			—				305				—				305				—				361				—				361
Asset-backed securities(1)			—				167				—				167				—				171				—				171
Mortgage-backed securities(1)			—				90				—				90				—				99				13				112
Foreign government bonds			—				65				—				65				—				10				—				10
Equity securities			111				24				—				135				117				23				—				140
Other debt securities			—				3				—				3				—				3				—				3
			111				3,307				—				3,418				117				3,346				13				3,476
Other assets
Securities held for employee compensation			191				—				—				191				181				—				—				181
Derivative assets (2)
Purchased currency options			—				357				—				357				—				477				—				477
Forward exchange contracts			—				32				—				32				—				95				—				95
Interest rate swaps			—				96				—				96				—				56				—				56
			—				485				—				485				—				628				—				628
Total assets		$	302			$	3,792			$	—			$	4,094			$	298			$	3,974			$	13			$	4,285
Liabilities
Derivative liabilities (2)
Forward exchange contracts		$	—			$	201			$	—			$	201			$	—			$	54			$	—			$	54
Interest rate swaps			—				10				—				10				—				7				—				7
Total liabilities		$	—			$	211			$	—			$	211			$	—			$	61			$	—			$	61

     There were no significant transfers between Level 1 and Level 2 during the first quarter of 2011. As of March 31, 2011, Cash and cash equivalents of $11.7 billion included $11.0 billion of cash equivalents.

Level 3 Valuation Techniques:

     Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial assets also include certain investment securities for which there is limited market activity such that the determination of fair value requires significant judgment or estimation. The Company’s Level 3 investment securities included certain mortgage-backed securities that were valued primarily using pricing models for which management understands the methodologies. These models incorporate transaction details such as contractual terms, maturity, timing and amount of future cash inflows, as well as assumptions about liquidity and credit valuation adjustments of marketplace participants.

Notes to Consolidated Financial Statements (unaudited) (continued)

     The table below provides a summary of the changes in fair value of all financial assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

		Three Months Ended March 31, 2011												Three Months Ended March 31, 2010
		Available-												Available-
		for-sale				Other								for-sale				Other
($ in millions)		investments				assets				Total				investments				assets				Total
Beginning balance January 1		$	13			$	—			$	13			$	—			$	72			$	72
Sales			(13	)			—				(13	)			—				(52	)			(52	)
Settlements			—				—				—				—				(2	)			(2	)
Total realized and unrealized gains (losses)
Included in:
Earnings (1)			—				—				—				—				13				13
Comprehensive income			—				—				—				—				(11	)			(11	)
Ending balance March 31		$	—			$	—			$	—			$	—			$	20			$	20
Losses recorded in earnings for Level 3 assets still held at March 31		$	—			$	—			$	—			$	—			$	(2	)		$	(2	)

Financial Instruments not Measured at Fair Value

     Some of the Company’s financial instruments are not measured at fair value on a recurring basis but are recorded at amounts that approximate fair value due to their liquid or short-term nature, such as cash and cash equivalents, receivables and payables.

     The estimated fair value of loans payable and long-term debt (including current portion) at March 31, 2011 was $18.3 billion compared with a carrying value of $17.8 billion and at December 31, 2010 was $18.7 billion compared with a carrying value of $17.9 billion. Fair value was estimated using quoted dealer prices.

     A summary of gross unrealized gains and losses on available-for-sale investments recorded in AOCI is as follows:

		March 31, 2011																December 31, 2010
		Fair				Amortized				Gross Unrealized									Fair				Amortized				Gross Unrealized
($ in millions)		Value				Cost				Gains				Losses				Value				Cost				Gains				Losses
Corporate notes and bonds		$	1,174			$	1,167			$	10			$	(3	)		$	1,133			$	1,124			$	12			$	(3	)
Commercial paper			1,095				1,095				—				—				1,046				1,046				—				—
U.S. government and agency securities			384				386				1				(3	)			500				501				1				(2	)
Municipal securities			305				304				3				(2	)			361				359				4				(2	)
Asset-backed securities			167				166				1				—				171				170				1				—
Mortgage-backed securities			90				90				—				—				112				108				5				(1	)
Foreign government bonds			65				59				6				—				10				10				—				—
Other debt securities			3				1				2				—				3				1				2				—
Equity securities			326				298				28				—				321				295				34				(8	)
		$	3,609			$	3,566			$	51			$	(8	)		$	3,657			$	3,614			$	59			$	(16	)

     Available-for-sale debt securities included in Short-term investments totaled $1.3 billion at March 31, 2011. Of the remaining debt securities, $1.6 billion mature within five years. At March 31, 2011, there were no debt securities pledged as collateral.

Concentrations of Credit Risk

     On an ongoing basis, the Company monitors concentrations of credit risk associated with corporate 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. Approximately half of the Company’s cash and cash equivalents are invested in three highly-rated money market funds.

Notes to Consolidated Financial Statements (unaudited) (continued)

     The majority of the Company’s accounts receivable arise from product sales in the United States and Europe and are primarily due from drug wholesalers and retailers, hospitals, government agencies, managed health care providers and pharmacy benefit managers. The Company monitors the financial performance and credit worthiness of its customers so that it can properly assess and respond to changes in their credit profile. The Company also continues to monitor economic conditions, including the volatility associated with international sovereign economies, and associated impacts on the financial markets and its business, taking into consideration the global economic downturn and the sovereign debt issues in certain European countries. The Company continues to monitor the credit and economic conditions within Greece, Spain, Italy and Portugal, among other members of the EU. These deteriorating economic conditions, as well as inherent variability of timing of cash receipts, have resulted in, and may continue to result in, an increase in the average length of time that it takes to collect accounts receivable outstanding. As of March 31, 2011, the Company’s accounts receivable in Greece, Italy, Spain and Portugal totaled approximately $1.5 billion of which hospital and public sector receivables in Greece were approximately 7%. As of March 31, 2011, the Company’s total accounts receivable outstanding for more than one year were approximately $345 million, of which approximately $285 million related to accounts receivable in Greece, Italy, Spain and Portugal, mostly comprised of hospital and public sector receivables.

     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. As of March 31, 2011 and December 31, 2010, the Company had received cash collateral of $3 million and $157 million, respectively, from various counterparties which is recorded in Accrued and other current liabilities. The Company had not advanced any cash collateral to counterparties as of March 31, 2011 or December 31, 2010.

6. Inventories

     Inventories consisted of:

		March 31,				December 31,
($ in millions)		2011				2010
Finished goods		$	1,384			$	1,484
Raw materials and work in process			5,801				5,449
Supplies			306				315
Total (approximates current cost)			7,491				7,248
Reduction to LIFO costs			(170	)			(186	)
		$	7,321			$	7,062
Recognized as:
Inventories		$	6,057			$	5,868
Other assets			1,264				1,194

     As of March 31, 2011 and December 31, 2010, $175 million and $225 million, respectively, of purchase accounting adjustments to inventories remained which are recognized as a component of Materials and production costs as the related inventories are sold. Amounts recognized as Other assets are comprised almost entirely of raw materials and work in process inventories. At March 31, 2011 and at December 31, 2010, these amounts included $1.0 billion of inventories not expected to be sold within one year, principally vaccines. In addition, these amounts included $262 million and $197 million at March 31, 2011 and December 31, 2010, respectively, of inventories produced in preparation for product launches, including Victrelis (boceprevir) which is currently under review with the U.S. Food and Drug Administration (“FDA”).

7. Other Intangibles

     At the time of the Merger, the Company measured the fair value of legacy Schering-Plough pipeline programs and capitalized these amounts. During the first quarter of 2011, the Company recorded $302 million of in-process research and development (“IPR&D”) impairment charges within Research and development expenses primarily for programs that had previously been deprioritized and were deemed to have no alternative use during the quarter. During the first quarter of 2010, the Company recorded $27 million of IPR&D impairment charges attributable to compounds identified during the Company’s pipeline prioritization review that were abandoned and determined to have either no alternative use or were returned to the respective licensor. The Company may recognize additional non-cash impairment charges in the future for the cancellation of other legacy Schering-Plough pipeline programs and such charges could be material.

Notes to Consolidated Financial Statements (unaudited) (continued)

8. Joint Ventures and Other Equity Method Affiliates

     Equity income from affiliates reflects the performance of the Company’s joint ventures and other equity method affiliates and was comprised of the following:

		Three Months Ended
		March 31,
($ in millions)		2011				2010
| |
AstraZeneca LP		$	133			$	125
Other (1)			5				13
		$	138			$	138

AstraZeneca LP

     In 1998, Old Merck and Astra completed the restructuring of the ownership and operations of their existing joint venture whereby Old Merck acquired Astra’s interest in KBI Inc. (“KBI”) and contributed KBI’s operating assets to a new U.S. limited partnership, Astra Pharmaceuticals L.P. (the “Partnership”), in exchange for a 1% limited partner interest. Astra contributed the net assets of its wholly owned subsidiary, Astra USA, Inc., to the Partnership in exchange for a 99% general partner interest. The Partnership, renamed AstraZeneca LP (“AZLP”) upon Astra’s 1999 merger with Zeneca Group Plc (the “AstraZeneca merger”), became the exclusive distributor of the products for which KBI retained rights.

     In connection with the 1998 restructuring, Astra purchased an option (the “Asset Option”) for a payment of $443 million, which was recorded as deferred income, to buy Old Merck’s interest in the KBI products, excluding the gastrointestinal medicines Nexium and Prilosec (the “Non-PPI Products”). In April 2010, AstraZeneca exercised the Asset Option. Merck received $647 million from AstraZeneca, representing the net present value as of March 31, 2008 of projected future pretax revenue to be received by Old Merck from the Non-PPI Products, which was recorded as a reduction to the Company’s investment in AZLP. The Company recognized the $443 million of deferred income in the second quarter of 2010 as a component of Other (income) expense, net. In addition, in 1998, Old Merck granted Astra an option (the “Shares Option”) to buy Old Merck’s common stock interest in KBI and, therefore, Old Merck’s interest in Nexium and Prilosec, exercisable in 2012. The exercise price for the Shares Option will be based on the net present value of estimated future net sales of Nexium and Prilosec as determined at the time of exercise, subject to certain true-up mechanisms. The Company believes that it is likely that AstraZeneca will exercise the Shares Option.

     Summarized financial information for AZLP is as follows:

		Three Months Ended
		March 31,
($ in millions)		2011				2010
| |
Sales		$	1,155			$	1,293
Materials and production costs			545				633
Other expense, net			300				142
Income before taxes (1)		$	310			$	518

Other

     In March 2011, Merck and sanofi-aventis mutually terminated their agreement to form a new animal health joint venture by combining Intervet/Schering-Plough, Merck’s animal health unit, with Merial, the animal health business of sanofi-aventis. As a result of the termination, both Merial and Intervet/Schering-Plough continue to operate independently. The termination of the agreement was without penalty to either party.

Notes to Consolidated Financial Statements (unaudited) (continued)

9. Contingencies

     The Company is involved in various claims and legal proceedings of a nature considered normal to its business, including product liability, intellectual property, and commercial litigation, as well as additional matters such as antitrust actions.

Vioxx Litigation

Product Liability Lawsuits

     As previously disclosed, individual and putative class actions have been filed against Old Merck in state and federal courts alleging personal injury and/or economic loss with respect to the purchase or use of Vioxx. All such actions filed in federal court are coordinated in a multidistrict litigation in the U.S. District Court for the Eastern District of Louisiana (the “MDL”) before District Judge Eldon E. Fallon. A number of such actions filed in state court are coordinated in separate coordinated proceedings in state courts in California and Texas, and the counties of Philadelphia, Pennsylvania and Washoe and Clark Counties, Nevada. (All of the actions discussed in this paragraph and in “Other Lawsuits” below are collectively referred to as the “Vioxx Product Liability Lawsuits.”)

     Of the plaintiff groups in the Vioxx Product Liability Lawsuits described above, the vast majority were dismissed as a result of the Vioxx Settlement Program, which has been described previously. As of March 31, 2011, approximately 30 plaintiff groups who were otherwise eligible for the Settlement Program did not participate and their claims remain pending against Old Merck. In addition, the claims of approximately 120 plaintiff groups who were not eligible for the Settlement Program remain pending against Old Merck. A number of these 120 plaintiff groups are subject to various motions to dismiss for failure to comply with court-ordered deadlines.

     There is one U.S. Vioxx Product Liability Lawsuit currently scheduled for trial in 2011. Old Merck has previously disclosed the outcomes of several Vioxx Product Liability Lawsuits that were tried prior to 2010. Of the cases that went to trial, there are two unresolved post-trial appeals: Ernst v. Merck and Garza v. Merck. Merck has previously disclosed the details associated with these cases and the grounds for Merck’s appeals.

Other Lawsuits

     There are still pending in various U.S. courts putative class actions purportedly brought on behalf of individual purchasers or users of Vioxx seeking reimbursement for alleged economic loss. In the MDL proceeding, approximately 30 such class actions remain. On June 30, 2010, Old Merck moved to strike the class claims or for judgment on the pleadings regarding the master complaint, which includes the above-referenced cases, and briefing on that motion was completed on September 23, 2010. The MDL court heard oral argument on Old Merck’s motion on October 7, 2010, and took it under advisement.

     On June 12, 2008, a Missouri state court certified a class of Missouri plaintiffs seeking reimbursement for out-of-pocket costs relating to Vioxx. Trial is scheduled to begin in May 2012. In addition, in Indiana, plaintiffs have filed a motion to certify a class of Indiana Vioxx purchasers in a case pending before the Circuit Court of Marion County, Indiana. On April 1, 2010, a Kentucky state court denied Old Merck’s motion for summary judgment and certified a class of Kentucky plaintiffs seeking reimbursement for out-of-pocket costs relating to Vioxx. The Kentucky Court of Appeals denied Old Merck’s petition for a writ of mandamus, and the Kentucky Supreme Court has affirmed that ruling. The trial court entered an amended class certification order on January 27, 2011, and Merck has appealed that ruling to the Kentucky Court of Appeals.

     Old Merck has also been named as a defendant in several lawsuits brought by, or on behalf of, government entities. Twelve of these suits are being brought by state Attorneys General, one on behalf of a county, and one is being brought by a private citizen (as a qui tam suit). All of these actions, except for a suit brought by the Attorney General of Michigan, are in the MDL proceeding. The Michigan Attorney General case was remanded to state court. The trial court denied Merck’s motion to dismiss, but the Court of Appeals reversed that ruling on March 17, 2011, ordering the trial court to dismiss the case. These actions allege that Old Merck misrepresented the safety of Vioxx. All but one of these suits seeks recovery for expenditures on Vioxx by government-funded health care programs such as Medicaid, along with other relief such as penalties and attorneys’ fees. An action brought by the Attorney General of Kentucky seeks only penalties for alleged Consumer Fraud Act violations. The lawsuit brought by the county is a class action filed by Santa Clara County, California on behalf of all similarly situated California counties. Old Merck moved to dismiss the False Claims Act claims brought by a qui tam plaintiff on behalf of the District of Columbia in November 2010. The court granted that motion on March 28, 2011. Old Merck also moved to dismiss the case brought by the Attorney General of Oklahoma in December 2010.

     On March 31, 2010, Judge Fallon partially granted and partially denied Old Merck’s motion for summary judgment in the Louisiana Attorney General case. A trial on the remaining claims before Judge Fallon began on April 12, 2010 and was completed on April 21, 2010. Judge Fallon found in favor of Old Merck on June 29, 2010, dismissing the Attorney General’s remaining claims with prejudice. The Louisiana Attorney General is appealing that ruling.

Notes to Consolidated Financial Statements (unaudited) (continued)

Shareholder Lawsuits

     As previously disclosed, in addition to the Vioxx Product Liability Lawsuits, various putative class actions and individual lawsuits under federal and state securities laws have been filed against Old Merck and various current and former officers and directors (the “Vioxx Securities Lawsuits”). As previously disclosed, the Vioxx Securities Lawsuits have been transferred by the Judicial Panel on Multidistrict Litigation (the “JPML”) to the U.S. District Court for the District of New Jersey before District Judge Stanley R. Chesler for inclusion in a nationwide MDL (the “Shareholder MDL”), and have been consolidated for all purposes. In June 2010, Old Merck moved to dismiss the Fifth Amended Class Action Complaint in the consolidated securities action. Plaintiffs filed their opposition in August 2010, and Old Merck filed its reply in September 2010. The motion is currently pending before the district court.

     As previously disclosed, several individual securities lawsuits filed by foreign institutional investors also are consolidated with the Vioxx Securities Lawsuits. By stipulation, defendants are not required to respond to these complaints until the resolution of any motions to dismiss in the consolidated securities class action.

     In addition, as previously disclosed, various putative class actions have been filed in federal court under the Employee Retirement Income Security Act (“ERISA”) against Old Merck and certain current and former officers and directors (the “Vioxx ERISA Lawsuits”). Those cases were consolidated in the Shareholder MDL before Judge Chesler. Fact discovery in the Vioxx ERISA Lawsuits closed on September 30, 2010. The Court has entered a schedule for expert discovery, dispositive motions, and a pre-trial conference. Motions for summary judgment must be filed by June 30, 2011.

International Lawsuits

     As previously disclosed, in addition to the lawsuits discussed above, Old Merck has been named as a defendant in litigation relating to Vioxx in Australia, Brazil, Canada, Europe and Israel (collectively, the “Vioxx Foreign Lawsuits”).

     In Canada, in 2006, the Superior Court in Quebec authorized a class action on behalf of Vioxx users in Quebec who alleged negligence and, in 2008, the Superior Court of Ontario certified a class of Vioxx users in Canada, except those in Quebec and Saskatchewan, who alleged negligence and an entitlement to elect to waive the tort. These procedural decisions in the Canadian litigation do not address the merits of the plaintiffs’ claims and litigation in Canada remains in an early stage.

Insurance

     As previously disclosed, the Company has Directors and Officers insurance coverage applicable to the Vioxx Securities Lawsuits with remaining stated upper limits of approximately $175 million. The Company has Fiduciary and other insurance for the Vioxx ERISA Lawsuits with stated upper limits of approximately $275 million. As a result of the previously disclosed insurance arbitration, additional insurance coverage for these claims should also be available, if needed, under upper-level excess policies that provide coverage for a variety of risks. There are disputes with the insurers about the availability of some or all of the Company’s insurance coverage for these claims and there are likely to be additional disputes. The amounts actually recovered under the policies discussed in this paragraph may be less than the stated upper limits.

Investigations

     As previously disclosed, Old Merck has received subpoenas from the Department of Justice (“DOJ”) requesting information related to Old Merck’s research, marketing and selling activities with respect to Vioxx in a federal health care investigation under criminal statutes. This investigation included subpoenas for witnesses to appear before a grand jury. As previously disclosed, in March 2009, Old Merck received a letter from the U.S. Attorney’s Office for the District of Massachusetts identifying it as a target of the grand jury investigation regarding Vioxx. On October 29, 2010, the Company announced that it had established a $950 million reserve (the “Vioxx Liability Reserve”) in connection with the anticipated resolution of the DOJ’s investigation. The Company’s discussions with the government are ongoing. Until they are concluded, there can be no certainty about a definitive resolution. The Company is cooperating with the DOJ in its investigation (the “Vioxx Investigation”). The Company cannot predict the outcome of these inquiries; however, they could result in potential civil and/or criminal remedies.

Reserves

     There was one U.S. Vioxx Product Liability Lawsuit tried in 2010. There is one U.S. Vioxx Product Liability Lawsuit currently scheduled for trial in 2011. The Company cannot predict the timing of any other trials related to the Vioxx Litigation (as defined below). The Company believes that it has meritorious defenses to the Vioxx Product Liability Lawsuits, Vioxx Shareholder Lawsuits and Vioxx Foreign Lawsuits (collectively, the “Vioxx Lawsuits”) and will vigorously defend against them. In view of the inherent difficulty of predicting the outcome of litigation, particularly where there are many claimants and the claimants seek indeterminate damages, the Company is unable to predict the outcome of these matters, and at this time cannot reasonably estimate the possible loss or range of loss with respect to the Vioxx Lawsuits not included in the Settlement Program. Unfavorable outcomes in the Vioxx Litigation could have a material adverse effect on the Company’s financial position, liquidity and results of operations.

Notes to Consolidated Financial Statements (unaudited) (continued)

     Legal defense costs expected to be incurred in connection with a loss contingency are accrued when probable and reasonably estimable. As of December 31, 2010, the Company had an aggregate reserve of approximately $76 million (the “Vioxx Legal Defense Costs Reserve”) solely for future legal defense costs related to the Vioxx Litigation.

     During the first quarter of 2011, the Company spent approximately $16 million in the aggregate in legal defense costs worldwide related to (i) the Vioxx Product Liability Lawsuits, (ii) the Vioxx Shareholder Lawsuits, (iii) the Vioxx Foreign Lawsuits, and (iv) the Vioxx Investigation (collectively, the “Vioxx Litigation”). Consequently, as of March 31, 2011, the aggregate amount of the Vioxx Legal Defense Costs Reserve was approximately $60 million, which is solely for future legal defense costs for the Vioxx Litigation. Some of the significant factors considered in the review of the Vioxx Legal Defense Costs Reserve were as follows: the actual costs incurred by the Company; the development of the Company’s legal defense strategy and structure in light of the scope of the Vioxx Litigation, including the Settlement Agreement and the expectation that certain lawsuits will continue to be pending; the number of cases being brought against the Company; the costs and outcomes of completed trials and the most current information regarding anticipated timing, progression, and related costs of pre-trial activities and trials in the Vioxx Litigation. The amount of the Vioxx Legal Defense Costs Reserve as of March 31, 2011 represents the Company’s best estimate of the minimum amount of defense costs to be incurred in connection with the remaining aspects of the Vioxx Litigation; however, events such as additional trials in the Vioxx Litigation and other events that could arise in the course of the Vioxx Litigation could affect the ultimate amount of 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 increase the Vioxx Legal Defense Costs Reserve at any time in the future if, based upon the factors set forth, it believes it would be appropriate to do so.

Other Product Liability Litigation

Fosamax

     As previously disclosed, Old Merck is a defendant in product liability lawsuits in the United States involving Fosamax (the “Fosamax Litigation”). As of March 31, 2011, approximately 1,450 cases, which include approximately 1,890 plaintiff groups, had been filed and were pending against Old Merck in either federal or state court, including one case which seeks class action certification, as well as damages and/or medical monitoring. In approximately 1,080 of these actions, plaintiffs allege, among other things, that they have suffered osteonecrosis of the jaw (“ONJ”), generally subsequent to invasive dental procedures, such as tooth extraction or dental implants and/or delayed healing, in association with the use of Fosamax. In addition, plaintiffs in approximately 365 of these actions generally allege that they sustained femur fractures and/or other bone injuries in association with the use of Fosamax.

     Cases Alleging ONJ and/or Other Jaw Related Injuries

     In August 2006, the JPML ordered that certain Fosamax product liability cases pending in federal courts nationwide should be transferred and consolidated into one multidistrict litigation (the “Fosamax MDL”) for coordinated pre-trial proceedings. The Fosamax MDL has been transferred to Judge John Keenan in the U.S. District Court for the Southern District of New York. As a result of the JPML order, approximately 900 of the cases are before Judge Keenan. Judge Keenan issued a Case Management Order (and various amendments thereto) which set forth a schedule governing the proceedings focused primarily upon resolving the class action certification motions in 2007 and completing fact discovery in an initial group of 25 cases by October 1, 2008. Briefing and argument on plaintiffs’ motions for certification of medical monitoring classes were completed in 2007 and Judge Keenan issued an order denying the motions on January 3, 2008. In January 2008, Judge Keenan issued a further order dismissing with prejudice all class claims asserted in the first four class action lawsuits filed against Old Merck that sought personal injury damages and/or medical monitoring relief on a class wide basis. Daubert motions were filed in May 2009 and Judge Keenan conducted a Daubert hearing in July 2009. In July 2009, Judge Keenan issued his ruling on the parties’ respective Daubert motions. The ruling denied the Plaintiff Steering Committee’s motion and granted in part and denied in part Old Merck’s motion. In the first Fosamax MDL trial, Boles v. Merck, the Fosamax MDL court declared a mistrial because the eight person jury could not reach a unanimous verdict. The Boles case was retried in June 2010 and resulted in a verdict in favor of the plaintiff in the amount of $8 million. Merck filed post-trial motions seeking judgment as a matter of law or, in the alternative, a new trial. On October 4, 2010, the court denied Merck’s post-trial motions but sua sponte ordered a remittitur, reducing the verdict to $1.5 million. Plaintiff rejected the remittitur ordered by the court and requested a new trial on damages. The Company has filed a motion for interlocutory appeal.

     In the next Fosamax MDL case set for trial, Maley v. Merck, the jury in May 2010 returned a unanimous verdict in Merck’s favor. On February 1, 2010, Judge Keenan selected a new bellwether case, Judith Graves v. Merck, to replace the Flemings bellwether case, which the Fosamax MDL court dismissed when it granted summary judgment in favor of Old Merck. In November 2010, the Second Circuit affirmed the Court’s granting of summary judgment in favor of Old Merck in the Flemings case. In Graves, the jury returned a unanimous verdict in favor of Old Merck in November 2010.

Notes to Consolidated Financial Statements (unaudited) (continued)

     The next trials scheduled in the Fosamax MDL are Secrest v. Merck, which was scheduled to begin on March 14, 2011, but has been continued until September 7, 2011, and Hester v. Merck, which was scheduled to begin on May 9, 2011, but after Merck filed its motion for summary judgment, plaintiff’s counsel dismissed Hester with prejudice. On April 27, 2011, Judge Keenan selected Raber v. Merck as the case to replace Hester and set the trial for Raber to begin on November 7, 2011. In addition, Judge Keenan ordered on February 4, 2011 that there will be two further bellwether trials conducted in the Fosamax MDL. The cases to be tried and the trial dates for those cases have not yet been determined.

     Outside the Fosamax MDL, a trial in Florida was scheduled to begin on June 21, 2010 but the Florida state court postponed the trial date and a new date has been set for March 5, 2012.

     In addition, in July 2008, an application was made by the Atlantic County Superior Court of New Jersey requesting that all of the Fosamax cases pending in New Jersey be considered for mass tort designation and centralized management before one judge in New Jersey. In October 2008, the New Jersey Supreme Court ordered that all pending and future actions filed in New Jersey arising out of the use of Fosamax and seeking damages for existing dental and jaw-related injuries, including ONJ, but not solely seeking medical monitoring, be designated as a mass tort for centralized management purposes before Judge Higbee in Atlantic County Superior Court. As of March 31, 2011, approximately 180 ONJ cases were pending against Old Merck in Atlantic County, New Jersey. On July 20, 2009, Judge Higbee entered a Case Management Order (and various amendments thereto) setting forth a schedule that contemplates completing fact and expert discovery in an initial group of cases to be worked up for trial. On February 14, 2011, the jury in Rosenberg v. Merck, the first trial in the New Jersey coordinated proceeding, returned a verdict in Merck’s favor.

     Discovery is ongoing in the Fosamax MDL litigation, the New Jersey coordinated proceeding, and the remaining jurisdictions where Fosamax cases are pending. The Company intends to defend against these lawsuits.

     Cases Alleging Femur Fractures and/or Other Bone Injuries

     As of March 31, 2011, approximately 310 cases alleging femur fractures and/or other bone injuries have been filed in New Jersey state court and are pending before Judge Higbee in Atlantic County Superior Court. A Case Management Order setting forth a schedule with respect to the work-up of these cases is expected but has not yet been entered and no trial dates for any of the New Jersey state femur fracture cases has been set.

     On March 23, 2011, Merck submitted a Motion to Transfer to the JPML seeking to have all federal cases alleging femur fractures and other bone injuries consolidated into one multidistrict litigation for coordinated pre-trial proceedings. The Motion to Transfer would consolidate 36 existing federal cases and any future cases filed in or removed to federal court. Oral argument on Merck’s motion is scheduled for May 16, 2011.

     A petition was filed seeking to coordinate all femur fracture cases filed in California state court before a single judge in Orange County, California. It is expected that the petition will be granted and that Judge Ronald L. Bauer will preside over the coordinated proceedings.

     Additionally, there are two femur fracture cases pending in other state courts. One case is pending in Massachusetts and one is pending in Florida. Discovery is ongoing in the federal and state courts where femur fracture cases are pending and the Company intends to defend against these lawsuits.

NuvaRing

     Beginning in May 2007, a number of complaints were filed in various jurisdictions asserting claims against the Company’s subsidiaries Organon USA, Inc., Organon Pharmaceuticals USA, Inc., Organon International (collectively, “Organon”), and Schering-Plough arising from Organon’s marketing and sale of NuvaRing, a combined hormonal contraceptive vaginal ring. The plaintiffs contend that Organon and Schering-Plough failed to adequately warn of the alleged increased risk of venous thromboembolism (“VTE”) posed by NuvaRing, and/or downplayed the risk of VTE. The plaintiffs seek damages for injuries allegedly sustained from their product use, including some alleged deaths, heart attacks and strokes. The majority of the cases are currently pending in a federal multidistrict litigation (the “NuvaRing MDL”) venued in Missouri and in New Jersey state court.

     As of March 31, 2011, there were approximately 775 NuvaRing cases. Of these cases, 650 are pending in the NuvaRing MDL in the U.S. District Court for the Eastern District of Missouri before Judge Rodney Sippel, and 122 are pending in consolidated discovery proceedings in the Bergen County Superior Court of New Jersey before Judge Brian R. Martinotti. Three additional cases are pending in various other state courts.

     Pursuant to orders of Judge Sippel in the NuvaRing MDL, the parties selected 26 trial pool cases which are the subject of fact discovery. Pursuant to Judge Martinotti’s order, the parties selected an additional 10 trial pool cases that are the subject of fact discovery in the New Jersey consolidated proceedings. Based on a revised scheduling order entered in both jurisdictions on September 15, 2010, fact discovery in these trial pool cases will end in June 2011 and expert discovery will end in February 2012. The first trials will then be scheduled in each jurisdiction. The Company intends to defend against these lawsuits.

Notes to Consolidated Financial Statements (unaudited) (continued)

Commercial Litigation

AWP Litigation and Investigations

     As previously disclosed, the Company and/or certain of its subsidiaries remain defendants in cases brought by various states and certain New York counties alleging manipulation by pharmaceutical manufacturers of Average Wholesale Prices (“AWP”), which are sometimes used by public and private payors in calculating provider reimbursement levels. The outcome of these lawsuits could include substantial damages, the imposition of substantial fines and penalties and injunctive or administrative remedies. In January 2010, the U.S. District Court for the District of Massachusetts held that a unit of the Company and eight other drug makers overcharged New York City and 42 New York counties for certain generic drugs. The court has reserved the issue of damages and any penalties for future proceedings. In a separate matter, in September 2010, a jury in the U.S. District Court for the District of Massachusetts found the Company liable on the ground that units of Schering-Plough caused Massachusetts to overpay pharmacists for prescriptions of albuterol. The District Court recently held that Massachusetts should be awarded approximately $13.8 million in treble damages and penalties, together with prejudgment interest and attorney’s fees. The Company intends to pursue a reversal of the verdict on appeal.

     In the period from September 2010 through March 2011, the Company settled certain AWP cases brought by the states of Utah, South Carolina, Alaska, Idaho, Kentucky, Pennsylvania, Mississippi, and Wisconsin. During the same period, the Company and several other manufacturers were named defendants in AWP cases brought by the states of Oklahoma and Louisiana. Accordingly, the Company and/or certain of its subsidiaries continue to be defendants in cases brought by 13 states and the New York counties.

Centocor Distribution Agreement

     On May 27, 2009, Centocor, a wholly owned subsidiary of Johnson & Johnson, delivered to Schering-Plough a notice initiating an arbitration proceeding to resolve whether, as a result of the Merger, Centocor is permitted to terminate the Company’s rights to distribute and commercialize Remicade and Simponi. On April 15, 2011, the Company announced that it had settled the arbitration. Under the terms of the amended distribution agreement, Merck’s subsidiary, Schering-Plough (Ireland) will relinquish exclusive marketing rights for Remicade and Simponi to Johnson & Johnson’s Janssen pharmaceutical companies in territories including Canada, Central and South America, the Middle East, Africa and Asia Pacific (“relinquished territories”), effective July 1, 2011. Merck will retain exclusive marketing rights throughout Europe, Russia and Turkey (“retained territories”). The retained territories represent approximately 70% of Merck’s 2010 revenue of approximately $2.8 billion from Remicade and Simponi, while the relinquished territories represent approximately 30%. In addition, all profit derived from Merck’s exclusive distribution of the two products in the retained territories will be equally divided between Merck and Johnson & Johnson, beginning July 1, 2011. Under the prior terms of the distribution agreement, the contribution income (profit) split, which is currently at 58% to Merck and 42% to Centocor Ortho Biotech Inc., would have declined for Merck and increased for Johnson & Johnson each year until 2014, when it would have been equally divided. Johnson & Johnson also received a one-time payment from Merck of $500 million in April 2011.

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. Certain products of the Company (or marketed via agreements with other companies) currently involved in such patent infringement litigation in the United States include: Cancidas, Integrilin, Nasonex, Nexium, Propecia, Temodar, Vytorin and Zetia. 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 generic 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.

     Cancidas — In November 2009, a patent infringement lawsuit was filed in the United States against Teva Parenteral Medicines, Inc. (“TPM”) in respect of TPM’s application to the FDA seeking pre-patent expiry approval to sell a generic version of Cancidas. That lawsuit has been dismissed with no rights granted to TPM. Also, in March 2010, a patent infringement lawsuit was filed in the United States against Sandoz Inc. (“Sandoz”) in respect of Sandoz’s application to the FDA seeking pre-patent expiry approval to sell a generic version of Cancidas. The lawsuit automatically stays FDA approval of Sandoz’s application until August 24, 2012 or until an adverse court decision, if any, whichever may occur earlier.

     Integrilin — In February 2009, a patent infringement lawsuit was filed (jointly with Millennium Pharmaceuticals, Inc. (“Millennium”)) in the United States against TPM in respect of TPM’s application to the FDA seeking approval to sell a generic version of Integrilin prior to the expiry of the last to expire listed patent. As TPM did not challenge certain patents that will not expire until November 2014, FDA approval of the TPM application cannot occur any earlier than November 2014, however, it could be later in the event of a favorable decision in the lawsuit for the Company and Millennium.

Notes to Consolidated Financial Statements (unaudited) (continued)

     Nasonex — In December 2009, a patent infringement suit was filed in the United States against Apotex Corp. (“Apotex”) in respect of Apotex’s application to the FDA seeking pre-patent expiry approval to market a generic version of Nasonex. The lawsuit automatically stays FDA approval of Apotex’s ANDA until May 2012 or until an adverse court decision, if any, whichever may occur earlier.

     Nexium — In November 2005, a patent infringement lawsuit was filed (jointly with AstraZeneca) in the United States against Ranbaxy Laboratories Ltd. (“Ranbaxy”) in respect of Ranbaxy’s application to the FDA seeking pre-patent expiry approval to sell a generic version of Nexium. As previously disclosed, AstraZeneca, Merck and Ranbaxy entered into a settlement agreement which provided that Ranbaxy would be entitled to bring its generic esomeprazole product to market in the United States on May 27, 2014. The Company and AstraZeneca each received a Civil Investigative Demand (“CID”) from the Federal Trade Commission (“FTC”) in July 2008 regarding the settlement agreement with Ranbaxy. The Company is cooperating with the FTC in responding to this CID. In March 2006, a patent infringement lawsuit was filed (jointly with AstraZeneca) against IVAX Pharmaceuticals, Inc. (“IVAX”) (later acquired by Teva Pharmaceuticals, Inc. (“Teva”)), in respect of IVAX’s application to the FDA seeking pre-patent expiry approval to sell a generic version of Nexium. In January 2010, AstraZeneca, Merck and Teva/IVAX entered into a settlement agreement which provides that Teva/IVAX would be entitled to bring its generic esomeprazole product to market in the United States on May 27, 2014. Patent infringement lawsuits have also been filed in the United States against Dr. Reddy’s Laboratories (“Dr. Reddy’s”), Sandoz and Lupin Ltd. (“Lupin”) in respect to their respective applications to the FDA seeking pre-patent expiry approval to sell generic versions of Nexium. In January 2011, AstraZeneca, Merck and Dr. Reddy’s entered into a settlement agreement which provides that Dr. Reddy’s would be entitled to bring its generic esomeprazole product to market in the United States on May 27, 2014. The lawsuits against Sandoz and Lupin are ongoing with no trial dates presently scheduled. In February 2011, a patent infringement lawsuit was filed (jointly with AstraZeneca) in the United States against Hamni USA, Inc. (“Hamni”) in respect of Hamni’s application to the FDA seeking pre-patent expiry approval to sell a generic version of Nexium. A patent infringement lawsuit was also filed (jointly with AstraZeneca) in February 2010 in the United States against Sun Pharma Global Fze in respect of its application to the FDA seeking pre-patent expiry approval to sell a generic version of Nexium IV.

     Propecia — In December 2010, a patent infringement lawsuit was filed in the United States against Hetero Drugs Limited (“Hetero”) in respect of Hetero’s application to the FDA seeking pre-patent expiry approval to sell a generic version of Propecia. In March 2011, the Company settled this lawsuit with Hetero by agreeing to allow Hetero to sell a generic 1 mg finasteride product beginning on July 1, 2013.

     Temodar — In July 2007, a patent infringement action was filed (jointly with Cancer Research Technologies, Limited (“CRT”)) in the United States against Barr Laboratories (“Barr”) (later acquired by Teva) in respect of Barr’s application to the FDA seeking pre-patent expiry approval to sell a generic version of Temodar. In January 2010, the court issued a decision finding the CRT patent unenforceable on grounds of prosecution laches and inequitable conduct. In November 2010, the appeals court issued a decision reversing the trial court’s finding. In December 2010, Barr filed a petition seeking a rehearing en banc of the appeal, which petition was denied. By virtue of an agreement that Barr not launch a product during the appeal process, the Company has agreed that Barr can launch a product in August 2013.

     In September 2010, a patent infringement lawsuit was filed (jointly with CRT) in the United States against Sun Pharmaceutical Industries Inc. (“Sun”) in respect of Sun’s application to the FDA seeking pre-patent expiry approval to sell a generic version of Temodar. The lawsuit automatically stays FDA approval of Sun’s ANDA until February 2013 or until an adverse court decision, if any, whichever may occur earlier. In November 2010, a patent infringement lawsuit was filed (jointly with CRT) in the United States against Accord HealthCare Inc. (“Accord”) in respect of its application to the FDA seeking pre-patent expiry approval to sell a generic version of Temodar. The Company, CRT and Accord have entered an agreement to stay the lawsuit pending the outcome of the appeal en banc process in the Barr lawsuit.

     Vytorin — In December 2009, a patent infringement lawsuit was filed in the United States against Mylan Pharmaceuticals, Inc. (“Mylan”) in respect of Mylan’s application to the FDA seeking pre-patent expiry approval to sell a generic version of Vytorin. The lawsuit automatically stays FDA approval of Mylan’s application until May 2012 or until an adverse court decision, if any, whichever may occur earlier. In February 2010, a patent infringement lawsuit was filed in the United States against Teva in respect of Teva’s application to the FDA seeking pre-patent expiry approval to sell a generic version of Vytorin. The lawsuit automatically stays FDA approval of Teva’s application until August 2013 or until an adverse court decision, if any, whichever may occur earlier. In August 2010, a patent infringement lawsuit was filed in the United States against Impax Laboratories Inc. (“Impax”) in respect of Impax’s application to the FDA seeking pre-patent expiry approval to sell a generic version of Vytorin. An agreement was reached with Impax to stay the lawsuit pending the outcome of the lawsuit with Mylan.

Notes to Consolidated Financial Statements (unaudited) (continued)

     Zetia — In March 2007, a patent infringement lawsuit was filed in the United States against Glenmark Pharmaceuticals Inc., USA and its parent corporation (collectively, “Glenmark”) in respect of Glenmark’s application to the FDA seeking pre-patent expiry approval to sell a generic version of Zetia. In May 2010, Glenmark agreed to a settlement by virtue of which Glenmark will be permitted to launch its generic product in the United States on December 12, 2016, subject to receiving final FDA approval. In June 2010, a patent infringement lawsuit was filed in the United States against Mylan in respect of Mylan’s application to the FDA seeking pre-patent expiry approval to sell a generic version of Zetia. The lawsuit automatically stays FDA approval of Mylan’s application until December 2012 or until an adverse court decision, if any, whichever may occur earlier. In September 2010, a patent infringement lawsuit was filed in the United States against Teva in respect of Teva’s application to the FDA seeking pre-patent expiry approval to sell a generic version of Zetia. The lawsuit automatically stays FDA approval of Teva’s application until January 2013 or until an adverse court decision, if any, whichever may occur earlier.

     In September 2008, a lawsuit was filed in the Federal Court of Canada against Teva seeking an order of prohibition of Teva’s application seeking pre-patent expiry approval to sell a generic version of Ezetrol (marketed in the United States as Zetia) in Canada. Teva responded asserting that the patent was invalid. In September 2010, the Federal Court of Canada issued a decision upholding the validity of the Company’s Canadian Ezetrol patent. This decision was not appealed. In August 2010, a lawsuit was filed in the Federal Court of Canada against Mylan seeking an order of prohibition of Mylan’s application seeking pre-patent expiry approval to sell a generic version of Ezetrol in Canada. In December 2010, Mylan withdrew its application for product approval prior to patent expiration in September 2014 and the subject lawsuit was withdrawn.

Environmental Matters

     As previously disclosed, approximately 2,200 plaintiffs have filed an amended complaint against Old Merck and 12 other defendants in U.S. District Court, Eastern District of California asserting claims under the Clean Water Act, the Resource Conservation and Recovery Act, as well as negligence and nuisance. The suit seeks damages for personal injury, diminution of property value, medical monitoring and other alleged real and personal property damage associated with groundwater and soil contamination found at the site of a former Old Merck subsidiary in Merced, California. Certain of the other defendants in this suit have settled with plaintiffs regarding some or all aspects of plaintiffs’ claims. This lawsuit is proceeding in a phased manner. A jury trial commenced in February 2011 during which a jury was asked to make certain factual findings regarding whether contamination moved off-site to any areas where plaintiffs could have been exposed to such contamination and, if so, when, where and in what amounts. Defendants in this “Phase 1” trial include Old Merck and three of the other original 12 defendants. On March 31, 2011, the Phase 1 jury returned a mixed verdict, finding in favor of Old Merck and the other defendants as to some, but not all, of plaintiffs’ claims. Specifically, the jury found that contamination from the site did not enter or affect plaintiffs’ municipal water supply wells or any private domestic wells. The jury found, however, that plaintiffs could have been exposed to contamination via air emissions prior to 1994, as well as via surface water in the form of storm drainage channeled into an adjacent irrigation canal, including during a flood in April 2006. Old Merck will file motions requesting that the court set aside those portions of the jury’s verdict that are adverse to Old Merck on the basis that those portions of the verdict are unsupported by the evidence and contrary to established legal principles. If necessary, Old Merck will seek to appeal, prior to commencement of any later phases of the litigation, those portions of the jury’s verdict adverse to Old Merck that are not set aside by the trial court. In the event the Phase 1 jury’s findings in favor of plaintiffs are not set aside by the trial court or on appeal, it is anticipated that later phases of the litigation would be required to address issues related to liability, causation and damages related to specific plaintiffs.

Other Litigation

     There are various other legal proceedings, principally product liability and intellectual property suits involving the Company, that are pending. While it is not feasible to predict the outcome of such proceedings or the proceedings discussed in this Note, in the opinion of the Company, all such proceedings should not ultimately result in any liability that would have a material adverse effect on the financial position, liquidity or results of operations of the Company, other than proceedings for which a separate assessment is provided in this Note.

Notes to Consolidated Financial Statements (unaudited) (continued)

10. Equity

																		Accumulated
										Other								Other												Non-
		Common Stock								Paid-In				Retained				Comprehensive				Treasury Stock								Controlling
($ in millions)		Shares				Par Value				Capital				Earnings				Loss				Shares				Cost				Interests				Total
Balance January 1, 2010			3,563			$	1,781			$	39,683			$	41,405			$	(2,767	)			454			$	(21,044	)		$	2,427			$	61,485
Net income attributable to Merck & Co., Inc.			—				—				—				299				—				—				—				—				299
Cash dividends declared on common stock			—				—				—				(1,193	)			—				—				—				—				(1,193	)
Share-based compensation plans and other			9				5				514				—				—				—				—				—				519
Other comprehensive loss			—				—				—				—				(805	)			—				—				—				(805	)
Net income attributable to noncontrolling interests			—				—				—				—				—				—				—				31				31
Distributions attributable to noncontrolling interests			—				—				—				—				—				—				—				(1	)			(1	)
Balance March 31, 2010			3,572			$	1,786			$	40,197			$	40,511			$	(3,572	)			454			$	(21,044	)		$	2,457			$	60,335
Balance January 1, 2011			3,577			$	1,788			$	40,701			$	37,536			$	(3,216	)			495			$	(22,433	)		$	2,429			$	56,805
Net income attributable to Merck & Co., Inc.			—				—				—				1,043				—				—				—				—				1,043
Cash dividends declared on common stock			—				—				—				(1,179	)			—				—				—				—				(1,179	)
Share-based compensation plans and other			—				—				(11	)			—				—				(3	)			109				—				98
Other comprehensive income			—				—				—				—				46				—				—				—				46
Net income attributable to noncontrolling interests			—				—				—				—				—				—				—				28				28
Distributions attributable to noncontrolling interests			—				—				—				—				—				—				—				(2	)			(2	)
Balance March 31, 2011			3,577			$	1,788			$	40,690			$	37,400			$	(3,170	)			492			$	(22,324	)		$	2,455			$	56,839

     In connection with the 1998 restructuring of Astra Merck Inc., the Company assumed $2.4 billion par value preferred stock with a dividend rate of 5% per annum, which is carried by KBI and included in Noncontrolling interests on the Consolidated Balance Sheet. If AstraZeneca exercises the Shares Option (see Note 8) this preferred stock obligation will be settled.

     The accumulated balances related to each component of other comprehensive income (loss), net of taxes, were as follows:

																		Accumulated
										Employee				Cumulative				Other
										Benefit				Translation				Comprehensive
($ in millions)		Derivatives				Investments				Plans				Adjustment				Income (Loss)
Balance January 1, 2010		$	(42	)		$	33			$	(2,469	)		$	(289	)		$	(2,767	)
Other comprehensive income (loss)			68				(6	)			59				(926	)			(805	)
Balance at March 31, 2010		$	26			$	27			$	(2,410	)		$	(1,215	)		$	(3,572	)
Balance January 1, 2011		$	41			$	31			$	(2,043	)		$	(1,245	)		$	(3,216	)
Other comprehensive income (loss)			(107	)			(1	)			18				136				46
Balance at March 31, 2011		$	(66	)		$	30			$	(2,025	)		$	(1,109	)		$	(3,170	)

     Comprehensive income (loss) was $1.1 billion and $(506) million for the three months ended March 31, 2011 and 2010, respectively.

     Included in the cumulative translation adjustment are pretax (losses) gains of $(149) million and $234 million for the first quarter of 2011 and 2010, respectively, from euro-denominated notes which have been designated as, and are effective as, economic hedges of the net investment in a foreign operation.

Notes to Consolidated Financial Statements (unaudited) (continued)

11. Share-Based Compensation Plans

     The Company has share-based compensation plans under which employees and non-employee directors may be granted restricted stock units (“RSUs”). In addition, the Company grants options to purchase shares of Company common stock at the fair market value at the time of grant and performance share units (“PSUs”) to certain management-level employees. The Company recognizes the fair value of share-based compensation in net income on a straight-line basis over the requisite service period.

     The following table provides amounts of share-based compensation cost recorded in the Consolidated Statement of Income:

		Three Months Ended
		March 31,
($ in millions)		2011				2010
Pretax share-based compensation expense		$	93			$	132
Income tax benefit			(32	)			(45	)
Total share-based compensation expense, net of taxes		$	61			$	87

     During the first three months of 2011 and 2010, the Company granted 221 thousand RSUs with a weighted-average grant price of $33.27 per RSU and 1.0 million RSUs with a weighted-average grant price of $37.49 per RSU, respectively.

     During the first three months of 2011 and 2010, the Company granted 25 thousand options with a weighted-average grant price of $33.27 per option and 1.3 million options with a weighted-average grant price of $37.49 per option, respectively. The weighted average fair value of options granted for the first three months of 2011 and 2010 was $5.96 and $6.68 per option, respectively, and was determined using the following assumptions:

		Three Months Ended
		March 31,
		2011				2010
Expected dividend yield			4.2	%			4.1	%
Risk-free interest rate			3.1	%			2.7	%
Expected volatility			26.0	%			26.8	%
Expected life (years)			7.0				6.0

     At March 31, 2011, there was $649 million of total pretax unrecognized compensation expense related to nonvested stock options, RSU and PSU awards which will be recognized over a weighted average period of 2.3 years. For segment reporting, share-based compensation costs are unallocated expenses.

12. Pension and Other Postretirement Benefit Plans

     The Company has defined benefit pension plans covering eligible employees in the United States and in certain of its international subsidiaries. The net cost of such plans consisted of the following components:

		Three Months Ended
		March 31,
($ in millions)		2011				2010
Service cost		$	152			$	154
Interest cost			179				177
Expected return on plan assets			(243	)			(217	)
Net amortization			45				45
Termination benefits			10				19
Curtailments			(4	)			(36	)
Settlements			(1	)			(1	)
		$	138			$	141

Notes to Consolidated Financial Statements (unaudited) (continued)

     The Company provides medical, dental and life insurance benefits, principally to its eligible U.S. retirees and similar benefits to their dependents, through its other postretirement benefit plans. The net cost of such plans consisted of the following components:

		Three Months Ended
		March 31,
($ in millions)		2011				2010
Service cost		$	28			$	26
Interest cost			36				38
Expected return on plan assets			(35	)			(32	)
Net amortization			(3	)			2
Termination benefits			2				20
Curtailments			1				—
		$	29			$	54

     In connection with restructuring actions (see Note 2), termination charges for the three months ended March 31, 2011 and 2010 were recorded on pension and other postretirement benefit plans related to expanded eligibility for certain employees exiting Merck. Also, in connection with these restructuring actions, curtailments were recorded on pension and other postretirement benefit plans and settlements were recorded on pension plans as reflected in the tables above.

13. Other (Income) Expense, Net

     Other (income) expense, net, consisted of:

		Three Months Ended
		March 31,
($ in millions)		2011				2010
Interest income		$	(41	)		$	(12	)
Interest expense			186				181
Exchange losses			42				80
Other, net			435				(82	)
		$	622			$	167

     Other, net (as presented in the table above) for the first quarter of 2011 reflects a $500 million charge related to the resolution of the arbitration proceeding involving the Company’s rights to market Remicade and Simponi (see Note 9 to the interim consolidated financial statements), as well as a $134 million gain on the sale of certain manufacturing facilities and related assets. Other, net for the first quarter of 2010 reflects $102 million of income recognized on the settlement of certain disputed royalties. Exchange losses for the first quarter of 2011 declined as compared with the first quarter of 2010 primarily driven by a Venezuelan currency devaluation in the first quarter of 2010 resulting in the recognition of $80 million of exchange losses. Effective January 11, 2010, the Venezuelan government devalued its currency from at BsF 2.15 per U.S. dollar to a two-tiered official exchange rate at (1) “the essentials rate” at BsF 2.60 per U.S. dollar and (2) “the non-essentials rate” at BsF 4.30 per U.S. dollar. In January 2010, the Company was required to remeasure its local currency operations in Venezuela to U.S. dollars as the Venezuelan economy was determined to be hyperinflationary. Throughout 2010, the Company settled its transactions at the essentials rate and therefore remeasured monetary assets and liabilities using the essentials rate. In December 2010, the Venezuelan government announced it would eliminate the essentials rate and effective January 1, 2011, all transactions would be settled at the official rate of at BsF 4.30 per U.S. dollar. As a result of this announcement, the Company remeasured its December 31, 2010 monetary assets and liabilities at the new official rate. Interest paid for the three months ended March 31, 2011 and 2010 was $144 million and $129 million, respectively, which excludes commitment fees.

Notes to Consolidated Financial Statements (unaudited) (continued)

14. Taxes on Income

     The effective tax rate of 38.1% for the first quarter of 2011 reflects the impacts of purchase accounting adjustments, restructuring costs and the $500 million charge related to the resolution of the arbitration proceeding with Johnson & Johnson, which collectively had a 24% unfavorable impact as compared with the statutory rate. The effective tax rate was also affected by the beneficial impact of foreign earnings. The effective tax rate of 46.4% for the first quarter of 2010 reflects the impact of a $147 million charge associated with a change in tax law that requires taxation of the prescription drug subsidy of the Company’s retiree health benefit plans which was enacted in the first quarter of 2010 as part of U.S. health care reform legislation, as well as the impacts of purchase accounting adjustments and restructuring charges.

     The Company and Old Merck are both under examination by numerous tax authorities in various jurisdictions globally.

     In 2010, the Internal Revenue Service (“IRS”) finalized its examination of Schering-Plough’s 2003-2006 tax years. In this audit cycle, the Company reached an agreement with the IRS on an adjustment to income related to intercompany pricing matters. This income adjustment mostly reduced net operating losses (“NOLs”) and other tax credit carryforwards. Additionally, the Company is seeking resolution of one issue raised during this examination through the IRS administrative appeals process. The Company’s reserves for uncertain tax positions were adequate to cover all adjustments related to this examination period. The IRS began its examination of the 2007-2009 tax years for the Company in 2010.

     As previously disclosed, the Company believes that it is reasonably possible that the total amount of unrecognized tax benefits as of December 31, 2010 could decrease by up to $2.0 billion in 2011 for both the Company and Old Merck as a result of various audit closures, including the IRS audit discussed below, 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 any risks or exposures.

     In April 2011, the IRS concluded its examination of Old Merck’s 2002-2005 federal income tax returns and as a result the Company was required to make net payments of approximately $465 million. The Company’s unrecognized tax benefits for the years under examination exceed the adjustments related to this examination period and therefore the Company anticipates that a potentially significant non-cash favorable financial statement impact from this resolution will be recorded in the second quarter. The Company disagrees with the IRS treatment of one issue raised during this examination and is appealing the matter through the IRS administrative process.

     As previously disclosed, the Canada Revenue Agency (“CRA”) has proposed adjustments for 1999 and 2000 relating to intercompany pricing matters. The adjustments would increase Canadian tax due by approximately $325 million (U.S. dollars) plus approximately $360 million (U.S. dollars) of interest through March 31, 2011. The Company disagrees with the positions taken by the CRA and believes they are without merit. The Company continues to contest the assessments through the CRA appeals process. The CRA is expected to prepare similar adjustments for later years. Management believes that resolution of these matters will not have a material effect on the Company’s financial position or liquidity.

     In October 2001, IRS auditors asserted that two interest rate swaps that Schering-Plough entered into with an unrelated party should be re-characterized as loans from affiliated companies, resulting in additional tax liability for the 1991 and 1992 tax years. In September 2004, Schering-Plough made payments to the IRS in the amount of $194 million for income taxes and $279 million for interest. The Company’s tax reserves were adequate to cover these payments. Schering-Plough filed refund claims for the taxes and interest with the IRS in December 2004. Following the IRS’s denial of Schering-Plough’s claims for a refund, Schering-Plough filed suit in May 2005 in the U.S. District Court for the District of New Jersey for refund of the full amount of taxes and interest. A decision in favor of the government was announced in August 2009. The Company’s appeal of the decision was heard by the U.S. Court of Appeals for the Third Circuit on March 24, 2011. The Company is awaiting a decision on the appeal.

Notes to Consolidated Financial Statements (unaudited) (continued)

15. Earnings Per Share

     The Company calculates earnings per share pursuant to the two-class method, which is an earnings allocation formula that determines earnings per share for common stock and participating securities according to dividends declared and participation rights in undistributed earnings. Under this method, all earnings (distributed and undistributed) are allocated to common shares and participating securities based on their respective rights to receive dividends. RSUs and certain PSUs granted before December 31, 2009 to certain management level employees participate in dividends on the same basis as common shares and such dividends are nonforfeitable by the holder. As a result, these RSUs and PSUs meet the definition of a participating security. For RSUs and PSUs issued on or after January 1, 2010, dividends declared during the vesting period are payable to the employees only upon vesting and therefore such RSUs and PSUs do not meet the definition of a participating security.

     The calculations of earnings per share under the two-class method are as follows:

		Three Months Ended
		March 31,
		2011				2010
Basic Earnings per Common Share
Net income attributable to Merck & Co., Inc. common shareholders		$	1,043			$	299
Less: Income allocated to participating securities			3				1
Net income allocated to common shareholders		$	1,040			$	298
Average common shares outstanding			3,084				3,114
		$	0.34			$	0.10
Earnings per Common Share Assuming Dilution
Net income attributable to Merck & Co., Inc. common shareholders		$	1,043			$	299
Less: Income allocated to participating securities			3				1
Net income allocated to common shareholders		$	1,040			$	298
Average common shares outstanding			3,084				3,114
Common shares issuable (1)			20				27
Average common shares outstanding assuming dilution			3,104				3,141
		$	0.34			$	0.09

     For the three months ended March 31, 2011 and 2010, 185 million and 182 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.