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 July 30, 2010: 3,073,593,302

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								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Sales		$	11,346.3			$	5,899.9			$	22,768.5			$	11,285.1
Costs, Expenses and Other
Materials and production			4,548.9				1,353.9				9,764.5				2,687.7
Marketing and administrative			3,202.7				1,729.5				6,448.9				3,362.5
Research and development			2,150.9				1,395.3				4,177.6				2,619.5
Restructuring costs			526.3				37.4				814.0				101.7
Equity income from affiliates			(42.9	)			(587.1	)			(180.4	)			(1,173.0	)
Other (income) expense, net			(280.4	)			3.6				(112.7	)			(63.6	)
			10,105.5				3,932.6				20,911.9				7,534.8
Income Before Taxes			1,240.8				1,967.3				1,856.6				3,750.3
Taxes on Income			460.6				379.0				746.2				706.2
Net Income		$	780.2			$	1,588.3			$	1,110.4			$	3,044.1
Less: Net Income Attributable to Noncontrolling Interests			27.8				32.0				59.2				62.8
Net Income Attributable to Merck & Co., Inc.		$	752.4			$	1,556.3			$	1,051.2			$	2,981.3
Basic Earnings per Common Share Attributable to Merck & Co., Inc. Common Shareholders		$	0.24			$	0.74			$	0.34			$	1.41
Earnings per Common Share Assuming Dilution Attributable to Merck & Co., Inc. Common Shareholders		$	0.24			$	0.74			$	0.33			$	1.41
Dividends Declared per Common Share		$	0.38			$	0.38			$	0.76			$	0.76

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)

		June 30,				December 31,
		2010				2009
Assets
Current Assets
Cash and cash equivalents		$	8,665.6			$	9,311.4
Short-term investments			1,277.0				293.1
Accounts receivable (net of allowance for doubtful accounts of $152.9 in 2010 and $112.6 in 2009)			6,276.1				6,602.9
Inventories (excludes inventories of $1,094.9 in 2010 and $1,157.2 in 2009 classified in Other assets - see Note 7)			6,244.2				8,057.5
Deferred income taxes and other current assets			3,790.7				4,199.9
Total current assets			26,253.6				28,464.8
Investments			2,045.6				432.3
Property, Plant and Equipment, at cost, net of allowance for depreciation of $12,819.8 in 2010 and $12,594.7 in 2009			17,334.2				18,257.9
Goodwill			12,225.5				12,140.0
Other Intangibles, Net			43,281.4				47,778.3
Other Assets			5,030.2				5,376.4
		$	106,170.5			$	112,449.7
Liabilities and Equity
Current Liabilities
Loans payable and current portion of long-term debt		$	4,147.3			$	1,379.3
Trade accounts payable			2,171.5				2,239.1
Accrued and other current liabilities			6,834.4				9,457.8
Income taxes payable			879.4				1,258.2
Dividends payable			1,182.0				1,189.0
6% Mandatory convertible preferred stock, $1 par value
Authorized - 11,500,000 shares
Issued and outstanding - 853,158 shares in 2010 and 855,422 shares in 2009			206.0				206.6
Total current liabilities			15,420.6				15,730.0
Long-Term Debt			13,835.3				16,095.1
Deferred Income Taxes and Noncurrent Liabilities			19,248.9				19,132.0
Merck & Co., Inc. Stockholders’ Equity
Common stock, $0.50 par value
Authorized - 6,500,000,000 shares							.
Issued - 3,572,963,192 shares in 2010; 3,562,528,536 shares in 2009			1,786.5				1,781.3
Other paid-in capital			40,337.7				39,682.6
Retained earnings			40,081.8				41,404.9
Accumulated other comprehensive loss			(4,658.7	)			(2,766.5	)
			77,547.3				80,102.3
Less treasury stock, at cost
491,662,773 shares in 2010 and 454,305,985 shares in 2009			22,315.6				21,044.3
Total Merck & Co., Inc. stockholders’ equity			55,231.7				59,058.0
Noncontrolling Interests			2,434.0				2,434.6
Total equity			57,665.7				61,492.6
		$	106,170.5			$	112,449.7

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)

		Six Months Ended
		June 30,
		2010				2009
Cash Flows from Operating Activities
Net income		$	1,110.4			$	3,044.1
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			3,635.1				932.6
Equity income from affiliates			(180.4	)			(1,173.0	)
Dividends and distributions from equity affiliates			182.1				960.3
Gain on AstraZeneca option exercise			(443.0	)			—
Deferred income taxes			(318.9	)			649.4
Share-based compensation			274.2				197.1
Other			437.0				(231.0	)
Net changes in assets and liabilities			(5.5	)			(2,917.9	)
Net Cash Provided by Operating Activities			4,691.0				1,461.6
Cash Flows from Investing Activities
Capital expenditures			(679.8	)			(600.3	)
Purchases of securities and other investments			(4,235.2	)			(2,654.4	)
Proceeds from sales of securities and other investments			1,699.6				5,838.9
Acquisitions of businesses, net of cash acquired			(141.3	)			(130.0	)
Proceeds from AstraZeneca option exercise			647.0				—
(Increase) decrease in restricted assets			(7.0	)			1,550.6
Other			32.4				4.1
Net Cash (Used in) Provided by Investing Activities			(2,684.3	)			4,008.9
Cash Flows from Financing Activities
Net change in short-term borrowings			1,657.7				214.3
Proceeds from the issuance of debt, net			5.3				4,228.0
Payments on debt			(626.1	)			(7.5	)
Purchases of treasury stock			(1,297.2	)			—
Dividends paid to stockholders			(2,377.9	)			(1,606.9	)
Proceeds from exercise of stock options			237.2				3.0
Other			(120.1	)			(247.4	)
Net Cash (Used in) Provided by Financing Activities			(2,521.1	)			2,583.5
Effect of Exchange Rate Changes on Cash and Cash Equivalents			(131.4	)			35.3
Net (Decrease) Increase in Cash and Cash Equivalents			(645.8	)			8,089.3
Cash and Cash Equivalents at Beginning of Year			9,311.4				4,368.3
Cash and Cash Equivalents at End of Period		$	8,665.6			$	12,457.6

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 March 1, 2010.
		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. The results of Schering-Plough’s business have been included in New Merck’s financial statements only for periods subsequent 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 June 2009, the Financial Accounting Standards Board (“FASB”) issued an amendment to the accounting and disclosure requirements for transfers of financial assets, which was effective January 1, 2010. The amendment eliminates the concept of a qualifying special-purpose entity, changes the requirements for derecognizing financial assets and requires enhanced disclosures to provide financial statement users with greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets. The effect of adoption on the Company’s financial position and results of operations was not material.

Also, in June 2009, the FASB amended the existing accounting and disclosure guidance for the consolidation of variable interest entities, which was effective January 1, 2010. The amended guidance requires enhanced disclosures intended to provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. The effect of adoption on the Company’s financial position and results of operations was not material.

		Recently Issued Accounting Standards
		In October 2009, the FASB issued new guidance for revenue recognition with multiple deliverables, which is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, although early adoption is permitted. 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. After adoption, this guidance will also require expanded qualitative and quantitative disclosures. The Company is currently assessing the impact of adoption on its financial position and results of operations.
		In January 2010, the FASB amended the existing disclosure guidance on fair value measurements, which is effective January 1, 2010, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which is effective January 1, 2011. Among other things, the updated guidance requires additional disclosure for the amounts of significant transfers in and out of Level 1 and Level 2 measurements and requires certain Level 3 disclosures on a gross basis. Additionally, the updates amend existing guidance to require a greater level of disaggregated information and more robust disclosures about valuation techniques and inputs to fair value measurements. Since the amended guidance requires only additional disclosures, the adoption of the provisions effective January 1, 2010 did not, and for the provisions effective in 2011 will not, impact the Company’s financial position or results of operations.

Notes to Consolidated Financial Statements (unaudited) (continued)

2.

Merger

		On November 3, 2009, Old Merck and Schering-Plough completed the Merger for aggregate consideration of $49.6 billion. The Merger expanded the Company’s pipeline of product candidates, broadened the Company’s commercial portfolio, expanded its global presence and increased its manufacturing capabilities. Additionally, the Company expects to realize substantial cost savings and synergies, including opportunities for consolidation in both sales and marketing and research and development.
		A preliminary allocation of the consideration transferred to the net assets of Schering-Plough was made as of the Merger date. During the first quarter of 2010, the Company adjusted the preliminary values assigned to certain assets and liabilities in order to reflect additional information obtained since the Merger date. The opening balance sheet has been adjusted to reflect these changes, the most significant of which included an increase to Other intangibles, net of $122.5 million, an increase to Deferred income taxes and noncurrent liabilities of $360.5 million and an increase to Goodwill of $216.9 million. Additional adjustments to the preliminary values of assets and liabilities recognized in the Merger may occur as the allocation of the consideration transferred is finalized during 2010. Under business combinations accounting guidance, the Company has up to one year from the date of the Merger to finalize the allocation of the consideration transferred.
		Also, during the first quarter of 2010, the Company recorded $27 million of impairment charges associated with in-process research and development (“IPR&D”) for previously in-licensed projects capitalized in connection with the Merger that were subsequently abandoned in connection with the Company’s pipeline prioritization review and returned to the respective licensors.
		Schering-Plough’s results of operations have been included in New Merck’s financial statements for periods subsequent to the completion of the Merger. The following unaudited supplemental pro forma data presents consolidated information as if the Merger had been completed on January 1, 2009:

		Three Months					Six Months
($ in millions, except per share amounts)		Ended June 30, 2009
Sales		$	11,534.0					$	22,217.0
Net income attributable to Merck & Co., Inc.			392.9						7,277.0
Basic earnings per common share attributable to Merck & Co., Inc. common shareholders			0.13						2.34
Earnings per common share assuming dilution attributable to Merck & Co., Inc. common shareholders			0.13						2.34

The unaudited supplemental pro forma data reflect the application of the following adjustments:

	•		The consolidation of the Merck/Schering-Plough partnership (the “MSP Partnership”), which is now wholly-owned by the Company, and the corresponding gain resulting from the Company’s remeasurement of its previously held equity interest in the MSP Partnership;
	•		Additional depreciation and amortization expense that would have been recognized assuming fair value adjustments to inventory, property, plant and equipment and intangible assets;
	•		Additional interest expense and financing costs that would have been incurred on borrowing arrangements and loss of interest income on cash and short-term investments used to fund the Merger;
	•		Transaction costs associated with the Merger; and
	•		Conversion of a portion of outstanding 6% mandatory convertible preferred stock

The unaudited supplemental pro forma financial information does not reflect the potential realization of cost savings relating to the integration of the two companies. The pro forma data should not be considered indicative of the results that would have occurred if the Merger and related borrowings had been consummated on January 1, 2009, nor are they indicative of future results.

Notes to Consolidated Financial Statements (unaudited) (continued)

3.

Restructuring

		Merger Restructuring Program
		In February 2010, the Company announced the first phase of a new 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. On July 6, 2010, the Company announced the next phase of the Merger Restructuring Program. As part of the first and second phases of the Merger Restructuring Program, which the Company anticipates will be substantially completed by the end of 2012, the Company expects to reduce its total workforce by approximately 15% across the Company worldwide. The Company also plans to eliminate 2,500 vacant positions. 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. The Company will continue to hire new employees in strategic growth areas of the business as necessary during this period. Merck plans to phase out operations at certain research and manufacturing sites, as well as to continue to consolidate office facilities worldwide. Over the next two years, operations will be phased out at eight research sites which include: Montreal, Canada; Boxmeer (Nobilon facility only), Oss, and Schaijk, Netherlands; Odense, Denmark; Waltrop, Germany; Newhouse, Scotland; and Cambridge (Kendall Square), Massachusetts. Beginning in the second half of 2010, the Company will phase out operations at eight manufacturing facilities and these sites will exit the global network as activities are transferred to other locations. Specifically, the Company intends to cease manufacturing activities at its facilities in Comazzo, Italy; Cacem, Portugal; Azcapotzalco, Mexico; Coyoacan, Mexico, and Santo Amaro, Brazil, and intends to sell the Mirador, Argentina and Miami Lakes, Florida, facilities. In Singapore, chemical manufacturing will be phased out at the legacy Merck site, but it will continue at the legacy Schering-Plough site. The Company’s extensive pharmaceutical manufacturing operations will continue at both Singapore facilities. The Company will continue to pursue productivity efficiencies and evaluate its manufacturing supply chain capabilities on an ongoing basis.
		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 $830.2 million and $1.1 billion in the second quarter and first six months of 2010, respectively, related to this program. Since inception of the Merger Restructuring Program through June 30, 2010, Merck has recorded total pretax accumulated costs of $2.6 billion and eliminated approximately 7,725 positions comprised of employee separations, and the elimination of contractors and vacant positions. The first and second phases of the Merger Restructuring Program are expected to be substantially completed by the end of 2012 with the cumulative pretax costs estimated to be approximately $3.5 billion to $4.3 billion. The Company estimates that approximately two-thirds of the cumulative pretax costs relate to cash outlays, primarily due 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. About 40% of these reductions will occur in the United States. The program includes the roll out of a new, more customer-centric selling model. The Company is also making greater use of outside technology resources, centralizing common sales and marketing activities, and consolidating and streamlining its operations. Merck’s manufacturing division is further focusing its capabilities on core products and outsourcing non-core manufacturing. This program also included the implementation of a new model for its basic research global operating strategy at legacy Merck Research Laboratories sites.
		Pretax restructuring costs of $65.5 million and $192.3 million were recorded in the second quarter of 2010 and 2009, respectively, and $130.4 million and $366.9 million were recorded in the first six months of 2010 and 2009, respectively, related to the 2008 Restructuring Program. Since inception of the 2008 Restructuring Program through June 30, 2010, Merck has recorded total pretax accumulated costs of $1.5 billion and eliminated approximately 5,685 positions comprised of employee separations and the elimination of contractors and vacant positions. The 2008 Restructuring Program is expected to be substantially completed by the end of 2011 with the total 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.

Notes to Consolidated Financial Statements (unaudited) (continued)

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

		Three Months Ended June 30, 2010																Six Months Ended June 30, 2010
		Separation				Accelerated												Separation				Accelerated
($ in millions)		Costs				Depreciation				Other				Total				Costs				Depreciation				Other				Total
Merger Restructuring Program
Materials and production		$	—			$	149.4			$	21.9			$	171.3			$	—			$	174.5			$	21.9			$	196.4
Research and development			—				113.2				30.5				143.7				—				113.2				36.7				149.9
Restructuring costs			374.1				40.6				100.5				515.2				582.8				40.6				143.6				767.0
		$	374.1			$	303.2			$	152.9			$	830.2			$	582.8			$	328.3			$	202.2			$	1,113.3
2008 Restructuring Program
Materials and production		$	—			$	10.7			$	35.8			$	46.5			$	—			$	39.8			$	35.8			$	75.6
Research and development			—				—				—				—				—				—				—				—
Restructuring costs			11.6				—				7.4				19.0				30.6				—				24.2				54.8
		$	11.6			$	10.7			$	43.2			$	65.5			$	30.6			$	39.8			$	60.0			$	130.4
		$	385.7			$	313.9			$	196.1			$	895.7			$	613.4			$	368.1			$	262.2			$	1,243.7

		Three Months Ended June 30, 2009																Six Months Ended June 30, 2009
		Separation				Accelerated												Separation				Accelerated
($ in millions)		Costs				Depreciation				Other				Total				Costs				Depreciation				Other				Total
2008 Restructuring Program
Materials and production		$	—			$	47.0			$	0.1			$	47.1			$	—			$	68.4			$	0.9			$	69.3
Research and development			—				107.6				0.2				107.8				—				193.6				2.3				195.9
Restructuring costs			16.7				—				20.7				37.4				44.9				—				56.8				101.7
		$	16.7			$	154.6			$	21.0			$	192.3			$	44.9			$	262.0			$	60.0			$	366.9

		Separation costs are associated with actual headcount reductions, as well as those headcount reductions which were probable and could be reasonably estimated. In the second quarter of 2010, approximately 2,435 positions were eliminated under the Merger Restructuring Program and 240 positions were eliminated under the 2008 Restructuring Program. In the first six months of 2010, approximately 7,585 positions were eliminated under the Merger Restructuring Program and 775 positions were eliminated under the 2008 Restructuring Program. In the second quarter and first six months of 2009, approximately 925 positions and 1,975 positions, respectively, were eliminated in connection with the 2008 Restructuring 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 and research facilities to be sold or closed as part of the programs. 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. The site assets include manufacturing and research facilities and equipment.
		Other activity of $196.1 million and $21.0 million for the second quarter of 2010 and 2009, respectively, and $262.2 million and $60.0 million for the first six months of 2010 and 2009, respectively, reflects costs that include curtailment, settlement and termination charges associated with pension and other postretirement benefit plans (see Note 13), as well as contract termination costs, asset abandonment, shut-down and other related costs.

Notes to Consolidated Financial Statements (unaudited) (continued)

The following table summarizes the charges and spending relating to Merger Restructuring Program and 2008 Restructuring Program activities for the six months ended June 30, 2010:

		Separation				Accelerated
($ in millions)		Costs				Depreciation				Other				Total
Merger Restructuring Program
Restructuring reserves as of January 1, 2010		$	1,303.4			$	—			$	—			$	1,303.4
Expense			582.8				328.3				202.2				1,113.3
(Payments) receipts, net			(766.9	)			—				(126.2	)			(893.1	)
Non-cash activity			—				(328.3	)			(76.0	)			(404.3	)
Restructuring reserves as of June 30, 2010 (1)		$	1,119.3			$	—			$	—			$	1,119.3
2008 Restructuring Program
Restructuring reserves as of January 1, 2010		$	249.3			$	—			$	—			$	249.3
Expense			30.6				39.8				60.0				130.4
(Payments) receipts, net			(77.0	)			—				(26.1	)			(103.1	)
Non-cash activity			—				(39.8	)			(33.9	)			(73.7	)
Restructuring reserves as of June 30, 2010 (1)		$	202.9			$	—			$	—			$	202.9

(1)		The cash outlays associated with the first and second phases of the Merger Restructuring Program are expected to be substantially completed by the end of 2012. The cash outlays associated with the remaining restructuring reserve for the 2008 Restructuring Program are expected to be completed by the end of 2011.

		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. As of January 1, 2010, the Company had a reserve of $79.7 million related to this program. During the first six months of 2010, the Company recorded $9.1 million of accelerated depreciation costs included in Materials and production costs and a $7.8 million net gain in Restructuring costs, primarily related to the sale of a manufacturing facility. During the first six months of 2010, the Company made payments of $20.2 million under this plan, resulting in a remaining reserve of $59.5 million at June 30, 2010. Approximately 75 positions were eliminated in connection with this program during the first six months of 2010.

4.

Acquisitions, Research Collaborations and License Agreements

		In February 2010, the Company completed the acquisition of Avecia Biologics Limited (“Avecia”) for a total purchase price of approximately $190 million. Avecia is a contract manufacturing organization with specific expertise in microbial-derived biologics. Under the terms of the agreement, the Company acquired Avecia and all of its assets, including all of Avecia’s process development and scale-up, manufacturing, quality and business support operations located in Billingham, United Kingdom. The transaction was accounted for as a business combination; accordingly, the assets acquired and liabilities assumed were recorded at their respective fair values as of the acquisition date. The determination of fair value requires management to make significant estimates and assumptions. In connection with the acquisition, substantially all of the purchase price was allocated to Avecia’s property, plant and equipment and goodwill. The remaining net assets acquired were not material. This transaction closed on February 1, 2010, and accordingly, the results of operations of the acquired business have been included in the Company’s results of operations beginning after the acquisition date. Pro forma financial information has not been included because Avecia’s historical financial results are not significant when compared with the Company’s financial results.
		In May 2010, Merck announced that it had restructured its co-development and co-commercialization agreement with ARIAD Pharmaceuticals, Inc. (“ARIAD”) for ridaforolimus, an investigational orally available mTOR inhibitor currently being evaluated for the treatment of multiple cancer types, to an exclusive license agreement. Under the restructured agreement, Merck has acquired full control of the development and worldwide commercialization of ridaforolimus. ARIAD received a $50 million upfront fee, which the Company recorded as research and development expense in the second quarter of 2010, and is eligible to receive milestone payments associated with regulatory filings and approvals of ridaforolimus in multiple cancer indications and achievement of significant sales thresholds. In lieu of the profit split on U.S. sales provided for in the previous agreement, ARIAD will now receive royalties on global net sales of ridaforolimus, and all sales will be recorded by Merck. Merck will assume responsibility for all activities and has acquired decision rights on matters relating to the development, manufacturing and commercialization of ridaforolimus. The Investigational New Drug application has been transferred to Merck, and Merck will file the marketing application worldwide for any oncology indications and lead all interactions with regulatory agencies. The agreement is terminable by Merck upon nine months notice, or immediately upon a good faith determination of a serious safety issue. The agreement is terminable by either party as a result of insolvency by the other party or an uncured material breach by the other party or by ARIAD for a failure by Merck to perform certain product development responsibilities.

Notes to Consolidated Financial Statements (unaudited) (continued)

5.

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 an aggressive 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. 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 U.S. marketing exclusivity 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 and February 2010, respectively.
		Remicade/Simponi
		In 1998, a subsidiary of Schering-Plough entered into a licensing agreement with Centocor, Inc. (“Centocor”), now 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 has exclusive marketing rights to both products outside the United States, Japan and certain 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. After operating expenses and subject to certain adjustments, the Company was entitled to receive an approximate 60% share of profits on the Company’s distribution in the Company’s marketing territory through December 31, 2009. Beginning in 2010, the share of profits change over time to a 50% share of profits by 2014 for both products and the share of profits will remain fixed thereafter for the remainder of the term. The Company may independently develop and market Simponi for a Crohn’s disease indication in its territories, with an option for Centocor to participate. See Note 10 for a discussion of the arbitration involving the Remicade/Simponi product rights.

6.

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. Merck relies on sustained cash flows generated from foreign sources to support its long-term commitment to U.S. dollar-based research and development. To the extent the dollar value of cash flows is diminished as a result of a strengthening dollar, the Company’s ability to fund research and other dollar-based strategic initiatives at a consistent level may be impaired. 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. The Company also utilizes 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. Accordingly, 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 Company does not enter into derivatives for trading or speculative purposes. The cash flows from these contracts are reported as operating activities in the Consolidated Statement of Cash Flows.
		The primary objective of the balance sheet risk management program is to mitigate the exposure of foreign currency denominated net monetary assets 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.

Notes to Consolidated Financial Statements (unaudited) (continued)

		Foreign currency denominated monetary assets and liabilities 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 and qualify 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.
		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 comprehensive income.
		Interest Rate Risk Management
		At June 30, 2010, the Company was a party to seven 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 and five swaps maturing in 2015 with notional amounts of $150 million each that effectively convert $750 million of the Company’s $1.0 billion, 4.0% fixed-rate notes due 2015 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:

				June 30, 2010												December 31, 2009
				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		$	245.8			$	—			$	2,133.7			$	139.3			$	—			$	3,050.5
Foreign exchange contracts (non-current)		Other assets			304.0				—				2,534.0				152.6				—				2,118.1
Foreign exchange contracts (current)		Accrued and other current liabilities			—				—				—				—				34.0				658.6
Interest rate swaps (non-current)		Other assets			61.3				—				1,000.0				26.7				—				1,000.0
				$	611.1			$	—			$	5,667.7			$	318.6			$	34.0			$	6,827.2
Derivatives Not Designated as Hedging Instruments
Foreign exchange contracts (current)		Deferred income taxes and other current assets		$	192.0			$	—			$	3,066.3			$	60.3			$	—			$	2,841.7
Foreign exchange contracts (current)		Accrued and other current liabilities			—				71.8				2,424.7				—				38.6				2,104.3
				$	192.0			$	71.8			$	5,491.0			$	60.3			$	38.6			$	4,946.0
				$	803.1			$	71.8			$	11,158.7			$	378.9			$	72.6			$	11,773.2

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, and (iii) not designated in a hedging relationship:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
($ in millions)		2010				2009				2010				2009
Derivatives designated in fair value hedging relationships
Interest rate swap contracts
Amount of gain (loss) recognized in Other (income) expense, net on derivatives		$	13.4			$	(1.7	)		$	34.6			$	1.0
Amount of (loss) gain recognized in Other (income) expense, net on hedged item			(13.4	)			1.7				(34.6	)			(1.0	)
Foreign exchange contracts
Amount of gain (loss) recognized in Other (income) expense, net on derivatives			—				(46.5	)			—				9.1
Amount of (loss) gain recognized in Other (income) expense, net on hedged item			—				46.0				—				(12.7	)
Derivatives designated in cash flow hedging relationships
Foreign exchange contracts
Amount of pretax (gain) loss reclassified from AOCI to Sales			(5.1	)			(8.7	)			13.5				(7.8	)
Amount of pretax (gain) loss recognized in OCI on derivatives			(189.5	)			233.0				(283.8	)			161.8
Derivatives not designated in a hedging relationship
Foreign exchange contracts
Amount of gain (loss) recognized in Other (income) expense, net on derivatives (1)			116.5				(87.2	)			185.2				78.5
Amount of gain (loss) recognized in Sales on hedged item			46.1				—				112.9				—

(1)		These derivative contracts mitigate changes in the value of remeasured foreign currency denominated monetary assets and liabilities attributable to changes in foreign currency exchange rates.

		At June 30, 2010, the Company estimates $114.5 million of pretax net unrealized gain 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 mainly include certain mortgage-backed and asset-backed securities with limited market activity. At June 30, 2010, $17.1 million, or approximately 0.5%, of the Company’s investment securities were categorized as Level 3 assets (all of which were pledged under certain collateral arrangements (see Note 15)).
		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)		June 30, 2010																December 31, 2009
Assets
Investments
Commercial paper		$	—			$	1,036.5			$	—			$	1,036.5			$	—			$	—			$	—			$	—
U.S. government and agency securities			—				653.0				—				653.0				—				215.6				—				215.6
Mortgage-backed securities			—				111.4				—				111.4				—				—				—				—
Corporate notes and bonds			—				956.7				—				956.7				—				205.2				—				205.2
Municipal securities			—				326.6				—				326.6				—				186.7				—				186.7
Asset-backed securities (1)			—				170.9				—				170.9				—				36.0				—				36.0
Equity securities			35.3				19.7				—				55.0				39.4				39.1				—				78.5
Other debt securities			—				12.5				—				12.5				—				3.4				—				3.4
			35.3				3,287.3				—				3,322.6				39.4				686.0				—				725.4
Other assets
Securities held for employee compensation			236.7				14.2				—				250.9				107.7				14.2				—				121.9
Other assets			—				15.7				17.1				32.8				—				55.1				71.5				126.6
			236.7				29.9				17.1				283.7				107.7				69.3				71.5				248.5
Derivative assets (2)
Purchased currency options			—				660.4				—				660.4				—				291.9				—				291.9
Forward exchange contracts			—				81.4				—				81.4				—				60.3				—				60.3
Interest rate swaps			—				61.3				—				61.3				—				26.7				—				26.7
			—				803.1				—				803.1				—				378.9				—				378.9
Total assets		$	272.0			$	4,120.3			$	17.1			$	4,409.4			$	147.1			$	1,134.2			$	71.5			$	1,352.8
Liabilities
Derivative liabilities (2)
Written currency options		$	—			$	—			$	—			$	—			$	—			$	0.3			$	—			$	0.3
Forward exchange contracts			—				71.8				—				71.8				—				72.3				—				72.3
Total liabilities		$	—			$	71.8			$	—			$	71.8			$	—			$	72.6			$	—			$	72.6

(1)		Substantially all of the asset-backed securities are highly-rated (Standard & Poor’s rating of AAA and Moody’s Investors Service rating of Aaa), secured primarily by credit card, auto loan, and home equity receivables, with weighted-average lives of primarily 5 years or less.
(2)		The fair value determination of derivatives includes an assessment of the credit risk of counterparties to the derivatives and the Company’s own credit risk, the effects of which were not significant.
(3)		There were no significant transfers between Level 1 and Level 2 during the second quarter or first six months of 2010.

		As of June 30, 2010, Cash and cash equivalents of $8.7 billion included $7.9 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 at June 30, 2010, primarily include certain mortgage-backed and asset-backed securities. These securities 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 at June 30, 2010.

Notes to Consolidated Financial Statements (unaudited) (continued)

The table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

		Three Months Ended June 30, 2010												Three Months Ended June 30, 2009
		Available-												Available-
		for-sale				Other								for-sale				Other
($ in millions)		investments				assets				Total				investments				assets				Total
Beginning balance April 1		$	—			$	20.0			$	20.0			$	26.8			$	48.2			$	75.0
Net transfers in to (out of) Level 3			—				—				—				—				—				—
Purchases, sales, settlements, net			—				(8.4	)			(8.4	)			(26.9	)			(6.2	)			(33.1	)
Total realized and unrealized gains (losses)
Included in:
Earnings (1)			—				5.9				5.9				0.5				0.4				0.9
Comprehensive income			—				(0.4	)			(0.4	)			(0.4	)			(0.3	)			(0.7	)
Ending balance at June 30		$	—			$	17.1			$	17.1			$	—			$	42.1			$	42.1
Losses recorded in earnings for Level 3 assets still held at June 30		$	—			$	—			$	—			$	—			$	(0.5	)		$	(0.5	)

		Six Months Ended June 30, 2010												Six Months Ended June 30, 2009
		Available-												Available-
		for-sale				Other								for-sale				Other
($ in millions)		investments				assets				Total				investments				assets				Total
Beginning balance January 1		$	—			$	71.5			$	71.5			$	—			$	96.6			$	96.6
Net transfers in to (out of) Level 3 (2)			—				(0.4	)			(0.4	)			26.6				(23.8	)			2.8
Purchases, sales, settlements, net			—				(62.6	)			(62.6	)			(26.9	)			(32.5	)			(59.4	)
Total realized and unrealized gains (losses)
Included in:
Earnings (1)			—				18.5				18.5				0.5				(1.3	)			(0.8	)
Comprehensive income			—				(9.9	)			(9.9	)			(0.2	)			3.1				2.9
Ending balance at June 30		$	—			$	17.1			$	17.1			$	—			$	42.1			$	42.1
Losses recorded in earnings for Level 3 assets still held at June 30		$	—			$	—			$	—			$	—			$	(0.5	)		$	(0.5	)

(1)		Amounts are recorded in Other (income) expense, net.
(2)		During the first six months of 2009, investments in the aggregate amount of $26.6 million, which were no longer pledged as collateral, were reclassified from other assets to available-for-sale investments. Transfers in and out of Level 3 are deemed to occur at the beginning of the quarter in which the transaction takes place.

		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 June 30, 2010 was $19.0 billion compared with a carrying value of $18.0 billion and at December 31, 2009 was $17.7 billion compared with a carrying value of $17.5 billion. Fair value was estimated using quoted dealer prices.

Notes to Consolidated Financial Statements (unaudited) (continued)

A summary of the gross unrealized gains and losses on the Company’s available-for-sale investments, including those pledged as collateral, recorded in AOCI is as follows:

		June 30, 2010																December 31, 2009
		Fair				Amortized				Gross Unrealized								Fair				Amortized				Gross Unrealized
($ in millions)		Value				Cost				Gains (1)				Losses (1)				Value				Cost				Gains (1)				Losses (1)
Commercial paper		$	1,036.5			$	1,036.5			$	—			$	—			$	—			$	—			$	—			$	—
U.S. government and agency securities			653.0				647.6				5.4				—				215.6				215.7				1.1				(1.2	)
Corporate notes and bonds			960.4				953.1				8.6				(1.3	)			209.2				207.1				3.3				(1.2	)
Municipal securities			326.6				321.0				5.6				—				186.7				184.8				2.9				(1.0	)
Mortgage-backed securities			139.0				135.2				4.3				(0.5	)			79.4				65.9				13.8				(0.3	)
Asset-backed securities			172.2				171.2				1.1				(0.1	)			79.3				69.2				10.1				—
Foreign government bonds			10.0				9.9				0.1				—				0.4				0.4				—				—
Other debt securities			6.6				5.1				1.5				—				21.7				19.3				9.4				(7.0	)
Equity securities			302.0				278.4				27.1				(3.5	)			181.6				161.4				28.4				(8.2	)
		$	3,606.3			$	3,558.0			$	53.7			$	(5.4	)		$	973.9			$	923.8			$	69.0			$	(18.9	)

(1)		At June 30, 2010, gross unrealized gains and gross unrealized losses related to amounts pledged as collateral (see Note 15) were $5.6 million and $(0.3) million, respectively. At December 31, 2009, gross unrealized gains and gross unrealized losses related to amounts pledged as collateral were $25.6 million and $(0.3) million, respectively.

		Available-for-sale debt securities included in Short-term investments totaled $1.3 billion at June 30, 2010. Of the remaining debt securities, $1.6 billion mature within five years. At June 30, 2010, there were no debt securities pledged as collateral included in current assets nor any debt securities pledged as collateral that mature within five years.
		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.
		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 European sovereign debt crisis. The Company believes the credit and economic conditions within Greece, Spain, Italy and Portugal, among other members of the European Union, have deteriorated through the first half of 2010. These 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 on the accounts receivable outstanding in these countries. As of June 30, 2010, the Company’s accounts receivable in Greece, Italy, Spain and Portugal totaled approximately $1.3 billion of which hospital and public sector receivables in Greece were approximately 15%. The Company anticipates receiving full payment on the $1.3 billion of receivables in accordance with historical practices in these locations.
		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 June 30, 2010, the Company had received cash collateral of $345.1 million from various counterparties which is recorded in Accrued and other current liabilities. The Company had not advanced any cash collateral to counterparties as of June 30, 2010.

Notes to Consolidated Financial Statements (unaudited) (continued)

7.		Inventories

Inventories consisted of:

		June 30,				December 31,
($ in millions)		2010				2009
Finished goods		$	1,879.4			$	2,475.5
Raw materials and work in process			5,310.4				6,583.1
Supplies			308.4				322.8
Total (approximates current cost)			7,498.2				9,381.4
Reduction to LIFO cost for domestic inventories			(159.1	)			(166.7	)
		$	7,339.1			$	9,214.7
Recognized as:
Inventories		$	6,244.2			$	8,057.5
Other assets			1,094.9				1,157.2

As of June 30, 2010, $490.6 million of purchase accounting adjustments to inventories remained which will be 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.

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								Six Months Ended
		June 30,								June 30,
($ in millions)		2010				2009				2010				2009
AstraZeneca LP		$	40.1			$	122.9			$	165.1			$	291.2
Merck/Schering-Plough (1)			—				362.3				—				653.2
Other (2)			2.8				101.9				15.3				228.6
		$	42.9			$	587.1			$	180.4			$	1,173.0

(1)		Upon completion of the Merger, the MSP Partnership became wholly-owned by the Company (see below).
(2)		Primarily reflects results from Merial Limited (which was disposed of on September 17, 2009), Sanofi Pasteur MSD and Johnson & Johnson°Merck Consumer Pharmaceuticals Company.

		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 $443.0 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”). On February 26, 2010, AstraZeneca notified the Company that it was exercising the Asset Option. Upon consummation of the exercise on April 30, 2010, 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 $443.0 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 two years after Astra’s exercise of the Asset Option. Astra can also exercise the Shares Option in 2017 or if combined annual sales of both products fall below a minimum amount since AstraZeneca’s Asset Option was exercised. The exercise price for the Shares Option is 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.

Notes to Consolidated Financial Statements (unaudited) (continued)

Summarized financial information for AZLP is as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
($ in millions)		2010				2009				2010				2009
Sales		$	1,297.1			$	1,493.2			$	2,590.5			$	2,808.9
Materials and production costs			626.3				666.1				1,259.0				1,350.7
Other expense, net			312.4				292.7				455.1				618.3
Income before taxes (1)			$358.4			$	534.4			$	876.4			$	839.9

(1)		Merck’s partnership returns from AZLP are generally contractually determined and are not based on a percentage of income from AZLP, other than with respect to the 1% limited partnership interest discussed above.

		Merck/Schering-Plough Partnership
		In 2000, Old Merck and Schering-Plough (collectively the “Partners”) entered into agreements to create an equally-owned partnership to develop and market in the United States new prescription medicines for cholesterol management. These agreements generally provided for equal sharing of development costs and for co-promotion of approved products by each company. In 2001, the cholesterol-management partnership was expanded to include all the countries of the world, excluding Japan. In 2002, ezetimibe, the first in a new class of cholesterol-lowering agents, was launched in the United States as Zetia (marketed as Ezetrol outside the United States). In 2004, a combination product containing the active ingredients of both Zetia and Zocor was approved in the United States as Vytorin (marketed as Inegy outside of the United States).
		As a result of the Merger (see Note 2), the MSP Partnership is wholly-owned by the Company. The results of the MSP Partnership through the date of the Merger are reflected in Equity income from affiliates. Activity resulting from the sale of MSP Partnership products after the Merger has been consolidated with Merck’s results.
		See Note 10 for information with respect to litigation involving the MSP Partnership and the Partners related to the sale and promotion of Zetia and Vytorin.
		Summarized financial information for the MSP Partnership for periods presented prior to the Merger is as follows:

		Three Months				Six Months
($ in millions)		Ended June 30, 2009
Sales		$	1,033.4			$	1,978.7
Zetia			513.5				992.8
Vytorin			519.9				985.9
Materials and production costs			43.1				85.1
Other expense, net			282.3				524.5
Income before taxes		$	708.0			$	1,369.1
Merck’s share of income before taxes (1)		$	368.6			$	662.4

(1)		Old Merck’s share of the MSP Partnership’s income before taxes differed from the equity income recognized from the MSP Partnership primarily due to the timing of recognition of certain transactions between Old Merck and the MSP Partnership during the periods presented, including milestone payments.

		Merial Limited
		In 1997, Old Merck and Rhône-Poulenc S.A. (now sanofi-aventis) combined their animal health businesses to form Merial Limited (“Merial”), a fully integrated animal health company, which was a stand-alone joint venture, 50% owned by each party. Merial provides a comprehensive range of pharmaceuticals and vaccines to enhance the health, well-being and performance of a wide range of animal species. In 2009, Old Merck sold its 50% interest in Merial to sanofi-aventis for $4 billion in cash.
		In connection with the sale of Merial, Old Merck, sanofi-aventis and Schering-Plough signed a call option agreement which provided sanofi-aventis with an option to require the Company to combine its Intervet/Schering-Plough Animal Health business with Merial to form an animal health joint venture that would be owned equally by the Company and sanofi-aventis. In March 2010, sanofi-aventis exercised its option. As part of the call option agreement, the value of Merial has been fixed at $8 billion. The minimum total value to be received by the Company for contributing Intervet/Schering-Plough to the combined entity would be $9.25 billion (subject to customary transaction adjustments), consisting of a floor valuation of Intervet/Schering-Plough which is fixed at a minimum of $8.5 billion (which was subject to potential upward revision based on a valuation exercise by the two parties) and an additional payment by sanofi-aventis of $750 million. Based on the valuation exercise, the value of Intervet/Schering-Plough was determined to be $8.5 billion, leading to a future payment of $250 million by sanofi-aventis to the Company to true-up the value of the

Notes to Consolidated Financial Statements (unaudited) (continued)

contributions so that they are equal pursuant to the terms of the agreement. All payments, including adjustments for debt and certain other liabilities, will be made upon closing of the transaction. The formation of this new animal health joint venture is subject to execution of final agreements, antitrust review in the United States, Europe and other countries and other customary closing conditions. On March 30, 2010, the parties signed the contribution agreement which obligates them, subject to regulatory approval, to form the joint venture. The Company expects the transaction to close in the first quarter of 2011.

9.

Loans Payable, Long-Term Debt and Other Commitments

		During the first quarter of 2010, the Company repaid $610 million of euro-denominated notes due to mature in 2012. Funding to repay the notes was provided through the issuance of commercial paper.
		In June 2010, the Company closed on a new $2.0 billion, 364-day credit facility and terminated both Old Merck’s $1.0 billion incremental facility due to expire in November 2010 and its $1.5 billion revolving credit facility scheduled to mature in April 2013. The Company’s $2.0 billion credit facility maturing in August 2012 remains outstanding. Both outstanding facilities provide backup liquidity for the Company’s commercial paper borrowing facility and are to be used for general corporate purposes. The Company has not drawn funding from either facility.

10.

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 New Jersey, California and Texas, and the counties of Philadelphia, Pennsylvania and Washoe and Clark Counties, Nevada. As of June 30, 2010, the Company had been served or was aware that it had been named as a defendant in approximately 5,500 pending lawsuits, which include approximately 9,100 plaintiff groups, alleging personal injuries resulting from the use of Vioxx, and in approximately 30 putative class actions alleging economic loss. (All of the actions discussed in this paragraph and in “Other Lawsuits” below are collectively referred to as the “Vioxx Product Liability Lawsuits.”) Of these lawsuits, approximately 4,250 lawsuits representing approximately 6,550 plaintiff groups are or are slated to be in the federal MDL and approximately 5 lawsuits representing approximately 5 plaintiff groups are included in a coordinated proceeding in New Jersey Superior Court before Judge Carol E. Higbee.
		Of the plaintiff groups described above, the vast majority were in the Vioxx Settlement Program, described below. As of June 30, 2010, approximately 40 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 130 plaintiff groups who are not eligible for the Settlement Program remain pending against Old Merck. A number of these 130 plaintiff groups are subject to various motions to dismiss for failure to comply with court-ordered deadlines. Since June 30, 2010, certain of these plaintiff groups have since been dismissed. In addition, the claims of over 42,500 plaintiffs had been dismissed as of June 30, 2010, the vast majority of which were dismissed as a result of the settlement process discussed below.
		On November 9, 2007, Old Merck announced that it had entered into an agreement (the “Settlement Agreement”) with the law firms that comprise the executive committee of the Plaintiffs’ Steering Committee (“PSC”) of the federal Vioxx MDL, as well as representatives of plaintiffs’ counsel in the Texas, New Jersey and California state coordinated proceedings, to resolve state and federal myocardial infarction (“MI”) and ischemic stroke (“IS”) claims filed as of that date in the United States. The Settlement Agreement applies only to U.S. legal residents and those who allege that their MI or IS occurred in the United States. The Settlement Agreement provided for Old Merck to pay a fixed aggregate amount of $4.85 billion into two funds ($4.0 billion for MI claims and $850 million for IS claims) (the “Settlement Program”).
		As of June 30, 2010, the processing of all MI and IS claims in the Settlement Program is complete and final payments have been made to more than 99% of all claimants. The majority of claimants not yet paid are finalizing documents. There has been one U.S. Vioxx Product Liability Lawsuit trial held in 2010. That trial in the Louisiana Attorney General matter is discussed below. There is one U.S. Vioxx Product Liability Lawsuit currently scheduled for trial in October 2010. 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 previously disclosed the details associated with these cases and the grounds for Merck’s appeals.

Notes to Consolidated Financial Statements (unaudited) (continued)

		Other Lawsuits
		Approximately 190 claims by individual private third-party payors (“TPPs”) were filed in the New Jersey court and in federal court in the MDL. On September 15, 2009, Old Merck announced it had finalized a settlement agreement, which it had previously disclosed, to resolve all pending lawsuits in which U.S.-based private TPPs sought reimbursement for covering Vioxx purchased by their plan members. Certain other claimants participated in the resolution as well. The agreement provided that Old Merck did not admit wrongdoing or fault. Under the settlement agreement, Old Merck paid a fixed total of $80 million. Pursuant to the settlement agreement, stipulated dismissals of the settled TTP actions were filed in New Jersey and the MDL in December 2009. Old Merck recorded a charge of $80 million in the second quarter of 2009 related to the settlement and paid the $80 million in the fourth quarter of 2009. Since the settlement, one additional TPP case has been filed, which is pending in the MDL proceeding.
		Separately, there are also still pending in various U.S. courts putative class actions purportedly brought on behalf of individual purchasers or users of Vioxx and seeking reimbursement of alleged economic loss. In the MDL proceeding, approximately 30 such class actions remain. Old Merck moved to dismiss a master complaint that includes such cases on June 30, 2010.
		On March 17, 2009, the New Jersey Superior Court denied plaintiffs’ motion for class certification in Martin-Kleinman v. Merck, a putative consumer class action. Plaintiffs moved for leave to appeal the decision to the New Jersey Supreme Court on November 6, 2009. On January 12, 2010, the New Jersey Supreme Court denied plaintiff’s request for appellate review of the denial of class certification. Both Martin and Kleinman have been dismissed pursuant to stipulations signed by the parties.
		On June 12, 2008, a Missouri state court certified a class of Missouri plaintiffs seeking reimbursement for out-of-pocket costs relating to Vioxx. The plaintiffs do not allege any personal injuries from taking Vioxx. The Missouri Court of Appeals affirmed the trial court’s certification of a class on May 12, 2009, and the Missouri Supreme Court denied Old Merck’s application for review of that decision on September 1, 2009. Trial has been set for April 11, 2011. 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; discovery in that case is ongoing. 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. In response, Old Merck filed a petition for writ of mandamus seeking interlocutory appellate review of the court’s rulings, which petition was denied. Old Merck intends to appeal that denial.
		Plaintiffs also filed a class action in California state court seeking certification of a class of California third-party payors and end-users. The trial court denied the motion for class certification on April 30, 2009, and the Court of Appeal affirmed that ruling on December 15, 2009. On January 25, 2010, plaintiffs filed a petition for review with the California Supreme Court, which was denied on March 30, 2010.
		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 brought by state Attorneys General, one on behalf of a county, and one was 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 has been remanded to state court. 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 healthcare programs such as Medicaid, along with other relief such as penalties and attorneys’ fees. On July 26, 2010, Judge Fallon dismissed with prejudice a taxpayer derivative action containing similar allegations that was brought against the Company by a private citizen in Colorado. The action brought by the Attorney General of Kentucky seeks only penalties for alleged consumer fraud 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’s motion for summary judgment was granted in November 2009 in a case brought by the Attorney General of Texas that was scheduled to go to trial in early 2010. The Texas Attorney General did not appeal. In the Michigan Attorney General case, Old Merck is currently seeking appellate review of the trial court’s order denying Old Merck’s motion to dismiss. The trial court has entered a stay of proceedings (including discovery) pending the result of that appeal. Finally, the Attorney General actions in the MDL described in the previous paragraph are in the discovery phase. 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.
		Shareholder Lawsuits
		As previously disclosed, in addition to the Vioxx Product Liability Lawsuits, Old Merck and various current and former officers and directors are defendants in various putative class actions and individual lawsuits under the federal securities laws and state securities laws (the “Vioxx Securities Lawsuits”). All of the Vioxx Securities Lawsuits pending in federal court 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”). Judge Chesler has consolidated the Vioxx Securities Lawsuits for all purposes. The putative class action, which requests damages on behalf of purchasers of Old Merck stock between May 21, 1999 and October 29, 2004, alleges that the defendants made false and misleading statements regarding Vioxx in

Notes to Consolidated Financial Statements (unaudited) (continued)

		violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and seeks unspecified compensatory damages and the costs of suit, including attorneys’ fees. The complaint also asserts claims under Section 20A of the Securities and Exchange Act against certain defendants relating to their sales of Old Merck stock and under Sections 11, 12 and 15 of the Securities Act of 1933 against certain defendants based on statements in a registration statement and certain prospectuses filed in connection with the Old Merck Stock Investment Plan, a dividend reinvestment plan. On April 12, 2007, Judge Chesler granted defendants’ motion to dismiss the complaint with prejudice. Plaintiffs appealed Judge Chesler’s decision to the U.S. Court of Appeals for the Third Circuit. On September 9, 2008, the Third Circuit issued an opinion reversing Judge Chesler’s order and remanding the case to the District Court. Old Merck filed a petition for a writ of certiorari with the United States Supreme Court on January 15, 2009, which the Supreme Court granted on May 26, 2009. While the petition for certiorari was pending, plaintiffs filed their Consolidated and Fifth Amended Class Action Complaint in the District Court. Old Merck filed a motion to dismiss that complaint on May 1, 2009, following which the District Court proceedings were stayed pending the outcome of the Supreme Court appeal. On September 16, 2009, Old Merck withdrew its motion to dismiss in the District Court without prejudice to its right to re-file such a motion pending the outcome of the Supreme Court appeal. On April 27, 2010, the Supreme Court affirmed the Third Circuit’s order reversing the District Court’s dismissal of the then-operative complaint. The case was returned to the District Court for further proceedings and Old Merck again moved to dismiss the Fifth Amended Class Action Complaint on June 18, 2010. The motion is scheduled to be fully briefed by September 17, 2010.
		In October 2005, a Dutch pension fund filed a complaint in the District of New Jersey alleging violations of federal securities laws as well as violations of state law against Old Merck and certain officers. Pursuant to the Case Management Order governing the Shareholder MDL, the case, which is based on the same allegations as the Vioxx Securities Lawsuits, was consolidated with the Vioxx Securities Lawsuits. Defendants’ motion to dismiss the pension fund’s complaint was filed on August 3, 2007. In September 2007, the Dutch pension fund filed an amended complaint rather than responding to defendants’ motion to dismiss. In addition, in 2007, six new complaints were filed in the District of New Jersey on behalf of various foreign institutional investors also alleging violations of federal securities laws as well as violations of state law against Old Merck and certain officers. By stipulation, defendants are not required to respond to these complaints until the resolution of any motion to dismiss in the consolidated securities action.
		In addition, as previously disclosed, various putative class actions 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” and, together with the Vioxx Securities Lawsuits and the Vioxx Derivative Lawsuits described below, the “Vioxx Shareholder Lawsuits”) have been transferred to the Shareholder MDL and consolidated for all purposes. The consolidated complaint asserts claims for breach of fiduciary duty on behalf of certain of Old Merck’s current and former employees who are participants in certain of Old Merck’s retirement plans. The complaint makes similar allegations with respect to Vioxx to the allegations contained in the Vioxx Securities Lawsuits. On July 11, 2006, Judge Chesler granted in part and denied in part defendants’ motion to dismiss the ERISA complaint. On October 19, 2007, plaintiffs moved for certification of a class of individuals who were participants in and beneficiaries of Old Merck’s retirement savings plans at any time between October 1, 1998 and September 30, 2004 and whose plan accounts included investments in the Old Merck Common Stock Fund and/or Old Merck common stock. On February 9, 2009, the court denied the motion for certification of a class as to one count and granted the motion as to the remaining counts. The court also excluded from the class definition those individuals who (i) were not injured in connection with their investments in Old Merck stock and (ii) executed post-separation settlement agreements that released their claims under ERISA. On March 23, 2009, Judge Chesler denied defendants’ motion for judgment on the pleadings. On May 11, 2009, Judge Chesler entered an order denying plaintiffs’ motion for partial summary judgment against certain individual defendants, which had been filed on December 24, 2008. Discovery in the Vioxx ERISA Lawsuits is ongoing. Fact discovery is scheduled to close on September 30, 2010.
		As previously disclosed, on October 29, 2004, two individual shareholders made a demand on Old Merck’s Board to take legal action against Mr. Raymond Gilmartin, former Chairman, President and Chief Executive Officer, and other individuals for allegedly causing damage to Old Merck with respect to the allegedly improper marketing of Vioxx. In December 2004, the Special Committee of the Board of Directors retained the Honorable John S. Martin, Jr. of Debevoise & Plimpton LLP to conduct an independent investigation of, among other things, the allegations set forth in the demand. Judge Martin’s report was made public in September 2006. Based on the Special Committee’s recommendation made after careful consideration of the Martin report and the impact that derivative litigation would have on Old Merck, the Board rejected the demand. On October 11, 2007, two shareholders filed a shareholder derivative lawsuit purportedly on Old Merck’s behalf in state court in Atlantic County, New Jersey against current and former officers and directors of Old Merck. Plaintiffs alleged that the Board’s rejection of their demand was unreasonable and improper, and that the defendants breached various duties to Old Merck in allowing Vioxx to be marketed. The parties reached a proposed settlement and, on February 8, 2010, the court issued an order preliminarily approving the settlement, requiring that notice of the proposed settlement be made to Merck’s shareholders, and setting a hearing to consider final approval of the settlement on March 22, 2010. On February 9, 2010, Merck notified shareholders of the proposed settlement and its terms. On March 22, 2010, the court orally approved the settlement but reserved judgment on plaintiffs’ request for attorneys’ fees. On April 15, 2010, the court issued an order approving the settlement and awarding to plaintiffs’ attorneys fees and expenses totaling $9,219,460. Under the settlement, Merck will make certain corporate governance changes and supplement policies and procedures previously established by the Company. In addition, Merck, the plaintiffs and the individual defendants have exchanged full, mutual releases of all claims that were, or could have been, asserted in the derivative actions. The settlement does not constitute an admission of liability or wrongful

Notes to Consolidated Financial Statements (unaudited) (continued)

		conduct by Merck or by any of the defendants named in the actions. The settlement also resolves the federal consolidated shareholder derivative action described below.
		As previously disclosed, various shareholder derivative actions filed in federal court were transferred to the Shareholder MDL and consolidated for all purposes by Judge Chesler (the “Vioxx Derivative Lawsuits”). On May 5, 2006, Judge Chesler granted defendants’ motion to dismiss on the grounds that plaintiffs had failed to demonstrate that demand should be excused and denied plaintiffs’ request for leave to amend their complaint. Plaintiffs appealed, arguing that Judge Chesler erred in denying plaintiffs’ leave to amend their complaint with documents acquired by stipulation of the parties. On July 18, 2007, the United States Court of Appeals for the Third Circuit reversed the District Court’s decision on the grounds that Judge Chesler should have allowed plaintiffs to seek leave to amend their complaint using the documents acquired by stipulation, and remanded the case for the District Court’s consideration of whether, even with the additional materials, plaintiffs’ proposed amendment would be futile. Plaintiffs filed their brief in support of their request for leave to amend their complaint, along with their proposed amended complaint, on November 9, 2007. The court denied the motion on June 17, 2008, and again dismissed the case. One of the plaintiffs appealed Judge Chesler’s decision to the United States Court of Appeals for the Third Circuit. Oral argument on the appeal was held on July 15, 2009. On November 10, 2009, before any decision was issued, the appeal was stayed pending the settlement reached in the derivative action pending in the New Jersey Superior Court. As discussed above, the settlement was approved on April 15, 2010, and resolves all shareholder derivative litigation relating to Vioxx. On June 2, 2010, pursuant to the terms of the settlement, the parties to the appeal filed a stipulation and proposed order for voluntary dismissal with prejudice of the Third Circuit appeal. On June 10, 2010, the Third Circuit dismissed the appeal.
		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 various countries (collectively, the “Vioxx Foreign Lawsuits”) in Europe, as well as Canada, Brazil, Argentina, Australia, Turkey, Israel and the Philippines.
		In November 2006, the Superior Court in Quebec authorized the institution of a class action on behalf of all individuals who, in Quebec, consumed Vioxx and suffered damages arising out of its ingestion. On May 7, 2009, the plaintiffs served an introductory motion for a class action based upon that authorization, and the case remains in preliminary stages of litigation. On May 30, 2008, the provincial court of Queen’s Bench in Saskatchewan, Canada entered an order certifying a class of Vioxx users in Canada, except those in Quebec. Old Merck appealed the certification order and, on March 30, 2009, the Court of Appeal granted Old Merck’s appeal and quashed the certification order. On October 22, 2009, the Supreme Court of Canada dismissed plaintiffs’ appeal application and decided not to review the judgment of the Saskatchewan Court of Appeal. On July 28, 2008, the Superior Court in Ontario denied Old Merck’s motion to stay class proceedings in Ontario and decided to certify an overlapping class of Vioxx users in Canada, except those in Quebec and Saskatchewan, who allege negligence and an entitlement to elect to waive the tort. On February 13, 2009, the Ontario Divisional Court dismissed the appeal from the order denying the stay and, on May 15, 2009, the Ontario Court of Appeal denied leave to appeal. On October 22, 2009, the Supreme Court of Canada dismissed Old Merck’s application and decided not to review the judgment of the Ontario Court of Appeal. After the Court of Appeal for Saskatchewan quashed the multi-jurisdictional certification order entered in that province, Old Merck applied to the Ontario Court of Appeal for leave to appeal from the Ontario certification order. Leave to appeal was granted, the appeal was filed on May 20, 2009 and, in accordance with the court’s decision, Old Merck sought leave to appeal to the Divisional Court, which was denied on December 7, 2009. 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.
		A trial in a representative action in Australia concluded on June 25, 2009, in the Federal Court of Australia. The named plaintiff, who alleged he suffered an MI after ingesting Vioxx, seeks to represent others in Australia who ingested Vioxx and suffered an MI, thrombotic stroke, unstable angina, transient ischemic attack or peripheral vascular disease. On March 30, 2009, the trial judge entered an order directing that, in advance of all other issues in the proceeding, the issues to be determined during the trial were those issues of fact and law in the named plaintiff’s individual case, and those issues of fact and law that the trial judge finds, after hearing the evidence, are common to the claims of the group members that the named plaintiff has alleged that he represents. On March 5, 2010, the trial judge delivered his judgment and entered orders on June 18 and July 2, 2010. The court dismissed all claims against Old Merck, specifically finding that Old Merck had done everything that might reasonably be expected of it in the discharge of its duty of care. With regard to Old Merck’s Australian subsidiary, Merck Sharp & Dohme (Australia) Pty Ltd, the court dismissed certain claims but awarded the named plaintiff, whom the court found suffered an MI after ingesting Vioxx for approximately 33 months, AU $330,465 based on statutory claims that Vioxx was not fit for purpose or of merchantable quality, even though the court rejected the applicant’s claim that Old Merck and its Australian subsidiary knew or ought to have known prior to the voluntary withdrawal of Vioxx in September 2004 that Vioxx materially increased the risk of MI. In its June 18, 2010 orders, the court also determined which of its findings of fact and law are common to the claims of other group members. Old Merck’s subsidiary has appealed the adverse findings.
		Insurance
		As previously disclosed, the Company has Directors and Officers insurance coverage applicable to the Vioxx Securities Lawsuits and Vioxx Derivative Lawsuits with stated upper limits of approximately $190 million. The Company has Fiduciary and other

Notes to Consolidated Financial Statements (unaudited) (continued)

		insurance for the Vioxx ERISA Lawsuits with stated upper limits of approximately $275 million. As a result of the previously disclosed 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 includes 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. Further, as previously disclosed, investigations are being conducted by local authorities in certain cities in Europe in order to determine whether any criminal charges should be brought concerning Vioxx. The Company is cooperating with these governmental entities in their respective investigations (the “Vioxx Investigations”). The Company cannot predict the outcome of these inquiries; however, they could result in potential civil and/or criminal remedies.
		In addition, Old Merck received a subpoena in September 2006 from the State of California Attorney General seeking documents and information related to the placement of Vioxx on California’s Medi-Cal formulary. The Company is cooperating with the Attorney General in responding to the subpoena.
		Reserves
		As discussed above, on November 9, 2007, Old Merck entered into the Settlement Agreement with the law firms that comprise the executive committee of the PSC of the federal Vioxx MDL as well as representatives of plaintiffs’ counsel in the Texas, New Jersey and California state coordinated proceedings to resolve state and federal MI and IS claims filed as of that date in the United States. In 2007, as a result of entering into the Settlement Agreement, Old Merck recorded a pretax charge of $4.85 billion which represents the fixed aggregate amount to be paid to plaintiffs qualifying for payment under the Settlement Program.
		There has been one U.S. Vioxx Product Liability Lawsuit tried in 2010. There is one U.S. Vioxx Product Liability Lawsuit currently scheduled for trial in October 2010. The Company cannot predict the timing of any other trials related to the Vioxx Litigation. 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. The Company has not established any reserves for any potential liability relating to the Vioxx Lawsuits or the Vioxx Investigations. Unfavorable outcomes in the Vioxx Litigation could have a material adverse effect on the Company’s financial position, liquidity and results of operations.
		Legal defense costs expected to be incurred in connection with a loss contingency are accrued when probable and reasonably estimable. As of December 31, 2009, Old Merck had an aggregate reserve of approximately $110 million (the “Vioxx Reserve”) for the Settlement Program and future legal defense costs related to the Vioxx Litigation.
		During the first six months of 2010, Merck spent approximately $78 million in the aggregate in legal defense costs worldwide, including $35 million in the second quarter of 2010, related to (i) the Vioxx Product Liability Lawsuits, (ii) the Vioxx Shareholder Lawsuits, (iii) the Vioxx Foreign Lawsuits, and (iv) the Vioxx Investigations (collectively, the “Vioxx Litigation”). In addition, Merck recorded a $30 million charge in each of the first and second quarters of 2010 solely for its future legal defense costs for the Vioxx Litigation. Consequently, as of June 30, 2010, the aggregate amount of the Vioxx Reserve was approximately $92 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 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 Reserve as of June 30, 2010 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 Reserve at any time in the future if, based upon the factors set forth, it believes it would be appropriate to do so.

Notes to Consolidated Financial Statements (unaudited) (continued)

		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 June 30, 2010, approximately 1,092 cases, which include approximately 1,470 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 these actions, plaintiffs allege, among other things, that they have suffered osteonecrosis of the jaw, 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 ten percent of these actions allege that they sustained stress and/or low energy femoral fractures in association with the use of Fosamax. On August 16, 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 815 of the cases are before Judge Keenan. Judge Keenan issued a Case Management Order (and various amendments thereto) setting forth a schedule governing the proceedings which 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. On January 28, 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. On July 27, 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. The first MDL trial — Boles v. Merck — began on August 11, 2009, and ended on September 2, 2009. On September 11, 2009, the MDL court declared a mistrial in Boles because the eight person jury could not reach a unanimous verdict. The second MDL case set for trial — Flemings v. Merck — was scheduled to start on January 12, 2010, but Judge Keenan granted Old Merck’s motion for summary judgment and dismissed the case on November 23, 2009. In the next MDL case set for trial — Maley v. Merck — the trial commenced on April 12, 2010 and went to the jury on May 5, 2010. On the same day, the jury 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 MDL court dismissed when it granted summary judgment in favor of Old Merck. The MDL court has set the Graves trial to begin on November 1, 2010. The Boles case which initially resulted in a mistrial was retried in June 2010. The trial began on June 7, 2010 and concluded on June 25, 2010 with a verdict in favor of the plaintiff in the amount of $8 million. Merck intends to file post-trial motions seeking judgment as a matter of law or, in the alternative, a new trial. A hearing on Merck’s post-trial motions is scheduled to be held on September 8, 2010. A trial in Alabama was scheduled to begin on May 3, 2010, but that trial was postponed and trial is now currently expected to be held in January 2011. A trial in Florida was scheduled to begin on June 21, 2010 but on April 7, 2010 the Florida state court postponed the trial date until sometime after January 1, 2011.
		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. On October 6, 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 osteonecrosis of the jaw, 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 June 30, 2010, approximately 255 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. The first trial in the New Jersey coordinated proceeding is currently set to be held beginning January 17, 2011.
		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.
		NuvaRing
		Beginning in May 2007, a number of complaints were filed in various jurisdictions asserting personal injury claims against the Company and its subsidiaries, Organon USA, Inc., Organon Pharmaceuticals USA, Inc., Organon International (collectively, “Organon”), arising from Organon’s marketing and sale of NuvaRing, a combined hormonal contraceptive vaginal ring. The plaintiffs seek damages for injuries allegedly sustained as a result of their product use; the most common alleged injuries are deep vein thrombosis and pulmonary embolism. There are also claims alleging heart attack, stroke and death.
		As of June 30, 2010, there were approximately 588 NuvaRing cases. Of these cases, 476 are pending in a multidistrict litigation (the “NuvaRing MDL”) in the U.S. District Court for the Eastern District of Missouri before Judge Rodney Sippel, and approximately 107 are pending in consolidated discovery proceedings in the Bergen County Superior Court of New Jersey before Judge Brian R. Martinotti. Five additional cases are pending in various other state courts.
		Pursuant to the January 13, 2010 and February 19, 2010 Orders of Judge Sippel in the NuvaRing MDL, the parties selected 26 trial pool cases which are the subject of fact discovery, and the first trials are expected to begin in September 2011. Pursuant to