Financial Section - Merck.com

1 19 merck & Co., Inc. Annual Report 2002 ContentsFinancial ReviewDescription of merck s Business19 Competition and the Health Care Environment20 Business Strategies20 Joint Ventures and Other Equity Method Affiliates21 Foreign Operations23 Operating Results23 Capital and Environmental Expenditures28 Analysis of Liquidity and Capital Resources29 Recently Issued Accounting Standards31 Critical Accounting Policies and Other Matters31 Cautionary Factors That May Affect Future Results37 Dividends Paid per Common Share37 Condensed Interim Financial Data37 Common Stock Market Prices37 Consolidated Statement of Income38 Consolidated Statement of Retained Earnings38 Consolidated Statement of Comprehensive Income38 Consolidated Balance Sheet39 Consolidated Statement of Cash Flows40 Notes to Consolidated Financial Statements41

2 Management s Report54 Audit Committee s Report54 Compensation and Benefits Committee s Report55 Reports of Independent Public Accountants55 Selected Financial Data56 Financial ReviewDescription of merck s BusinessMerck is a global research-driven pharmaceutical products andservices company that discovers, develops, manufactures andmarkets a broad range of innovative products to improve humanand animal health, directly and through its joint ventures, andprovides pharmacy benefit management services through MedcoHealth Solutions, Inc. (Medco Health).Sales ($ in millions)200220012000 Atherosclerosis$ 5, $5, $ 4, failure3, , , , , , , , , , , , , immunodeficiency virus (HIV) , , , Health30, , , $51, $47, $40, in 2002, sales by individual therapeutic class arepresented net of rebates and discounts. These amounts werepreviously presented on a gross basis, whereby rebates and dis-counts were included in Other.

3 Because rebates and discountshave always been included in total net sales, this change inpresentation has no effect on consolidated sales or net by individual therapeutic class for 2001 and 2000 are presented on a comparable basis to health products include therapeutic and preventiveagents, generally sold by prescription, for the treatment ofhuman disorders. Among these are atherosclerosis products, ofwhich Zocoris the largest-selling; hypertension/heart failureproducts, the most significant of which are Cozaar, Hyzaar,Vasotecand Prinivil; anti-inflammatory/analgesics, whichincludes Vioxxand Arcoxia, agents that specifically inhibit the COX-2 enzyme which is responsible for pain and inflammation;anosteoporosis product, Fosamax, for treatment and preventionof osteoporosis; a respiratory product, Singulair, a leukotrienereceptor antagonist; vaccines/biologicals, of which Varivax, aFinancial Section20 merck & Co.

4 , Inc. Annual Report 2002live virus vaccine for the prevention of chickenpox, M-M-R II, a pediatric vaccine for measles, mumps and rubella, andRecombivax HB(hepatitis B vaccine recombinant) are thelargest-selling; anti-bacterial/anti-fungal products, whichincludes Primaxinand Cancidasas well as the recently launchedInvanz; ophthalmologicals, of which Cosoptand Trusoptare thelargest-selling; a urology product, Proscar, for treatment ofsymptomatic benign prostate enlargement; and HIV products,which includes Crixivan, a protease inhibitor for the treatment ofhuman immunodeficiency viral infection in primarily includes sales of other human pharmaceuti-cals, also net of rebates and discounts, and pharmaceutical andanimal health supply sales to the Company s joint ventures andAstraZeneca LP (AZLP), of which Prilosecand Nexiumare themost significant.

5 Medco Health primarily includes Medco Health sales ofnon- merck products and Medco Health pharmacy benefit serv-ices, principally sales of prescription drugs through managedprescription drug programs, as well as services provided throughprograms to help its clients control the cost and enhance thequality of the prescription drug benefits to their sells its human health products primarily to drugwholesalers and retailers, hospitals, clinics, government agencies and managed health care providers such as healthmaintenance organizations and other institutions. TheCompany s professional representatives communicate the effectiveness, safety and value of our products to health careprofessionals in private practice, group practices and man-aged care and the Health Care EnvironmentThe markets in which the Company conducts its business arehighly competitive and often highly regulated.

6 Global effortstoward health care cost containment continue to exert pressureon product pricing and access. In the United States, the Companyhas been working with private and government employers toslow the increase of health care costs. Demonstrating that theCompany s medicines can help save costs in other areas andpricing flexibly across our product portfolio have encouragedgrowing use of our medicines and helped offset the effects of increasing cost pressures. Legislative bodies continue to work to expand health care access and reduce associated initiatives include prescription drug benefit proposals forMedicare beneficiaries introduced in the the United States, in difficult environments encum-bered by government cost containment actions, the Companyhas worked with payers to help them allocate scarce resourcesto optimize health care outcomes, limiting the potentially detri-mental effects of government actions on sales growth.

7 In addi-tion, countries within the European Union (EU), recognizing theeconomic importance of the research-based pharmaceuticalindustry and the value of innovative medicines to society, areworking with industry representatives and the EuropeanCommission on proposals to complete the Single Market in pharmaceuticals and improve the competitive climate through a variety of means including market has been an increasing amount of focus on privacyissues in countries around the world, including the United Statesand the EU. In the United States, federal and state governmentshave pursued legislative and regulatory initiatives regardingpatient privacy, including recently issued federal privacy regula-tions concerning health information, which have affected theCompany s operations, particularly at Medco no one can predict the outcome of these andother legislative, regulatory and advocacy initiatives, we arewell positioned to respond to the evolving health care environ-ment and market anticipate that the worldwide trend toward cost-containment will continue, resulting in ongoing pressures onhealth care budgets.

8 As we continue to successfully launch newproducts, contribute to health care debates and monitor reforms,our new products, policies and strategies will enable us to main-tain our strong position in the changing economic StrategiesThe Company is discovering new innovative products and devel-oping new indications for existing products the result of itscontinuing commitment to research. To enhance its product port-folio, the Company continues to pursue external alliances, fromearly-stage to late-stage product opportunities, including jointventures and targeted acquisitions. Additionally, achievement ofproductivity gains has become a permanent strategy. Productivityinitiatives include, at the manufacturing level, optimizing plantutilization, implementing lowest-cost processes and improvingtechnology transfer between research and manufacturing, and throughout the Company, reducing the cost of purchasedmaterials and services, re-engineering core and administrativeprocesses and streamlining the organization.

9 At the manufactur-ing level, the Company expects that productivity gains will con-tinue to substantially offset inflation on product cost in the corepharmaceuticals Company is committed to improving access to medi-cines and enhancing the quality of life for people around theworld. merck s African Comprehensive HIV/AIDS Partnership inBotswana, in collaboration with the Government of Botswanaand the Bill & Melinda Gates Foundation, is striving to develop a comprehensive and sustainable approach to HIV prevention,care and treatment. To further catalyze access to HIV medi-cines in developing countries, in October 2002 the Companyannounced that a new 600 mg tablet formulation of its antiretro-viral medicine Stocrinwill be introduced at a price of less thanone dollar per day in the least developed countries and thosehardest hit by the HIV/AIDS epidemic.

10 Through this and otheractions, merck is working with partners in the public and privatesectors alike to focus on the real barriers to access to medicinesin the developing world: the need for sustainable financing,increased international assistance and additional investments in education, training and health infrastructure and capacity indeveloping 1993, merck acquired Medco Containment Services, Inc.(renamed merck -Medco and later, Medco Health). Medco Healthprovides pharmacy benefit services in the United its home delivery pharmacies and national network ofretail pharmacies, Medco Health provides sophisticated pro-grams and services for its clients and the members of their phar-macy benefit plans, as well as for the physicians and pharmaciesthe members use. Medco Health s programs and services helpits clients control the cost and enhance the quality of the pre-scription drug benefits they offer to their members.