Item 8. Financial Statements and Supplementary Data.

**(a)**Financial Statements

The consolidated balance sheet of Merck & Co., Inc. and subsidiaries as of December 31, 2022 and 2021, and the related consolidated statements of income, of comprehensive income, of equity and of cash flows for each of the three years in the period ended December 31, 2022, the notes to consolidated financial statements, and the report dated February 24, 2023 of PricewaterhouseCoopers LLP, independent registered public accounting firm, are as follows:

Consolidated Statement of Income

Merck & Co., Inc. and Subsidiaries

Years Ended December 31

($ in millions except per share amounts)

			2022						2021						2020
Sales			$	59,283					$	48,704					$	41,518
Costs, Expenses and Other
Cost of sales			17,411						13,626						13,618
Selling, general and administrative			10,042						9,634						8,955
Research and development			13,548						12,245						13,397
Restructuring costs			337						661						575
Other (income) expense, net			1,501						(1,341)						(890)
			42,839						34,825						35,655
Income from Continuing Operations Before Taxes			16,444						13,879						5,863
Taxes on Income from Continuing Operations			1,918						1,521						1,340
Net Income from Continuing Operations			14,526						12,358						4,523
Less: Net Income Attributable to Noncontrolling Interests			7						13						4
Net Income from Continuing Operations Attributable to Merck & Co., Inc.			14,519						12,345						4,519
Income from Discontinued Operations, Net of Taxes and Amounts Attributable to Noncontrolling Interests			—						704						2,548
Net Income Attributable to Merck & Co., Inc.			$	14,519					$	13,049					$	7,067
Basic Earnings per Common Share Attributable to Merck & Co., Inc. Common Shareholders
Income from Continuing Operations			$	5.73					$	4.88					$	1.79
Income from Discontinued Operations			—						0.28						1.01
Net Income			$	5.73					$	5.16					$	2.79
Earnings per Common Share Assuming Dilution Attributable to Merck & Co., Inc. Common Shareholders
Income from Continuing Operations			$	5.71					$	4.86					$	1.78
Income from Discontinued Operations			—						0.28						1.00
Net Income			$	5.71					$	5.14					$	2.78

Consolidated Statement of Comprehensive Income

Merck & Co., Inc. and Subsidiaries

Years Ended December 31

($ in millions)

			2022						2021						2020
Net Income Attributable to Merck & Co., Inc.			$	14,519					$	13,049					$	7,067
Other Comprehensive (Loss) Income Net of Taxes:
Net unrealized (loss) gain on derivatives, net of reclassifications			(71)						410						(297)
Net unrealized loss on investments, net of reclassifications			—						—						(18)
Benefit plan net gain (loss) and prior service credit (cost), net of amortization			335						1,769						(279)
Cumulative translation adjustment			(603)						(423)						153
			(339)						1,756						(441)
Comprehensive Income Attributable to Merck & Co., Inc.			$	14,180					$	14,805					$	6,626

The accompanying notes are an integral part of these consolidated financial statements.

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Consolidated Balance Sheet

Merck & Co., Inc. and Subsidiaries

December 31

($ in millions except per share amounts)

			2022						2021
Assets
Current Assets
Cash and cash equivalents			$	12,694					$	8,096
Short-term investments			498						—
Accounts receivable (net of allowance for doubtful accounts of $72 in 2022 and $62 in 2021)			9,450						9,230
Inventories (excludes inventories of $2,938 in 2022 and $2,194 in 2021 classified in Other assets - see Note 8)			5,911						5,953
Other current assets			7,169						6,987
Total current assets			35,722						30,266
Investments			1,015						370
Property, Plant and Equipment (at cost)
Land			295						326
Buildings			13,166						12,529
Machinery, equipment and office furnishings			16,760						16,303
Construction in progress			9,186						8,313
			39,407						37,471
Less: accumulated depreciation			17,985						18,192
			21,422						19,279
Goodwill			21,204						21,264
Other Intangibles, Net			20,269						22,933
Other Assets			9,528						11,582
			$	109,160					$	105,694
Liabilities and Equity
Current Liabilities
Loans payable and current portion of long-term debt			$	1,946					$	2,412
Trade accounts payable			4,264						4,609
Accrued and other current liabilities			14,159						13,859
Income taxes payable			1,986						1,224
Dividends payable			1,884						1,768
Total current liabilities			24,239						23,872
Long-Term Debt			28,745						30,690
Deferred Income Taxes			1,795						3,441
Other Noncurrent Liabilities			8,323						9,434
Merck & Co., Inc. Stockholders’ Equity
Common stock, $0.50 par value Authorized - 6,500,000,000 shares Issued - 3,577,103,522 shares in 2022 and 2021			1,788						1,788
Other paid-in capital			44,379						44,238
Retained earnings			61,081						53,696
Accumulated other comprehensive loss			(4,768)						(4,429)
			102,480						95,293
Less treasury stock, at cost: 1,039,269,638 shares in 2022 and 1,049,499,023 shares in 2021			56,489						57,109
Total Merck & Co., Inc. stockholders’ equity			45,991						38,184
Noncontrolling Interests			67						73
Total equity			46,058						38,257
			$	109,160					$	105,694

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

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Consolidated Statement of Equity

Merck & Co., Inc. and Subsidiaries

Years Ended December 31

($ in millions except per share amounts)

			Common Stock						Other Paid-In Capital						Retained Earnings						Accumulated Other Comprehensive Loss						Treasury Stock						Non- controlling Interests						Total
Balance January 1, 2020			$	1,788					$	39,660					$	46,602					$	(6,193)					$	(55,950)					$	94					$	26,001
Net income attributable to Merck & Co., Inc.			—						—						7,067						—						—						—						7,067
Other comprehensive loss, net of taxes			—						—						—						(441)						—						—						(441)
Cash dividends declared on common stock ($2.48 per share)			—						—						(6,307)						—						—						—						(6,307)
Treasury stock shares purchased			—						—						—						—						(1,281)						—						(1,281)
Net income attributable to noncontrolling interests			—						—						—						—						—						15						15
Distributions attributable to noncontrolling interests			—						—						—						—						—						(22)						(22)
Share-based compensation plans and other			—						(72)						—						—						444						—						372
Balance December 31, 2020			1,788						39,588						47,362						(6,634)						(56,787)						87						25,404
Net income attributable to Merck & Co., Inc.			—						—						13,049						—						—						—						13,049
Other comprehensive income, net of taxes			—						—						—						1,756						—						—						1,756
Cash dividends declared on common stock ($2.64 per share)			—						—						(6,715)						—						—						—						(6,715)
Treasury stock shares purchased			—						—						—						—						(840)						—						(840)
Spin-off of Organon & Co.			—						4,643						—						449						—						(1)						5,091
Net income attributable to noncontrolling interests			—						—						—						—						—						16						16
Distributions attributable to noncontrolling interests			—						—						—						—						—						(29)						(29)
Share-based compensation plans and other			—						7						—						—						518						—						525
Balance December 31, 2021			1,788						44,238						53,696						(4,429)						(57,109)						73						38,257
Net income attributable to Merck & Co., Inc.			—						—						14,519						—						—						—						14,519
Other comprehensive loss, net of taxes			—						—						—						(339)						—						—						(339)
Cash dividends declared on common stock ($2.80 per share)			—						—						(7,134)						—						—						—						(7,134)
Net income attributable to noncontrolling interests			—						—						—						—						—						7						7
Distributions attributable to noncontrolling interests			—						—						—						—						—						(13)						(13)
Share-based compensation plans and other			—						141						—						—						620						—						761
Balance December 31, 2022			$	1,788					$	44,379					$	61,081					$	(4,768)					$	(56,489)					$	67					$	46,058

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

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Consolidated Statement of Cash Flows

Merck & Co., Inc. and Subsidiaries

Years Ended December 31

($ in millions)

			2022						2021						2020
Cash Flows from Operating Activities of Continuing Operations
Net income from continuing operations			$	14,526					$	12,358					$	4,523
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities of continuing operations:
Amortization			2,085						1,636						1,817
Depreciation			1,824						1,578						1,669
Intangible asset impairment charges			1,749						302						1,718
Loss (income) from investments in equity securities, net			1,419						(1,940)						(1,338)
Charge for the acquisition of Pandion Therapeutics, Inc.			—						1,556						—
Charge for the acquisition of VelosBio Inc.			—						—						2,660
Deferred income taxes			(1,568)						187						(566)
Share-based compensation			541						479						441
Other			1,301						805						1,294
Net changes in assets and liabilities:
Accounts receivable			(644)						(2,033)						(1,002)
Inventories			(161)						(674)						(895)
Trade accounts payable			(289)						405						684
Accrued and other current liabilities			(50)						277						(1,152)
Income taxes payable			380						(540)						814
Noncurrent liabilities			(545)						484						(617)
Other			(1,473)						(1,758)						(2,433)
Net Cash Provided by Operating Activities of Continuing Operations			19,095						13,122						7,617
Cash Flows from Investing Activities of Continuing Operations
Capital expenditures			(4,388)						(4,448)						(4,429)
Purchase of Seagen Inc. common stock			—						—						(1,000)
Purchases of securities and other investments			(1,204)						(1)						(95)
Proceeds from sales of securities and other investments			721						1,026						2,812
Acquisition of Acceleron Pharma Inc., net of cash acquired			—						(11,174)						—
Acquisition of Pandion Therapeutics, Inc., net of cash acquired			—						(1,554)						—
Acquisition of VelosBio Inc., net of cash acquired			—						—						(2,696)
Acquisition of ArQule, Inc., net of cash acquired			—						—						(2,545)
Other acquisitions, net of cash acquired			(121)						(179)						(1,365)
Other			32						(91)						125
Net Cash Used in Investing Activities of Continuing Operations			(4,960)						(16,421)						(9,193)
Cash Flows from Financing Activities of Continuing Operations
Net change in short-term borrowings			—						(3,986)						2,549
Payments on debt			(2,251)						(2,319)						(1,957)
Proceeds from issuance of debt			—						7,936						4,419
Distribution from Organon & Co.			—						9,000						—
Purchases of treasury stock			—						(840)						(1,281)
Dividends paid to stockholders			(7,012)						(6,610)						(6,215)
Proceeds from exercise of stock options			384						202						89
Other			(240)						(286)						(436)
Net Cash (Used in) Provided by Financing Activities of Continuing Operations			(9,119)						3,097						(2,832)
Cash Flows from Discontinued Operations
Net cash provided by operating activities			—						987						2,636
Net cash used in investing activities			—						(134)						(250)
Net cash used in financing activities			—						(504)						—
Net Cash Flows Provided by Discontinued Operations			—						349						2,386
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash			(410)						(133)						253
Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash			4,606						14						(1,769)
Cash, Cash Equivalents and Restricted Cash at Beginning of Year (includes $71, $103 and $258 of restricted cash at January 1, 2022, 2021 and 2020 included in Other current assets)			8,167						8,153						9,934
Less: Cash and cash equivalents related to discontinued operations			—						—						12
Cash, Cash Equivalents and Restricted Cash at End of Year (includes $79, $71 and $103 of restricted cash at December 31, 2022, 2021 and 2020 included in Other current assets)			$	12,773					$	8,167					$	8,153

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

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Notes to Consolidated Financial Statements

Merck & Co., Inc. and Subsidiaries

($ in millions except per share amounts)

1. Nature of Operations

Merck & Co., Inc. (Merck or the Company) is a global health care company that delivers innovative health solutions through its prescription medicines, including biologic therapies, vaccines and animal health products. The Company’s operations are principally managed on a product basis and include two operating segments, Pharmaceutical and Animal Health, both of which are reportable segments.

The Pharmaceutical segment includes human health pharmaceutical and vaccine products. Human health pharmaceutical products consist of therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. The Company sells these human health pharmaceutical products primarily to drug wholesalers and retailers, hospitals, government agencies and managed health care providers such as health maintenance organizations, pharmacy benefit managers and other institutions. Human health vaccine products consist of preventive pediatric, adolescent and adult vaccines. The Company sells these human health vaccines primarily to physicians, wholesalers, physician distributors and government entities.

The Animal Health segment discovers, develops, manufactures and markets a wide range of veterinary pharmaceutical and vaccine products, as well as health management solutions and services, for the prevention, treatment and control of disease in all major livestock and companion animal species. The Company also offers an extensive suite of digitally connected identification, traceability and monitoring products. The Company sells its products to veterinarians, distributors, animal producers, farmers and pet owners.

Spin-Off of Organon & Co.

On June 2, 2021, Merck completed the spin-off of products from its women’s health, biosimilars and established brands businesses into a new, independent, publicly traded company named Organon & Co. (Organon) through a distribution of Organon’s publicly traded stock to Company shareholders. The distribution is expected to qualify and has been treated as tax-free to the Company and its shareholders for U.S. federal income tax purposes. The established brands included in the transaction consisted of dermatology, non-opioid pain management, respiratory, select cardiovascular products, as well as the rest of Merck’s diversified brands franchise. Merck’s existing research pipeline programs continue to be owned and developed within Merck as planned. The historical results of the businesses that were contributed to Organon in the spin-off have been reflected as discontinued operations in the Company’s consolidated financial statements through the date of the spin-off (see Note 3).

2. Summary of Accounting Policies

Principles of Consolidation — The consolidated financial statements include the accounts of the Company and all of its subsidiaries in which a controlling interest is maintained. Intercompany balances and transactions are eliminated. Controlling interest is determined by majority ownership interest and the absence of substantive third-party participating rights or, in the case of variable interest entities, by majority exposure to expected losses, residual returns or both. For those consolidated subsidiaries where Merck ownership is less than 100%, the outside shareholders’ interests are shown as Noncontrolling interests in equity. Investments in affiliates over which the Company has significant influence but not a controlling interest, such as interests in entities owned equally by the Company and a third party that are under shared control, are carried on the equity basis.

Acquisitions — In a business combination, the acquisition method of accounting requires that the assets acquired and liabilities assumed be recorded as of the date of the acquisition at their respective fair values with limited exceptions. Assets acquired and liabilities assumed in a business combination that arise from contingencies are generally recognized at fair value. If fair value cannot be determined, the asset or liability is recognized if probable and reasonably estimable; if these criteria are not met, no asset or liability is recognized. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Accordingly, the Company may be required to value assets at fair value measures that do not reflect the Company’s intended use of those assets. Any excess of the purchase price (consideration transferred) over the estimated fair values of net assets acquired is recorded as goodwill. Transaction costs and costs to restructure the acquired company are expensed as incurred. The operating results of the acquired business are reflected in the Company’s consolidated financial statements after the date of the acquisition. If the Company determines the assets acquired do not meet the definition of a business under the acquisition method of accounting, the transaction will be accounted for as an acquisition of assets rather than a business combination and, therefore, no

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goodwill will be recorded. In an asset acquisition, acquired in-process research and development (IPR&D) with no alternative future use is charged to expense and contingent consideration is not recognized at the acquisition date.

Foreign Currency Translation — The net assets of international subsidiaries where the local currencies have been determined to be the functional currencies are translated into U.S. dollars using current exchange rates and results of operations are translated at average exchange rates. The U.S. dollar effects that arise from translating the net assets of these subsidiaries at changing rates are recorded in Other Comprehensive Income (OCI) and remain in Accumulated other comprehensive loss (AOCL) until either the sale or complete or substantially complete liquidation of the subsidiary. For those subsidiaries that operate in highly inflationary economies and for those subsidiaries where the U.S. dollar has been determined to be the functional currency, non-monetary foreign currency assets and liabilities are translated using historical rates, while monetary assets and liabilities are translated at current rates, with the U.S. dollar effects of rate changes included in Other (income) expense, net.

Cash Equivalents — Cash equivalents are comprised of certain highly liquid investments with original maturities of less than three months.

Inventories — Inventories are valued at the lower of cost or net realizable value. The cost of a substantial majority of U.S. human health inventories is determined using the last-in, first-out (LIFO) method for both financial reporting and tax purposes. The cost of all other inventories is determined using the first-in, first-out (FIFO) method. Inventories consist of currently marketed products, as well as certain inventories produced in preparation for product launches that are considered by the Company to be probable of obtaining regulatory approval. In evaluating the recoverability of inventories produced in preparation for product launches, the Company considers the likelihood that revenue will be obtained from the future sale of the related inventory together with the status of the product within the regulatory approval process.

Investments — Investments in marketable debt securities classified as available-for-sale are reported at fair value. Fair values of the Company’s investments in marketable debt securities are determined using quoted market prices in active markets for identical assets or quoted prices for similar assets or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Changes in fair value that are not impairment related are reported net of taxes in OCI. The Company considers available evidence in evaluating potential impairments of its investments in marketable debt securities, including the extent to which fair value is less than cost, whether an allowance for credit loss is required, as well as adverse factors that could affect the value of the securities. An impairment has occurred if the Company does not expect to recover the entire amortized cost basis of the marketable debt security. If the Company does not intend to sell the impaired debt security, and it is not more likely than not it will be required to sell the debt security before the recovery of its amortized cost basis, the amount of the impairment recognized in earnings, recorded in Other (income) expense, net is limited to the portion attributed to credit loss. The remaining portion of the impairment related to other factors is recognized in OCI. Realized gains and losses for debt securities are included in Other (income) expense, net.

Investments in publicly traded equity securities are reported at fair value determined using quoted market prices in active markets for identical assets or quoted prices for similar assets or other inputs that are observable or can be corroborated by observable market data. Changes in fair value are included in Other (income) expense, net. Unrealized gains and losses from investments that are directly owned are determined at the end of the reporting period. Gains and losses from ownership interests in investment funds, which are accounted for as equity method investments, are reported on a one quarter lag. Investments in equity securities without readily determinable fair values are recorded at cost, plus or minus subsequent observable price changes in orderly transactions for identical or similar investments, minus impairments. Such adjustments are recognized in Other (income) expense, net. Realized gains and losses for equity securities are included in Other (income) expense, net.

Revenue Recognition — Recognition of revenue requires evidence of a contract, probable collection of sales proceeds and completion of substantially all performance obligations. Merck acts as the principal in substantially all of its customer arrangements and therefore records revenue on a gross basis. The majority of the Company’s contracts related to the Pharmaceutical and Animal Health segments have a single performance obligation - the promise to transfer goods. Shipping is considered immaterial in the context of the overall customer arrangement and damages or loss of goods in transit are rare. Therefore, shipping is not deemed a separately recognized performance obligation.

The vast majority of revenues from sales of products are recognized at a point in time when control of the goods is transferred to the customer, which the Company has determined is when title and risks and rewards of ownership transfer to the customer and the Company is entitled to payment. The Company recognizes revenue from the sales of vaccines to the Federal government for placement into vaccine stockpiles in accordance with Securities and Exchange Commission (SEC) Interpretation*, Commission Guidance Regarding Accounting for Sales of Vaccines*

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and BioTerror Countermeasures to the Federal Government for Placement into the Pediatric Vaccine Stockpile or the Strategic National Stockpile. This interpretation allows companies to recognize revenue for sales of vaccines into U.S. government stockpiles even though these sales might not meet the criteria for revenue recognition under other accounting guidance. Some customers have bill-and-hold arrangements with the Company. Revenue for bill-and-hold arrangements is recognized when control transfers to the customer even though the customer does not yet have physical possession of the goods. Control transfers when the bill-and-hold arrangement has been requested by the customer, the product is identified as belonging to the customer and is ready for physical transfer, the product cannot be directed for use by anyone but the customer and, in certain circumstances, the customer has inspected and accepted the product at the Company’s facility. For certain services in the Animal Health segment, revenue is recognized over time, generally ratably over the contract term as services are provided. These service revenues are not material.

The nature of the Company’s business gives rise to several types of variable consideration including discounts and returns, which are estimated at the time of sale generally using the expected value method, although the most likely amount method is used for prompt pay discounts.

In the U.S., sales discounts are issued to customers at the point-of-sale, through an intermediary wholesaler (known as chargebacks), or in the form of rebates. Additionally, sales are generally made with a limited right of return under certain conditions. Revenues are recorded net of provisions for sales discounts and returns, which are established at the time of sale. In addition, if collection of accounts receivable is expected to be in excess of one year, sales are recorded net of time value of money discounts, which have not been material.

The U.S. provision for aggregate customer discounts covering chargebacks and rebates was $12.3 billion in 2022, $12.3 billion in 2021 and $11.4 billion in 2020. Chargebacks are discounts that occur when a contracted customer purchases through an intermediary wholesaler. The contracted customer generally purchases product from the wholesaler at its contracted price plus a mark-up. The wholesaler, in turn, charges the Company back for the difference between the price initially paid by the wholesaler and the contract price paid to the wholesaler by the customer. The provision for chargebacks is based on expected sell-through levels by the Company’s wholesale customers to contracted customers, as well as estimated wholesaler inventory levels. Rebates are amounts owed based upon definitive contractual agreements or legal requirements with private sector and public sector (Medicaid and Medicare Part D) benefit providers after the final dispensing of the product to a benefit plan participant. The provision for rebates is based on expected patient usage, as well as inventory levels in the distribution channel to determine the contractual obligation to the benefit providers. The Company uses historical customer segment utilization mix, sales forecasts, changes to product mix and price, inventory levels in the distribution channel, government pricing calculations and prior payment history in order to estimate the expected provision. Amounts accrued for aggregate customer discounts are evaluated on a quarterly basis through comparison of information provided by the wholesalers, health maintenance organizations, pharmacy benefit managers, federal and state agencies, and other customers to the amounts accrued. The accrued balances relative to the provisions for chargebacks and rebates included in Accounts receivable and Accrued and other current liabilities were $178 million and $2.7 billion, respectively, at December 31, 2022 and were $207 million and $2.6 billion, respectively, at December 31, 2021.

Outside of the U.S., variable consideration in the form of discounts and rebates are a combination of commercially-driven discounts in highly competitive product classes, discounts required to gain or maintain reimbursement, or legislatively mandated rebates. In certain European countries, legislatively mandated rebates are calculated based on an estimate of the government’s total unbudgeted spending and the Company’s specific payback obligation. Rebates may also be required based on specific product sales thresholds. The Company applies an estimated factor against its actual invoiced sales to represent the expected level of future discount or rebate obligations associated with the sale.

The Company maintains a returns policy that allows its U.S. pharmaceutical customers to return product within a specified period prior to and subsequent to the expiration date (generally, three to six months before and 12 months after product expiration). The estimate of the provision for returns is based upon historical experience with actual returns. Additionally, the Company considers factors such as levels of inventory in the distribution channel, product dating and expiration period, whether products have been discontinued, entrance in the market of generic or other competition, changes in formularies or launch of over-the-counter products, among others. Outside of the U.S., returns are only allowed in certain countries on a limited basis.

Merck’s payment terms for U.S. pharmaceutical customers are typically 36 days from receipt of invoice and for U.S. animal health customers are typically 30 days from receipt of invoice; however, certain products, including Keytruda, have longer payment terms, some of which are up to 90 days. Outside of the U.S., payment terms are typically 30 days to 90 days, although certain markets have longer payment terms.

See Note 19 for disaggregated revenue disclosures.

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Depreciation — Depreciation is provided over the estimated useful lives of the assets, principally using the straight-line method. For tax purposes, accelerated tax methods are used. The estimated useful lives primarily range from 25 to 40 years for Buildings, and from 3 to 15 years for Machinery, equipment and office furnishings. Depreciation expense was $1.8 billion in 2022, $1.6 billion in 2021 and $1.7 billion in 2020.

Advertising and Promotion Costs — Advertising and promotion costs are expensed as incurred. The Company recorded advertising and promotion expenses of $2.2 billion in 2022, $2.0 billion in 2021 and $1.8 billion in 2020.

Software Capitalization — The Company capitalizes certain costs incurred in connection with obtaining or developing internal-use software including external direct costs of material and services, and payroll costs for employees directly involved with the software development. These costs are included in Property, plant and equipment. In addition, the Company capitalizes certain costs incurred to implement a cloud computing arrangement that is considered a service agreement, which are included in Other Assets. Capitalized software costs are being amortized over periods ranging from 3 to 10 years, with the longer lives generally associated with enterprise-wide projects implemented over multiple years. Costs incurred during the preliminary project stage and post-implementation stage, as well as maintenance and training costs, are expensed as incurred.

Goodwill — Goodwill represents the excess of the consideration transferred over the fair value of net assets of businesses acquired. Goodwill is assigned to reporting units and evaluated for impairment on at least an annual basis, or more frequently if impairment indicators exist, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company concludes it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative fair value test is performed. If the carrying value of a reporting unit is greater than its fair value, a goodwill impairment charge will be recorded for the difference (up to the carrying value of goodwill).

Acquired Intangibles — Intangibles acquired in a business combination include products and product rights, trade names and patents, licenses and other, which are initially recorded at fair value, assigned an estimated useful life, and amortized primarily on a straight-line basis over their estimated useful lives ranging from 2 to 24 years. The Company periodically evaluates whether current facts or circumstances indicate that the carrying values of its acquired intangibles may not be recoverable. If such circumstances are determined to exist, an estimate of the undiscounted future cash flows of these assets, or appropriate asset groupings, is compared to the carrying value to determine whether an impairment exists. If the asset is determined to be impaired, the loss is measured based on the difference between the carrying value of the intangible asset and its fair value, which is determined based on the net present value of estimated future cash flows.

Acquired In-Process Research and Development — IPR&D that the Company acquires in conjunction with the acquisition of a business represents the fair value assigned to incomplete research projects which, at the time of acquisition, have not reached technological feasibility. The amounts are capitalized and are accounted for as indefinite-lived intangible assets, subject to impairment testing until completion or abandonment of the projects. Upon successful completion of each IPR&D project, Merck will make a determination as to the then-useful life of the intangible asset, generally determined by the period in which the substantial majority of the cash flows are expected to be generated, and begin amortization. The Company evaluates IPR&D for impairment at least annually, or more frequently if impairment indicators exist, by performing a quantitative test that compares the fair value of the IPR&D intangible asset with its carrying value. If the fair value is less than the carrying amount, an impairment loss is recognized in operating results.

Contingent Consideration — Certain of the Company’s acquisitions involve the potential for future payment of consideration that is contingent upon the achievement of performance milestones, including product development milestones and royalty payments on future product sales. If the transaction is accounted for as a business combination, the fair value of contingent consideration liabilities is determined at the acquisition date using unobservable inputs. These inputs include the estimated amount and timing of projected cash flows, the probability of success (achievement of the contingent event) and the risk-adjusted discount rate used to present value the probability-weighted cash flows. Subsequent to the acquisition date, at each reporting period until the contingency is resolved, the contingent consideration liability is remeasured at current fair value with changes (either expense or income) recorded in earnings. Significant events that increase or decrease the probability of achieving development and regulatory milestones or that increase or decrease projected cash flows will result in corresponding increases or decreases in the fair values of the related contingent consideration obligations.

Research and Development — Research and development is expensed as incurred. Nonrefundable advance payments for goods and services that will be used in future research and development activities are

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expensed when the activity has been performed or when the goods have been received rather than when the payment is made. Research and development expenses include restructuring costs and IPR&D impairment charges. In addition, research and development expenses include expense or income related to changes in the estimated fair value measurement of liabilities for contingent consideration associated with IPR&D assets. Research and development expenses also include upfront and milestone payments related to asset acquisitions and licensing transactions involving clinical development programs that have not yet received regulatory approval.

Collaborative Arrangements — Merck has entered into collaborative arrangements that provide the Company with varying rights to develop, produce and market products together with its collaborative partners. When Merck is the principal on sales transactions with third parties, the Company recognizes sales, cost of sales and selling, general and administrative expenses on a gross basis. Profit sharing amounts it pays to its collaborative partners are recorded within Cost of sales. When the collaborative partner is the principal on sales transactions with third parties, the Company records profit sharing amounts received from its collaborative partners as alliance revenue (within Sales). Alliance revenue is recorded net of cost of sales and includes an adjustment to share commercialization costs between the partners in accordance with the collaboration agreement. The adjustment is determined by comparing the commercialization costs Merck has incurred directly and reported within Selling, general and administrative expenses with the costs the collaborative partner has incurred. Research and development costs Merck incurs related to collaborations are recorded within Research and development expenses. Cost reimbursements to the collaborative partner or payments received from the collaborative partner to share these costs pursuant to the terms of the collaboration agreements are recorded as increases or decreases to Research and development expenses.

In addition, the terms of the collaboration agreements may require the Company to make payments based upon the achievement of certain developmental, regulatory approval or commercial milestones. Upfront and milestone payments payable by Merck to collaborative partners prior to regulatory approval are expensed as incurred and included in Research and development expenses. Payments due to collaborative partners upon or subsequent to regulatory approval are capitalized and amortized to Cost of sales over the estimated useful life of the corresponding intangible asset provided that future cash flows support the amounts capitalized. Sales-based milestones payable by Merck to collaborative partners are accrued and capitalized, subject to cumulative amortization catch-up, when determined to be probable of being achieved by the Company. The amortization catch-up is calculated either from the time of the first regulatory approval for indications that were unapproved at the time the collaboration was formed, or from time of the formation of the collaboration for approved products. The related intangible asset that is recognized is amortized to Cost of sales over its remaining useful life, subject to impairment testing.

Share-Based Compensation — The Company expenses all share-based payments to employees over the requisite service period based on the grant-date fair value of the awards.

Restructuring Costs — The Company records liabilities for costs associated with exit or disposal activities in the period in which the liability is incurred. In accordance with existing benefit arrangements, future employee termination costs to be incurred in conjunction with involuntary separations are accrued when such separations are probable and estimable. When accruing these costs, the Company will recognize the amount within a range of costs that is the best estimate within the range. When no amount within the range is a better estimate than any other amount, the Company recognizes the minimum amount within the range. Costs for one-time termination benefits in which the employee is required to render service until termination in order to receive the benefits are recognized ratably over the future service period.

Contingencies and Legal Defense Costs — The Company records accruals for contingencies and legal defense costs expected to be incurred in connection with a loss contingency when it is probable that a liability has been incurred and the amount can be reasonably estimated.

Taxes on Income — Deferred taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting based on enacted tax laws and rates. The Company evaluates tax positions to determine whether the benefits of tax positions are more likely than not of being sustained upon audit based on the technical merits of the tax position. For tax positions that are more likely than not of being sustained upon audit, the Company recognizes the amount of the benefit that is greater than 50% likely of being realized upon ultimate settlement in the financial statements. For tax positions that are not more likely than not of being sustained upon audit, the Company does not recognize any portion of the benefit in the financial statements. The Company recognizes interest and penalties associated with uncertain tax positions as a component of Taxes on Income from Continuing Operations. The Company accounts for the tax effects of the tax on global intangible low-taxed income (GILTI) of certain foreign subsidiaries in the income tax provision in the period the tax arises. The Company’s policy for releasing disproportionate income tax effects from AOCL is to utilize the item-by-item approach.

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

Use of Estimates — The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the U.S. (GAAP) and, accordingly, include certain amounts that are based on management’s best estimates and judgments. Estimates are used when accounting for amounts recorded in connection with acquisitions, including initial fair value determinations of assets and liabilities in a business combination (primarily IPR&D, other intangible assets and contingent consideration), as well as subsequent fair value measurements. Additionally, estimates are used in determining such items as provisions for sales discounts and returns, depreciable and amortizable lives, recoverability of inventories, including those produced in preparation for product launches, amounts recorded for contingencies, environmental liabilities, accruals for contingent sales-based milestone payments and other reserves, pension and other postretirement benefit plan assumptions, share-based compensation assumptions, restructuring costs, impairments of long-lived assets (including intangible assets and goodwill) and investments, and taxes on income. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates.

Recently Adopted Accounting Standards — In August 2020, the Financial Accounting Standards Board (FASB) issued amended guidance on the accounting for convertible instruments and contracts in an entity’s own equity. The guidance removes the separation model for convertible debt instruments and preferred stock, amends requirements for conversion options to be classified in equity as well as amends diluted earnings per share (EPS) calculations for certain convertible debt instruments. The Company adopted the new guidance on January 1, 2022 using a modified retrospective approach. There was no impact to the Company’s consolidated financial statements upon adoption.

In November 2021, the FASB issued new guidance to increase the transparency of transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy. The guidance requires annual disclosures of such transactions to include the nature of the transactions and the significant terms and conditions, the accounting treatment and the impact to a company’s financial statements. The Company adopted the new guidance on January 1, 2022 on a prospective basis. There was no material impact to the Company’s consolidated financial statements upon adoption.

In March 2020, the FASB issued optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting and subsequently issued clarifying amendments. The guidance provides optional expedients and exceptions for accounting for contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued because of reference rate reform. The Company adopted the optional guidance on July 1, 2022 on a prospective basis. There was no material impact to the Company’s consolidated financial statements upon adoption.

In October 2021, the FASB issued amended guidance that requires acquiring entities to recognize and measure contract assets and liabilities in a business combination in accordance with existing revenue recognition guidance. The Company adopted the guidance effective January 1, 2023. The adoption of this guidance did not have an impact on the Company’s consolidated financial statements for prior acquisitions; however, the impact in future periods will be dependent upon the contract assets and contract liabilities acquired in future business combinations.

Recently Issued Accounting Standard Not Yet Adopted — In June 2022, the FASB issued guidance related to the fair value measurement of an equity security subject to contractual restrictions that prohibit the sale of the equity security. The new guidance also introduces new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value. The amended guidance is effective for interim and annual periods in 2024 and is to be applied prospectively. Early adoption is permitted for both interim and annual periods. The Company is currently evaluating the impact of adoption on its consolidated financial statements.

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3. Spin-Off of Organon & Co.

On June 2, 2021, Merck completed the spin-off of Organon through a distribution of Organon’s publicly traded stock to Company shareholders. In connection with the spin-off, each Merck shareholder received one-tenth of a share of Organon’s common stock for each share of Merck common stock held by such shareholder. The distribution is expected to qualify and has been treated as tax free to Merck and its shareholders for U.S. federal income tax purposes. Indebtedness of $9.5 billion principal amount, consisting of term loans and senior notes, was issued in 2021 in connection with the spin-off and assumed by Organon. Merck is no longer the obligor of any Organon debt or financing arrangements. Cash proceeds of $9.0 billion were distributed by Organon to Merck in connection with the spin-off.

Also in connection with the spin-off, Merck and Organon entered into a separation and distribution agreement and also entered into various other agreements to effect the spin-off and provide a framework for the relationship between Merck and Organon after the spin-off, including a transition services agreement (TSA), manufacturing and supply agreements (MSAs), trademark license agreements, intellectual property license agreements, an employee matters agreement, a tax matters agreement and certain other commercial agreements. Under the TSA, Merck is providing Organon various services and, similarly, Organon is providing Merck various services. The provision of services under the TSA generally will terminate within 25 months following the spin-off; however, the provision of certain services has been extended to 35 months. Merck and Organon also entered into a series of interim operating agreements pursuant to which in various jurisdictions where Merck held licenses, permits and other rights in connection with marketing, import and/or distribution of Organon products prior to the separation, Merck is continuing to market, import and distribute such products until such time as the relevant licenses and permits are transferred to Organon. Under such interim operating agreements and in accordance with the separation and distribution agreement, Merck is continuing operations in the affected markets on behalf of Organon, with Organon receiving all of the economic benefits and burdens of such activities. Additionally, Merck and Organon entered into a number of MSAs pursuant to which Merck is (a) manufacturing and supplying certain active pharmaceutical ingredients for Organon, (b) manufacturing and supplying certain formulated pharmaceutical products for Organon, and (c) packaging and labeling certain finished pharmaceutical products for Organon. Similarly, Organon and Merck entered into a number of MSAs pursuant to which Organon is (a) manufacturing and supplying certain formulated pharmaceutical products for Merck, and (b) packaging and labeling certain finished pharmaceutical products for Merck. The terms of the MSAs range in initial duration from four years to ten years.

The amounts included in the consolidated statement of income for the above MSAs include sales of $383 million and $219 million in 2022 and 2021, respectively, and related cost of sales of $404 million and $195 million in 2022 and 2021, respectively. Amounts included in the consolidated statement of income for the TSAs were immaterial in 2022 and 2021. The amounts due from Organon under all of the above agreements were $511 million and $964 million at December 31, 2022 and 2021, respectively, and are reflected in Other current assets. The amounts due to Organon under these agreements were $345 million and $400 million at December 31, 2022 and 2021, respectively, and are included in Accrued and other current liabilities.

The results of the women’s health, biosimilars and established brands businesses (previously included in the Pharmaceutical segment) that were contributed to Organon in the spin-off, as well as interest expense related to the debt issuance in 2021, have been reflected as discontinued operations in the Company’s consolidated statement of income as Income from Discontinued Operations, Net of Taxes and Amounts Attributable to Noncontrolling Interests for periods prior to the spin-off on June 2, 2021. Merck incurred separation costs of $556 million in 2021 and $743 million in 2020 related to the spin-off of Organon, which are also included in Income from Discontinued Operations, Net of Taxes and Amounts Attributable to Noncontrolling Interests. These costs primarily relate to professional fees for separation activities within finance, tax, legal and information technology functions, as well as investment banking fees.

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Details of Income from Discontinued Operations, Net of Taxes and Amounts Attributable to Noncontrolling Interests are as follows:

Years Ended December 31			2021**(1)**						2020
Sales			$	2,512					$	6,476
Costs, Expenses and Other
Cost of sales			789						1,867
Selling, general and administrative			877						1,513
Research and development			103						161
Restructuring costs			1						3
Other (income) expense, net			(15)						4
			1,755						3,548
Income from discontinued operations before taxes			757						2,928
Tax provision			50						369
Income from discontinued operations, net of taxes			707						2,559
Less: Income of discontinued operations attributable to noncontrolling interests			3						11
			$	704					$	2,548

(1) Reflects amounts through the June 2, 2021 spin-off date.

4. Acquisitions, Research Collaborations and Licensing Agreements

The Company continues to pursue acquisitions and the establishment of external alliances such as research collaborations and licensing agreements to complement its internal research capabilities. These arrangements often include upfront payments, as well as expense reimbursements or payments to the third party, and milestone, royalty or profit share arrangements, contingent upon the occurrence of certain future events linked to the success of the asset in development. The Company also reviews its marketed products and pipeline to examine candidates which may provide more value through out-licensing and, as part of its portfolio assessment process, may also divest certain assets. Pro forma financial information for acquired businesses is not presented if the historical financial results of the acquired entity are not significant when compared with the Company’s financial results.

Recently Completed Transactions

In February 2023, Merck and Sichuan Kelun-Biotech Biopharmaceutical Co., Ltd. (Kelun-Biotech) closed a license and collaboration agreement expanding their relationship in which Merck gained exclusive rights for the research, development, manufacture and commercialization of up to seven investigational preclinical antibody drug conjugates (ADCs) for the treatment of cancer. Kelun-Biotech retained the right to research, develop, manufacture and commercialize certain licensed and option ADCs for Chinese mainland, Hong Kong and Macau. Merck will make an upfront payment of $175 million, which will be recorded in Research and development expenses in 2023. In addition, Kelun-Biotech is eligible to receive future contingent development-related payments aggregating up to $1.0 billion, $2.8 billion in regulatory milestones, and $5.5 billion in sales-based milestones if Kelun-Biotech does not retain Chinese mainland, Hong Kong and Macau rights for the option ADCs and all candidates achieve regulatory approval. In addition, Kelun-Biotech is eligible to receive tiered royalties ranging from a mid-single-digit rate to a low-double-digit rate on future net sales for any commercialized ADC product. Also, in connection with the agreement, Merck invested $100 million in Kelun-Biotech’s Series B preferred shares in January 2023.

In January 2023, Merck acquired Imago BioSciences, Inc. (Imago), a clinical stage biopharmaceutical company developing new medicines for the treatment of myeloproliferative neoplasms and other bone marrow diseases, for $1.35 billion (including payments to settle share-based equity awards) and also incurred approximately $60 million of transaction costs. Imago’s lead candidate bomedemstat, MK-3543 (formerly IMG-7289), is an investigational orally available lysine-specific demethylase 1 inhibitor currently being evaluated in multiple Phase 2 clinical trials for the treatment of essential thrombocythemia, myelofibrosis, and polycythemia vera, in addition to other indications. The transaction was accounted for as an acquisition of an asset. Merck will record net assets of approximately $200 million and Research and development expenses of $1.2 billion in 2023 related to the transaction. There are no future contingent payments associated with the acquisition.

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2022 Transactions

In October 2022, Merck and Royalty Pharma plc (Royalty Pharma) entered into a funding arrangement under which Royalty Pharma paid Merck $50 million to co-fund Merck’s development costs for a Phase 2b trial of MK-8189, an investigational oral phosphodiesterase 10A (PDE10A) inhibitor, which is being evaluated for the treatment of schizophrenia. As Royalty Pharma is sharing the risk of technical and regulatory success with Merck, the development funding was recognized by Merck as an obligation to perform contractual services. Accordingly, the payment received is being recognized by Merck as a reduction to Research and development expenses ratably over the estimated Phase 2b research period. Under the agreement, Royalty Pharma has no rights to MK-8189 and has no decision-making authority over the program. If Merck elects to advance MK-8189 into a Phase 3 study, Royalty Pharma has the option to provide additional funding of 50% of the development costs up to $375 million. Royalty Pharma is eligible to receive royalties on future sales. If Royalty Pharma elects to provide the additional funding noted above, Royalty Pharma becomes eligible to receive future regulatory milestone payments contingent upon certain marketing approvals, as well as a higher royalty rate. Merck will record the milestone payments as an expense within Other (income) expense, net upon receipt of the related approvals.

In September 2022, Merck exercised its option to jointly develop and commercialize personalized therapeutic cancer vaccine mRNA-4157/V940 pursuant to the terms of an existing collaboration and license agreement with Moderna, Inc. (Moderna), which resulted in a $250 million charge to Research and development expenses in 2022. mRNA-4157/V940 is currently being evaluated in combination with Keytruda (pembrolizumab), Merck’s anti-PD-1 therapy, as adjuvant treatment for patients with stage III/IV melanoma following complete resection in a Phase 2 clinical trial being conducted by Moderna. Merck and Moderna will collaborate on development and commercialization and will share costs and any profits equally under this worldwide collaboration.

In August 2022, Merck and Orna Therapeutics (Orna), a biotechnology company pioneering a new investigational class of engineered circular RNA (oRNA) therapies, entered into a collaboration agreement to discover, develop, and commercialize multiple programs, including vaccines and therapeutics in the areas of infectious disease and oncology. Under the terms of the agreement, Merck made an upfront payment to Orna of $150 million, which was recorded in Research and development expenses in 2022. In addition, Orna is eligible to receive future contingent development-related payments aggregating up to $440 million, $675 million in regulatory milestones, and $2.4 billion in sales-based milestones associated with the progress of the multiple vaccine and therapeutic programs, as well as royalties ranging from a high-single-digit rate to a low-double-digit rate on any approved products derived from the collaboration. Merck also invested $100 million in Orna’s Series B preferred shares in 2022.

In July 2022, Merck and Orion Corporation (Orion) announced a global co-development and co-commercialization agreement for Orion’s investigational candidate ODM-208 (MK-5684) and other drugs targeting cytochrome P450 11A1 (CYP11A1), an enzyme important in steroid production. MK-5684 is an oral, non-steroidal inhibitor of CYP11A1 currently being evaluated in a Phase 2 clinical trial for the treatment of patients with metastatic castration-resistant prostate cancer. Merck made an upfront payment to Orion of $290 million, which was recorded in Research and development expenses in 2022. Orion is responsible for the manufacture of clinical and commercial supply of MK-5684. In addition, the contract provides both parties with an option to convert the initial co-development and co-commercialization agreement into a global exclusive license to Merck. If the option is exercised, Merck would assume full responsibility for all past development and commercialization expenses associated with the program since inception of the agreement, as well as all future development and commercialization expenses. In addition, Orion would be eligible to receive milestone payments associated with progress in the development and commercialization of MK-5684, as well as tiered double-digit royalties on sales if the product is approved.

Also in July 2022, Merck and Kelun-Biotech closed a license and collaboration agreement in which Merck gained exclusive worldwide rights for the development, manufacture and commercialization of an investigational ADC (MK-1200) for the treatment of solid tumors. Under the terms of the agreement, Merck and Kelun-Biotech will collaborate on the early clinical development of the investigational ADC. Merck made an upfront payment of $35 million, which was recorded in Research and development expenses in 2022. Kelun-Biotech is also eligible to receive future contingent milestone payments aggregating up to $82 million in developmental milestones, $334 million in regulatory milestones, and $485 million in sales-based milestones. The agreement also provides for Merck to pay tiered royalties ranging from a mid-single-digit rate to a low-double-digit rate on future net sales.

In May 2022, in connection with an existing arrangement, Merck exercised its option to obtain an exclusive license outside of Chinese mainland, Hong Kong, Macau and Taiwan for the development, manufacture and commercialization of Kelun-Biotech’s trophoblast antigen 2 (TROP2)-targeting ADC programs, including its lead compound, SKB-264 (MK-2870), which is currently in Phase 2 clinical development. Under the terms of the agreement, Merck and Kelun-Biotech will collaborate on certain early clinical development plans, including evaluating the potential of MK-2870 as a monotherapy and in combination with Keytruda for advanced solid tumors. Upon option

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exercise, Merck made a payment of $30 million, which was recorded in Research and development expenses in 2022, and agreed to make additional payments of $30 million upon completion of specified project activities and $25 million upon technology transfer. Merck also agreed to make quarterly payments in 2022 and 2023 aggregating up to $111 million to fund Kelun-Biotech’s ongoing research and development activities, of which $51 million was paid in 2022. In addition, Kelun-Biotech is eligible to receive future contingent milestone payments (which includes all program compounds) aggregating up to $90 million in developmental milestones, $290 million in first commercial sale milestones, and $780 million in sales-based milestones. The agreement also provides for Merck to pay tiered royalties ranging from a mid-single-digit rate to a low-double-digit rate on future net sales.

2021 Transactions

In November 2021, Merck acquired Acceleron Pharma Inc. (Acceleron), a publicly traded biopharmaceutical company, for total consideration of $11.5 billion. Acceleron’s development work focused on evaluating the transforming growth factor (TGF)-beta superfamily of proteins that is known to play a central role in the regulation of cell growth, differentiation and repair. Acceleron’s lead therapeutic candidate, sotatercept (MK-7962), has a novel mechanism of action with the potential to improve short-term and/or long-term clinical outcomes in patients with pulmonary arterial hypertension (PAH). Sotatercept is in Phase 3 trials as an add-on to current standard of care for the treatment of PAH. Under a previous agreement assumed by Merck, Bristol Myers Squibb (BMS) was granted an exclusive license to develop and commercialize sotatercept outside of the pulmonary hypertension (PH) field (for which Merck would be eligible to receive contingent milestones and royalty payments), however, Merck retains the worldwide exclusive rights to develop and commercialize sotatercept in the PH field. The agreement provides for Merck to pay 22% royalties on future sales of sotatercept in the PH field to BMS.

In addition to sotatercept, Acceleron’s portfolio includes Reblozyl (luspatercept), a first-in-class erythroid maturation recombinant fusion protein that is approved in the U.S., Europe, and certain other markets for the treatment of anemia in certain rare blood disorders and is also being evaluated for additional indications for hematology therapies. Reblozyl is being developed and commercialized through a global collaboration with BMS. In connection with this ongoing collaboration, Merck receives a 20% sales royalty from BMS which could increase to a maximum of 24% based on sales levels. This royalty will be reduced by 50% upon the earlier of patent expiry or generic entry on an indication-by-indication basis in each market. Additionally, Merck received a contingent regulatory milestone payment of $20 million in 2022 and remains eligible to receive up to $80 million in sales-based milestones.

The transaction was accounted for as a business combination. The Company incurred $280 million of costs directly related to the acquisition of Acceleron, consisting primarily of share-based compensation payments to settle non-vested equity awards attributable to postcombination service, severance, as well as investment banking and legal fees. These costs were included in Selling, general and administrative expenses and Research and development costs in 2021.

The estimated fair value of assets acquired and liabilities assumed from Acceleron (inclusive of measurement period adjustments) is as follows:

						November 19, 2021
Cash and cash equivalents						$	340
Investments						285
Identifiable intangible assets: (1)
IPR&D - sotatercept						6,380
Products and product rights - Reblozyl (12 year useful life)						3,830
Deferred income tax liabilities, net						(1,814)
Other assets and liabilities, net						82
Total identifiable net assets						9,103
Goodwill (2)						2,411
Consideration transferred						$	11,514

(1) The estimated fair value of the identifiable intangible assets related to sotatercept and Reblozyl were determined using an income approach, specifically the multi-period excess earnings method. The future probability-weighted net cash flows were discounted to present value utilizing a discount rate of 7.5% for sotatercept and 6.0% for Reblozyl. Actual cash flows are likely to be different than those assumed.

(2) The goodwill recognized is largely attributable to anticipated synergies expected to arise after the acquisition and was allocated to the Pharmaceutical segment. The goodwill is not deductible for tax purposes.

In April 2021, Merck acquired Pandion Therapeutics, Inc. (Pandion), a clinical-stage biotechnology company developing novel therapeutics designed to address the unmet needs of patients living with autoimmune diseases. Pandion’s development work focused on advancing a pipeline of precision immune modulators targeting

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critical immune control nodes. Total consideration paid of $1.9 billion included $147 million of costs primarily comprised of share-based compensation payments to settle equity awards. The transaction was accounted for as an acquisition of an asset. Merck recorded net assets of $156 million (primarily cash) and Research and development expenses of $1.7 billion in 2021 related to the transaction. There are no future contingent payments associated with the acquisition.

In March 2021, Merck and Gilead Sciences, Inc. (Gilead) entered into an agreement to jointly develop and commercialize long-acting treatments in HIV that combine Merck’s investigational nucleoside reverse transcriptase translocation inhibitor, islatravir, and Gilead’s investigational capsid inhibitor, lenacapavir. The collaboration will initially focus on long-acting oral formulations and long-acting injectable formulations of these combination products, with other formulations potentially added to the collaboration as mutually agreed. There was no upfront payment made by either party upon entering into the agreement.

Under the terms of the agreement, Merck and Gilead will share operational responsibilities, as well as development, commercialization and marketing costs, and any future revenues. Global development and commercialization costs will be shared 60% Gilead and 40% Merck across the oral and injectable formulation programs. For long-acting oral products, Gilead will lead commercialization in the U.S. and Merck will lead commercialization in the EU and the rest of the world. For long-acting injectable products, Merck will lead commercialization in the U.S. and Gilead will lead commercialization in the EU and the rest of the world. Gilead and Merck will co-promote in the U.S. and certain other major markets. Merck and Gilead will share global product revenues equally until product revenues surpass certain pre-agreed per formulation revenue tiers. Upon passing $2.0 billion a year in net product sales for the oral combination, the revenue split will adjust to 65% Gilead and 35% Merck for any revenues above the threshold. Upon passing $3.5 billion a year in net product sales for the injectable combination, the revenue split will adjust to 65% Gilead and 35% Merck for any revenues above the threshold.

Beyond the potential combinations of investigational lenacapavir and investigational islatravir, Gilead will have the option to license certain of Merck’s investigational oral integrase inhibitors to develop in combination with lenacapavir. Reciprocally, Merck will have the option to license certain of Gilead’s investigational oral integrase inhibitors to develop in combination with islatravir. Each company may exercise its option for an investigational oral integrase inhibitor of the other company following completion of the first Phase 1 clinical trial of that integrase inhibitor. Upon exercise of an option, the companies will split development costs and revenues, unless the non-exercising company decides to opt-out.

In December 2021, the U.S. Food and Drug Administration (FDA) placed full or partial clinical holds on investigational new drug applications for certain oral, implant and injectable formulations of islatravir based on observations of decreases in total lymphocyte and CD4+ T-cell counts in some participants receiving islatravir in clinical studies. In September 2022, Merck announced the Phase 2 clinical trial evaluating an investigational oral once-weekly combination treatment regimen of islatravir and lenacapavir in adults with HIV-1 infection who are virologically suppressed will resume under an amended protocol with a lower dose of islatravir. The investigational new drug application for the islatravir + lenacapavir once-weekly treatment regimen remains under a partial clinical hold for any studies that would use weekly oral islatravir doses higher than the doses considered for the revised clinical program. Additionally, Merck announced it will discontinue the development of once-monthly oral islatravir for pre-exposure prophylaxis (PrEP). The Company remains committed to developing compounds for long-acting HIV prevention and believes in the potential of the nucleoside reverse transcriptase translocation inhibitor (NRTTI) mechanism.

In January 2021, Merck entered into an exclusive license and research collaboration agreement with Artiva Biotherapeutics, Inc. (Artiva) to discover, develop and manufacture CAR-NK cells that target certain solid tumors using Artiva’s proprietary platform. Merck and Artiva agreed to engage in up to three different research programs, each covering a collaboration target. Merck has sole responsibility for all development and commercialization activities (including regulatory filing and approval). Under the terms of the agreement, Merck made an upfront payment of $30 million, which was included in Research and development expenses in 2021, for license and other rights for the first two collaboration targets and agreed to make another upfront payment of $15 million for license and other rights for the third collaboration target when it is selected by Merck and accepted by Artiva. In addition, Artiva is eligible to receive future contingent milestone payments (which span all three collaboration targets), aggregating up to $217.5 million in developmental milestones, $570 million in regulatory milestones, and $1.05 billion in sales-based milestones. The agreement also provides for Merck to pay tiered royalties ranging from 7% to 14% on future sales.

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2020 Transactions

In December 2020, Merck acquired OncoImmune, a privately held, clinical-stage biopharmaceutical company, for an upfront payment of $423 million. OncoImmune’s lead therapeutic candidate (MK-7110) was being evaluated for the treatment of patients hospitalized with COVID-19. The transaction was accounted for as an acquisition of an asset. Under the agreement, prior to the completion of the acquisition, OncoImmune spun-out certain rights and assets unrelated to the MK-7110 program to a new entity owned by the existing shareholders of OncoImmune. In connection with the closing of the acquisition, Merck invested $50 million for a 20% ownership interest in the new entity, which was valued at $33 million resulting in a $17 million premium. Merck also recognized other net liabilities of $22 million. The Company recorded Research and development expenses of $462 million in 2020 related to this transaction. In 2021, Merck received feedback from the FDA that additional data would be needed to support a potential Emergency Use Authorization application and therefore the Company did not expect MK-7110 would become available until the first half of 2022. Given this timeline and the technical, clinical and regulatory uncertainties, the availability of a number of medicines for patients hospitalized with COVID-19, and the need to concentrate Merck’s resources on accelerating the development and manufacture of the most viable therapeutics and vaccines, Merck decided to discontinue development of MK-7110 for the treatment of COVID-19. Due to the discontinuation, the Company recorded charges of $207 million in 2021, which are reflected in Cost of sales and relate to fixed assets and materials written off, as well as the recognition of liabilities for purchase commitments.

Also in December 2020, Merck acquired VelosBio Inc. (VelosBio), a privately held, clinical-stage biopharmaceutical company, for $2.8 billion. VelosBio’s lead investigational candidate, zilovertamab vedotin (MK-2140), is an ADC targeting receptor tyrosine kinase-like orphan receptor 1 (ROR1) that is currently being evaluated for the treatment of patients with hematologic malignancies and solid tumors. The transaction was accounted for as an acquisition of an asset. Merck recorded net assets of $180 million (primarily cash) and Research and development expenses of $2.7 billion in 2020 related to the transaction. During 2021, the Company recorded adjustments to these amounts which resulted in a reduction of Research and development expenses of $43 million, an increase to total consideration paid of $47 million, and an increase to net assets recorded of $90 million.

In September 2020, Merck and Seagen Inc. (Seagen) announced an oncology collaboration to globally develop and commercialize Seagen’s ladiratuzumab vedotin (MK-6440), an investigational ADC targeting LIV-1, which is currently in Phase 2 clinical trials. The companies will equally share profits worldwide. Under the terms of the agreement, Merck made an upfront payment of $600 million and a $1.0 billion equity investment in 5 million shares of Seagen common stock at a price of $200 per share. Merck recorded $616 million in Research and development expenses in 2020 related to this transaction reflecting the upfront payment as well as a $16 million premium relating to the equity shares based on the price of Seagen common stock on the closing date. Seagen is also eligible to receive future contingent milestone payments of up to $2.6 billion, including $850 million in development milestones and $1.75 billion in sales-based milestones.

Concurrent with the above transaction, Seagen granted Merck an exclusive license to commercialize Tukysa (tucatinib), a small molecule tyrosine kinase inhibitor, for the treatment of human epidermal growth factor receptor 2 (HER2)-positive cancers, in Asia, the Middle East and Latin America and other regions outside of the U.S., Canada and Europe. Merck will be responsible for marketing applications seeking approval in its territories. Under the terms of the agreement, Merck made upfront payments aggregating $210 million, which were recorded as Research and development expenses in 2020. Seagen is also eligible to receive future contingent regulatory approval milestones of up to $65 million and is receiving tiered royalties ranging from 20% to 33% based on annual sales levels of Tukysa in Merck’s territories.

Also in September 2020, Merck acquired a biologics manufacturing facility located in Dunboyne, Ireland from Takeda Pharmaceutical Company Limited for €256 million ($302 million). The transaction was accounted for as an acquisition of an asset. Merck recorded property, plant and equipment of $289 million and other net assets of $13 million. There are no future contingent payments associated with the acquisition.

In July 2020, Merck acquired the U.S. rights to Sentinel Flavor Tabs and Sentinel Spectrum Chews from Virbac Corporation for $410 million. Sentinel products provide protection against common parasites in dogs. The transaction was accounted for as an acquisition of an asset. Merck recognized intangible assets of $401 million related to currently marketed products and inventory of $9 million at the acquisition date. The estimated fair values of the identifiable intangible assets related to currently marketed products were determined using an income approach. Actual cash flows are likely to be different than those assumed. The intangible assets related to currently marketed products are being amortized over their estimated useful lives of 15 years. There are no future contingent payments associated with the acquisition.

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Also in July 2020, Merck and Ridgeback Biotherapeutics LP (Ridgeback), a closely held biotechnology company, closed a collaboration agreement to develop Lagevrio (molnupiravir), an investigational oral antiviral COVID-19 medicine. See Note 5 for additional information related to this collaboration.

In June 2020, Merck acquired privately held Themis Bioscience GmbH (Themis), a company focused on vaccines (including a COVID-19 vaccine candidate, V591) and immune-modulation therapies for infectious diseases and cancer for $366 million. The acquisition originally provided for Merck to make additional contingent payments. The transaction was accounted for as a business combination. The Company determined the fair value of the contingent consideration was $85 million at the acquisition date utilizing a probability-weighted estimated cash flow stream using an appropriate discount rate dependent on the nature and timing of the milestone payments. Merck recognized intangible assets for IPR&D of $113 million, cash of $59 million, deferred tax assets of $72 million and other net liabilities of $32 million. The excess of the consideration transferred over the fair value of net assets acquired of $239 million was recorded as goodwill that was allocated to the Pharmaceutical segment and is not deductible for tax purposes. The fair values of the identifiable intangible assets related to IPR&D were determined using an income approach. In January 2021, the Company announced it was discontinuing development of V591 as discussed below. As a result, in 2020, the Company recorded an IPR&D impairment charge of $90 million within Research and development expenses. The Company also recorded a reduction in Research and development expenses resulting from a decrease in the related liability for contingent consideration of $45 million. In 2022, the Company wrote off the remaining IPR&D intangible asset and related contingent consideration liability; the net impact to Research and development expenses was immaterial.

In May 2020, Merck and the International AIDS Vaccine Initiative, Inc. (IAVI), a nonprofit scientific research organization dedicated to addressing urgent, unmet global health challenges, announced a collaboration to develop V590, an investigational vaccine against SARS-CoV-2 being studied for the prevention of COVID-19. The agreement provided for an upfront payment by Merck of $6.5 million and also provided for future contingent payments based on sales. Merck also signed an agreement with the Biomedical Advanced Research and Development Authority (BARDA), part of the office of the Assistant Secretary for Preparedness and Response within an agency of the U.S. Department of Health and Human Services, to provide initial funding support to Merck for this effort. In January 2021, the Company announced it was discontinuing development of V590 as discussed below.

In January 2021, the Company announced the discontinuation of the development programs for its COVID-19 vaccine candidates, V590 and V591, following Merck’s review of findings from Phase 1 clinical studies for the vaccines. In these studies, both V590 and V591 were generally well tolerated, but the immune responses were inferior to those seen following natural infection and those reported for other SARS-CoV-2/COVID-19 vaccines. Due to the discontinuation, the Company recorded a charge of $305 million in 2020, of which $260 million was reflected in Cost of sales and related to fixed assets and materials written off, as well as the recognition of liabilities for purchase commitments*.* The remaining $45 million of costs were reflected in Research and development expenses and represent amounts related to the Themis acquisition noted above (an IPR&D impairment charge, partially offset by a reduction in the related liability for contingent consideration).

In January 2020, Merck acquired ArQule, Inc. (ArQule), a publicly traded biopharmaceutical company focused on kinase inhibitor discovery and development for the treatment of patients with cancer and other diseases. Total consideration paid of $2.7 billion included $138 million of share-based compensation payments to settle equity awards attributable to precombination service and cash paid for transaction costs on behalf of ArQule. The Company incurred $95 million of costs directly related to the acquisition of ArQule, consisting almost entirely of share-based compensation payments to settle non-vested equity awards attributable to postcombination service. These costs were included in Selling, general and administrative expenses in 2020. ArQule’s lead investigational candidate, nemtabrutinib (MK-1026), is a novel, oral Bruton’s tyrosine kinase (BTK) inhibitor currently being evaluated for the treatment of B-cell malignancies. The transaction was accounted for as a business combination.

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The estimated fair value of assets acquired and liabilities assumed from ArQule is as follows:

			January 16, 2020
Cash and cash equivalents			$	145
IPR&D - nemtabrutinib (1)			2,280
Licensing arrangement for derazantinib			80
Deferred income tax liabilities			(361)
Other assets and liabilities, net			34
Total identifiable net assets			2,178
Goodwill (2)			512
Consideration transferred			$	2,690

(1) The estimated fair value of nemtabrutinib was determined using an income approach. The future probability-weighted net cash flows were discounted to present value utilizing a discount rate of 12.5%.

(2) The goodwill was allocated to the Pharmaceutical segment and is not deductible for tax purposes.

Merck recorded intangible asset impairment charges in 2022 and 2021 related to nemtabrutinib and in 2022 related to derazantinib (see Note 9).

5. Collaborative Arrangements

Merck has entered into collaborative arrangements that provide the Company with varying rights to develop, produce and market products together with its collaborative partners. Both parties in these arrangements are active participants and exposed to significant risks and rewards dependent on the commercial success of the activities of the collaboration. Merck’s more significant collaborative arrangements are discussed below.

AstraZeneca

In 2017, Merck and AstraZeneca PLC (AstraZeneca) entered into a global strategic oncology collaboration to co-develop and co-commercialize AstraZeneca’s Lynparza (olaparib) for multiple cancer types. Independently, Merck and AstraZeneca will develop and commercialize Lynparza in combinations with their respective PD-1 and PD-L1 medicines, Keytruda and Imfinzi. The companies are also jointly developing and commercializing AstraZeneca’s Koselugo (selumetinib) for multiple indications. Under the terms of the agreement, AstraZeneca and Merck will share the development and commercialization costs for Lynparza and Koselugo monotherapy and non-PD-L1/PD-1 combination therapy opportunities.

Profits from Lynparza and Koselugo product sales generated through monotherapies or combination therapies are shared equally. AstraZeneca is the principal on Lynparza and Koselugo sales transactions. Merck records its share of Lynparza and Koselugo product sales, net of cost of sales and commercialization costs, as alliance revenue, and its share of development costs associated with the collaboration as part of Research and development expenses. Reimbursements received from AstraZeneca for research and development expenses are recognized as reductions to Research and development costs.

As part of the agreement, Merck made an upfront payment to AstraZeneca and also made payments over a multi-year period for certain license options. In addition, the agreement provides for contingent payments from Merck to AstraZeneca related to the successful achievement of sales-based and regulatory milestones.

In 2022, Merck determined it was probable that sales of Lynparza in the future would trigger a $600 million sales-based milestone payment from Merck to AstraZeneca. Accordingly, Merck recorded a $600 million liability (which remained accrued at December 31, 2022) and a corresponding increase to the intangible asset related to Lynparza. Merck also recognized $250 million of cumulative amortization catch-up expense related to the recognition of this milestone in 2022. Merck made sales-based milestone payments to AstraZeneca aggregating $400 million and $550 million in 2022 and 2020, respectively. Potential future sales-based milestone payments of $2.1 billion have not yet been accrued as they are not deemed by the Company to be probable at this time.

In 2022 and 2020, Lynparza received regulatory approvals triggering capitalized milestone payments of $250 million and $160 million, respectively, from Merck to AstraZeneca. A regulatory milestone of $105 million that was accrued at December 31, 2022 was paid in January 2023. Potential future regulatory milestone payments of $1.1 billion remain under the agreement.

The intangible asset balance related to Lynparza (which includes capitalized sales-based and regulatory milestone payments) was $1.6 billion at December 31, 2022 and is included in Other Intangibles, Net. The amount is

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being amortized over its estimated useful life through 2028 as supported by projected future cash flows, subject to impairment testing.

Summarized financial information related to this collaboration is as follows:

Years Ended December 31			2022						2021						2020
Alliance revenue - Lynparza			$	1,116					$	989					$	725
Alliance revenue - Koselugo			54						29						8
Total alliance revenue			$	1,170					$	1,018					$	733
Cost of sales (1)			492						167						247
Selling, general and administrative			185						178						160
Research and development			106						120						133
December 31			2022						2021
Receivables from AstraZeneca included in Other current assets			$	303					$	271
Payables to AstraZeneca included in Trade accounts payable and Accrued and other current liabilities (2)			123						415
Payables to AstraZeneca included in Other Noncurrent Liabilities (2)			600						—

(1) Represents amortization of capitalized milestone payments. Amounts in 2022 and 2020 include $250 million and $106 million, respectively, of cumulative amortization catch-up expense.

(2) Includes accrued milestone payments.

Eisai

In 2018, Merck and Eisai Co., Ltd. (Eisai) announced a strategic collaboration for the worldwide co-development and co-commercialization of Lenvima (lenvatinib), an orally available tyrosine kinase inhibitor discovered by Eisai. Under the agreement, Merck and Eisai will develop and commercialize Lenvima jointly, both as monotherapy and in combination with Keytruda. Eisai records Lenvima product sales globally (Eisai is the principal on Lenvima sales transactions) and Merck and Eisai share applicable profits equally. Merck records its share of Lenvima product sales, net of cost of sales and commercialization costs, as alliance revenue. Expenses incurred during co-development are shared by the two companies in accordance with the collaboration agreement and reflected in Research and development expenses. Certain expenses incurred solely by Merck or Eisai are not shareable under the collaboration agreement, including costs incurred in excess of agreed upon caps and costs related to certain combination studies of Keytruda and Lenvima.

Under the agreement, Merck made an upfront payment to Eisai and also made payments over a multi-year period for certain option rights (of which the final $125 million option payment was made in March 2021). In addition, the agreement provides for contingent payments from Merck to Eisai related to the successful achievement of sales-based and regulatory milestones.

Merck made sales-based milestone payments to Eisai aggregating $600 million, $200 million and $500 million in 2022, 2021 and 2020, respectively. Potential future sales-based milestone payments of $2.6 billion have not yet been accrued as they are not deemed by the Company to be probable at this time.

In 2022, 2021 and 2020, Lenvima received regulatory approvals triggering capitalized milestone payments of $50 million, $75 million and $10 million, respectively, from Merck to Eisai. There are no regulatory milestone payments remaining under the agreement.

The intangible asset balance related to Lenvima (which includes capitalized sales-based and regulatory milestone payments) was $814 million at December 31, 2022 and is included in Other Intangibles, Net. The amount is being amortized over its estimated useful life through 2026 as supported by projected future cash flows, subject to impairment testing.

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Summarized financial information related to this collaboration is as follows:

Years Ended December 31			2022						2021						2020
Alliance revenue - Lenvima			$	876					$	704					$	580
Cost of sales (1)			212						195						271
Selling, general and administrative			158						127						73
Research and development			136						173						185
December 31			2022						2021
Receivables from Eisai included in Other current assets			$	214					$	200
Payables to Eisai included in Accrued and other current liabilities (2)			—						625

(1) Represents amortization of capitalized milestone payments.

(2) Represents accrued milestone payments.

Bayer AG

In 2014, the Company entered into a worldwide clinical development collaboration with Bayer AG (Bayer) to market and develop soluble guanylate cyclase (sGC) modulators including Bayer’s Adempas (riociguat). The two companies have implemented a joint development and commercialization strategy. The collaboration also includes development of Bayer’s Verquvo (vericiguat), which was approved in the U.S., the EU and Japan in 2021 and has since been approved in several other markets. Under the agreement, Bayer commercializes Adempas in the Americas, while Merck commercializes in the rest of the world. For Verquvo, Merck commercializes in the U.S. and Bayer commercializes in the rest of the world. Both companies share in development costs and profits on sales. Merck records sales of Adempas and Verquvo in its marketing territories, as well as alliance revenue. Alliance revenue represents Merck’s share of profits from sales of Adempas and Verquvo in Bayer’s marketing territories, which are product sales net of cost of sales and commercialization costs. Cost of sales includes Bayer’s share of profits from sales in Merck’s marketing territories.

In addition, the agreement provided for contingent payments from Merck to Bayer related to the successful achievement of sales-based milestones. Merck made sales-based milestone payments to Bayer of $400 million and $375 million in 2022 and 2020, respectively. There are no sales-based milestone payments remaining under the agreement.

The intangible asset balances related to Adempas (which includes the acquired intangible asset balance, as well as capitalized sales-based milestone payments attributed to Adempas) and Verquvo (which reflects the portion of the final sales-based milestone payment that was attributed to Verquvo) were $633 million and $57 million, respectively, at December 31, 2022 and are included in Other Intangibles, Net. The assets are being amortized over their estimated useful lives (through 2027 for Adempas and through 2031 for Verquvo) as supported by projected future cash flows, subject to impairment testing.

Summarized financial information related to this collaboration is as follows:

Years Ended December 31			2022						2021						2020
Alliance revenue - Adempas/Verquvo			$	341					$	342					$	281
Net sales of Adempas recorded by Merck			238						252						220
Net sales of Verquvo recorded by Merck			22						7						—
Total sales			$	601					$	601					$	501
Cost of sales (1)			210						424						196
Selling, general and administrative			153						126						47
Research and development			75						53						63
December 31			2022						2021
Receivables from Bayer included in Other current assets			$	143					$	114
Payables to Bayer included in Accrued and other current Liabilities (2)			80						472

(1) Includes amortization of intangible assets. Amount in 2021 includes $153 million of cumulative amortization catch-up expense.

(2) Amount as of December 31, 2021 includes accrued milestone payment.

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Ridgeback Biotherapeutics LP

In July 2020, Merck and Ridgeback, a closely held biotechnology company, entered into a collaboration agreement to develop Lagevrio, an investigational orally available antiviral candidate for the treatment of patients with COVID-19. Merck gained exclusive worldwide rights to develop and commercialize Lagevrio and related molecules. Following initial authorizations in certain markets in the fourth quarter of 2021, Lagevrio has since received multiple additional authorizations worldwide.

Under the terms of the agreement, Ridgeback received an upfront payment and is eligible to receive future contingent payments dependent upon the achievement of certain developmental and regulatory approval milestones. The agreement also provides for Merck to reimburse Ridgeback for a portion of certain third-party contingent milestone payments and royalties on net sales, which is part of the profit-sharing calculation. Merck is the principal on sales transactions, recognizing sales and related costs, with profit-sharing amounts recorded within Cost of sales. Profits from the collaboration are split equally between the partners. Reimbursements from Ridgeback for its share of research and development costs (deducted from Ridgeback’s share of profits) are reflected as decreases to Research and development expenses.

Summarized financial information related to this collaboration is as follows:

Years Ended December 31			2022						2021						2020
Net sales of Lagevrio			$	5,684					$	952					$	—
Cost of sales (1)(2)			3,038						502						17
Selling, general and administrative (2)			147						37						6
Research and development (2)(3)			88						137						349
December 31			2022						2021
Payables to Ridgeback included in Accrued and other current liabilities (4)			$	348					$	283

(1) Includes royalty expense and amortization of capitalized milestone payments.

(2) Expenses in all periods now include an allocation for overhead charges.

(3) Amount in 2020 includes upfront payment.

(4) Includes accrued royalty and milestone payments*.*

Bristol Myers Squibb

Reblozyl (luspatercept-aamt) is a first-in-class erythroid maturation recombinant fusion protein obtained as part of Merck’s November 2021 acquisition of Acceleron that is being developed and commercialized through a global collaboration with Bristol Myers Squibb (BMS). Reblozyl is approved in the U.S., Europe, and certain other markets for the treatment of anemia in certain rare blood disorders and is also being evaluated for additional indications for hematology therapies. BMS is the principal on sales transactions for Reblozyl; however, Merck co-promotes Reblozyl (and will co-promote all future products approved under this collaboration) in North America, which is reimbursed by BMS. Merck receives a 20% sales royalty from BMS which could increase to a maximum of 24% based on sales levels. This royalty will be reduced by 50% upon the earlier of patent expiry or generic entry on an indication-by-indication basis in each market. Additionally, Merck is eligible to receive future contingent sales-based milestone payments of up to $80 million. Merck recorded alliance revenue of $166 million in 2022, which includes royalties of $146 million and the receipt of a regulatory approval milestone payment of $20 million, compared with alliance revenue of $17 million in 2021.

6. Restructuring

In 2019, Merck approved a global restructuring program (Restructuring Program) as part of a worldwide initiative focused on further optimizing the Company’s manufacturing and supply network, as well as reducing its global real estate footprint. This program is a continuation of the Company’s plant rationalization and builds on prior restructuring programs. The actions currently contemplated under the Restructuring Program are expected to be substantially completed by the end of 2023, with the cumulative pretax costs to be incurred by the Company to implement the program estimated to be approximately $3.7 billion. The Company estimates that approximately 70% of the cumulative pretax costs will result in cash outlays, primarily related to employee separation expense and facility shut-down costs. Approximately 30% of the cumulative pretax costs will be non-cash, relating primarily to the accelerated depreciation of facilities to be closed or divested.

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The Company recorded total pretax costs of $666 million in 2022, $868 million in 2021 and $880 million in 2020 related to restructuring program activities. Since inception of the Restructuring Program through December 31, 2022, Merck has recorded total pretax accumulated costs of approximately $3.3 billion. The Company expects to record charges of approximately $400 million in 2023 related to the Restructuring Program. For segment reporting, restructuring charges are unallocated expenses.

The following table summarizes the charges related to restructuring program activities by type of cost:

			Separation Costs						Accelerated Depreciation						Other						Total
Year Ended December 31, 2022
Cost of sales			$	—					$	72					$	133					$	205
Selling, general and administrative			—						19						75						94
Research and development			—						29						1						30
Restructuring costs			212						—						125						337
			$	212					$	120					$	334					$	666
Year Ended December 31, 2021
Cost of sales			$	—					$	52					$	108					$	160
Selling, general and administrative			—						12						7						19
Research and development			—						27						1						28
Restructuring costs			451						—						210						661
			$	451					$	91					$	326					$	868
Year Ended December 31, 2020
Cost of sales			$	—					$	143					$	32					$	175
Selling, general and administrative			—						44						3						47
Research and development			—						81						2						83
Restructuring costs			385						—						190						575
			$	385					$	268					$	227					$	880

Separation costs are associated with actual headcount reductions, as well as involuntary headcount reductions which were probable and could be reasonably estimated.

Accelerated depreciation costs primarily relate to manufacturing, research and administrative facilities and equipment to be sold or closed as part of the program. Accelerated depreciation costs represent the difference between the depreciation expense to be recognized over the revised useful life of the asset, based upon the anticipated date the site will be closed or divested or the equipment disposed of, and depreciation expense as determined utilizing the useful life prior to the restructuring actions. All the sites have and will continue to operate up through the respective closure dates and, since future undiscounted cash flows are sufficient to recover the respective book values, Merck is recording accelerated depreciation over the revised useful life of the site assets. Anticipated site closure dates, particularly related to manufacturing locations, have been and may continue to be adjusted to reflect changes resulting from regulatory or other factors.

Other activity in 2022, 2021 and 2020 includes asset abandonment, facility shut-down and other related costs, as well as pretax gains and losses resulting from the sales of facilities and related assets. Additionally, other activity includes certain employee-related costs associated with pension and other postretirement benefit plans (see Note 14) and share-based compensation.

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The following table summarizes the charges and spending relating to restructuring program activities:

			Separation Costs						Accelerated Depreciation						Other						Total
Restructuring reserves January 1, 2021			$	567					$	—					$	19					$	586
Expenses			451						91						326						868
(Payments) receipts, net			(422)						—						(186)						(608)
Non-cash activity			—						(91)						(118)						(209)
Restructuring reserves December 31, 2021			596						—						41						637
Expenses			212						120						334						666
(Payments) receipts, net			(329)						—						(120)						(449)
Non-cash activity			—						(120)						(221)						(341)
Restructuring reserves December 31, 2022 (1)			$	479					$	—					$	34					$	513

(1) The remaining cash outlays are expected to be largely completed by the end of 2025.

7. Financial Instruments

Derivative Instruments and Hedging Activities

The Company manages the impact of foreign exchange rate movements and interest rate movements on its earnings, cash flows and fair values of assets and liabilities through operational means and through the use of various financial instruments, including derivative instruments.

A significant portion of the Company’s revenues and earnings in foreign affiliates is exposed to changes in foreign exchange rates. The objectives of and accounting related to the Company’s foreign currency risk management program, as well as its interest rate risk management activities are discussed below.

Foreign Currency Risk Management

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

The objective of the revenue hedging program is to reduce the variability caused by changes in foreign exchange rates that would affect the U.S. dollar value of future cash flows derived from foreign currency denominated sales, primarily the euro, Japanese yen and Chinese renminbi. To achieve this objective, the Company will hedge a portion of its forecasted foreign currency denominated third-party and intercompany distributor entity sales (forecasted sales) that are expected to occur over its planning cycle, typically no more than two years into the future. The Company will layer in hedges over time, increasing the portion of forecasted sales hedged as it gets closer to the expected date of the forecasted sales. The portion of forecasted sales hedged is based on assessments of cost-benefit profiles that consider natural offsetting exposures, revenue and exchange rate volatilities and correlations, and the cost of hedging instruments. The Company manages its anticipated transaction exposure principally with purchased local currency put options, forward contracts, and purchased collar options.

The fair values of these derivative contracts are recorded as either assets (gain positions) or liabilities (loss positions) in the Consolidated Balance Sheet. Changes in the fair value of derivative contracts are recorded each period in either current earnings or OCI depending on whether the derivative is designated as part of a hedge transaction and, if so, the type of hedge transaction. For derivatives that are designated as cash flow hedges, the unrealized gains or losses on these contracts are recorded in AOCL and reclassified into Sales when the hedged anticipated revenue is recognized. For those derivatives which are not designated as cash flow hedges, but serve as economic hedges of forecasted sales, unrealized gains or losses are recorded in Sales each period. The cash flows from both designated and non-designated contracts are reported as operating activities in the Consolidated Statement of Cash Flows. The Company does not enter into derivatives for trading or speculative purposes.

The Company manages operating activities and net asset positions at each local subsidiary in order to mitigate the effects of exchange on monetary assets and liabilities. Monetary assets and liabilities denominated in a currency other than the functional currency of a given subsidiary are remeasured at spot rates in effect on the balance sheet date with the effects of changes in spot rates reported in Other (income) expense, net. The Company also uses a balance sheet risk management program to mitigate the exposure of such assets and liabilities from the effects of volatility in foreign exchange. Merck principally utilizes forward exchange contracts to offset the effects of exchange in developed country currencies, primarily the euro, Japanese yen, British pound, Canadian dollar, Australian dollar and Swiss franc. For exposures in developing country currencies, including the Chinese renminbi,

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the Company will enter into forward contracts to offset the effects of exchange on exposures when it is deemed economical to do so based on a cost-benefit analysis that considers the magnitude of the exposure, the volatility of the exchange rate and the cost of the hedging instrument. The forward contracts are not designated as hedges and are marked to market through Other (income) expense, net. Accordingly, fair value changes in the forward contracts help mitigate the changes in the value of the remeasured assets and liabilities attributable to changes in foreign currency exchange rates, except to the extent of the spot-forward differences. These differences are not significant due to the short-term nature of the contracts, which typically have average maturities at inception of less than six months. The cash flows from these contracts are reported as operating activities in the Consolidated Statement of Cash Flows.

The Company also uses forward exchange contracts to hedge a portion of its net investment in foreign operations against movements in exchange rates. The forward contracts are designated as hedges of the net investment in a foreign operation. The unrealized gains or losses on these contracts are recorded in foreign currency translation adjustment within OCI, and remain in AOCL until either the sale or complete or substantially complete liquidation of the subsidiary. The Company excludes certain portions of the change in fair value of its derivative instruments from the assessment of hedge effectiveness (excluded components). Changes in fair value of the excluded components are recognized in OCI. The Company recognizes in earnings the initial value of the excluded components on a straight-line basis over the life of the derivative instrument, rather than using the mark-to-market approach. The cash flows from these contracts are reported as investing activities in the Consolidated Statement of Cash Flows.

Foreign exchange risk is also managed through the use of foreign currency debt. The Company’s senior unsecured euro-denominated notes have been designated as, and are effective as, economic hedges of the net investment in a foreign operation. Accordingly, foreign currency transaction gains or losses due to spot rate fluctuations on the euro-denominated debt instruments are included in foreign currency translation adjustment within OCI.

The effects of the Company’s net investment hedges on OCI and the Consolidated Statement of Income are shown below:

			Amount of Pretax (Gain) Loss Recognized in Other Comprehensive Income (1)																		Amount of Pretax (Gain) Loss Recognized in Other (income) expense, net for Amounts Excluded from Effectiveness Testing
Years Ended December 31			2022						2021						2020						2022						2021						2020
Net Investment Hedging Relationships
Foreign exchange contracts			$	(48)					$	(49)					$	26					$	(1)					$	(13)					$	(19)
Euro-denominated notes			(162)						(296)						385						—						—						—

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

Interest Rate Risk Management

The Company may use interest rate swap contracts on certain investing and borrowing transactions to manage its net exposure to interest rate changes and to reduce its overall cost of borrowing. The Company does not use leveraged swaps and, in general, does not leverage any of its investment activities that would put principal at risk.

In 2022, nine interest rate swap contracts with a total notional amount of $2.25 billion matured. These swaps effectively converted the Company’s $1.0 billion, 2.4% fixed-rate notes and $1.25 billion, 2.35% fixed-rate notes due 2022 to variable rate debt.

The interest rate swap contracts were designated hedges of the fair value changes in the notes attributable to changes in the benchmark LIBOR swap rate. The fair value changes in the notes attributable to changes in the LIBOR swap rate were recorded in interest expense along with the offsetting 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. The Company is not currently a party to any interest rate swaps.

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The table below presents the location of amounts recorded in the Consolidated Balance Sheet related to cumulative basis adjustments for fair value hedges as of December 31:

			Carrying Amount of Hedged Liabilities												Cumulative Amount of Fair Value Hedging Adjustment Increase Included in the Carrying Amount
			2022						2021						2022						2021
Balance Sheet Line Item in which Hedged Item is Included
Loans payable and current portion of long-term debt			$	—					$	2,263					$	—					$	13

Presented in the table below is the fair value of derivatives on a gross basis segregated between those derivatives that are designated as hedging instruments and those that are not designated as hedging instruments as of December 31:

									2022																		2021
									Fair Value of Derivative												U.S. Dollar Notional						Fair Value of Derivative												U.S. Dollar Notional
									Asset						Liability						Asset						Liability
Derivatives Designated as Hedging Instruments			Balance Sheet Caption
Interest rate swap contracts			Other current assets						$	—					$	—					$	—					$	14					$	—					$	2,250
Foreign exchange contracts			Other current assets						220						—						4,824						271						—						6,778
Foreign exchange contracts			Other Assets						27						—						1,609						43						—						1,551
Foreign exchange contracts			Accrued and other current liabilities						—						101						2,691						—						24						1,623
Foreign exchange contracts			Other Noncurrent Liabilities						—						1						91						—						1						43
									$	247					$	102					$	9,215					$	328					$	25					$	12,245
Derivatives Not Designated as Hedging Instruments			Balance Sheet Caption
Foreign exchange contracts			Other current assets						$	186					$	—					$	8,540					$	221					$	—					$	10,073
Foreign exchange contracts			Accrued and other current liabilities						—						307						10,926						—						96						10,640
									$	186					$	307					$	19,466					$	221					$	96					$	20,713
									$	433					$	409					$	28,681					$	549					$	121					$	32,958

As noted above, the Company records its derivatives on a gross basis in the Consolidated Balance Sheet. The Company has master netting agreements with several of its financial institution counterparties (see Concentrations of Credit Risk below). The following table provides information on the Company’s derivative positions subject to these master netting arrangements as if they were presented on a net basis, allowing for the right of offset by counterparty and cash collateral exchanged per the master agreements and related credit support annexes at December 31:

			2022												2021
			Asset						Liability						Asset						Liability
Gross amounts recognized in the consolidated balance sheet			$	433					$	409					$	549					$	121
Gross amounts subject to offset in master netting arrangements not offset in the consolidated balance sheet			(220)						(220)						(110)						(110)
Cash collateral received/posted			(66)						(19)						(164)						—
Net amounts			$	147					$	170					$	275					$	11

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The table below provides information regarding the location and amount of pretax gains and losses of derivatives designated in fair value or cash flow hedging relationships:

Years Ended December 31			2022						2021						2020						2022						2021						2020						2022						2021						2020
Financial Statement Caption in which Effects of Fair Value or Cash Flow Hedges are Recorded			Sales																		Other (income) expense, net (1)																		Other comprehensive income (loss)
			$	59,283					$	48,704					$	41,518					$	1,501					(1,341)						(890)						$	(339)					$	1,756					$	(441)
(Gain) loss on fair value hedging relationships:
Interest rate swap contracts
Hedged items			—						—						—						(13)						(40)						40						—						—						—
Derivatives designated as hedging instruments			—						—						—						4						1						(76)						—						—						—
Impact of cash flow hedging relationships:
Foreign exchange contracts
Amount of gain (loss) recognized in OCI on derivatives			—						—						—						—						—						—						684						333						(383)
Increase (decrease) in Sales as a result of AOCL reclassifications			773						(194)						(6)						—						—						—						(773)						194						6
Interest rate contracts
Amount of gain recognized in Other (income) expense, net on derivatives			—						—						—						(2)						(2)						(4)						—						—						—
Amount of loss recognized in OCI on derivatives			—						—						—						—						—						—						(2)						(2)						(4)

(1) Interest expense is a component of Other (income) expense, net.

The table below provides information regarding the income statement effects of derivatives not designated as hedging instruments:

									Amount of Derivative Pretax (Gain) Loss Recognized in Income
Years Ended December 31									2022						2021						2020
Derivatives Not Designated as Hedging Instruments			Income Statement Caption
Foreign exchange contracts (1)			Other (income) expense, net						$	(49)					$	313					$	(12)
Foreign exchange contracts (2)			Sales						(37)						9						13
Interest rate contracts (3)			Other (income) expense, net						—						—						9
Forward contract related to Seagen common stock			Research and development						—						—						15

(1) These derivative contracts primarily mitigate changes in the value of remeasured foreign currency denominated monetary assets and liabilities attributable to changes in foreign currency exchange rates. Amount in 2021 includes a loss on forward exchange contracts entered into in conjunction with the spin-off of Organon.

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

(3) These derivative contracts serve as economic hedges against rising treasury rates*.*

At December 31, 2022, the Company estimates $104 million of pretax net unrealized gains on derivatives maturing within the next 12 months that hedge foreign currency denominated sales over that same period will be reclassified from AOCL to Sales. The amount ultimately reclassified to Sales may differ as foreign exchange rates change. Realized gains and losses are ultimately determined by actual exchange rates at maturity.

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Investments in Debt and Equity Securities

Information on investments in debt and equity securities at December 31 is as follows:

			2022																								2021
			Amortized Cost						Gross Unrealized												Fair Value						Amortized Cost						Gross Unrealized												Fair Value
			Gains						Losses						Gains						Losses
Commercial paper			$	498					$	—					$	—					$	498					$	—					$	—					$	—					$	—
U.S. government and agency securities			68						—						—						68						80						—						—						80
Corporate notes and bonds			3						—						—						3						4						—						—						4
Foreign government bonds			—						—						—						—						2						—						—						2
Total debt securities			569						—						—						569						86						—						—						86
Publicly traded equity securities (1)																					1,284																								1,647
Total debt and publicly traded equity securities																					$	1,853																							$	1,733

(1) Unrealized net losses of $462 million were recorded in Other (income) expense, net in 2022 on equity securities still held at December 31, 2022. Unrealized net losses of $232 million were recorded in Other (income) expense, net in 2021 on equity securities still held at December 31, 2021.

At December 31, 2022 and 2021, the Company also had $832 million and $596 million, respectively, of equity investments without readily determinable fair values included in Other Assets. The Company records unrealized gains on these equity investments based on favorable observable price changes from transactions involving similar investments of the same investee and records unrealized losses based on unfavorable observable price changes, which are included in Other (income) expense, net. During 2022, the Company recorded unrealized gains of $56 million and unrealized losses of $12 million related to certain of these equity investments still held at December 31, 2022. During 2021, the Company recorded unrealized gains of $110 million and unrealized losses of $1 million related to certain of these investments still held at December 31, 2021. Cumulative unrealized gains and cumulative unrealized losses based on observable price changes for investments in equity investments without readily determinable fair values still held at December 31, 2022 were $289 million and $19 million, respectively.

At December 31, 2022, 2021 and 2020, the Company also had $598 million, $1.7 billion and $800 million, respectively, recorded in Other Assets for equity securities held through ownership interests in investment funds. Losses (gains) recorded in Other (income) expense, net relating to these investment funds were $1.0 billion, $(1.4) billion and $(583) million for the years ended December 31, 2022, 2021 and 2020, respectively.

Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company uses a fair value hierarchy which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. There are three levels of inputs used to measure fair value with Level 1 having the highest priority and Level 3 having the lowest:

Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 — Unobservable inputs that are supported by little or no market activity. Level 3 assets or liabilities are those whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques with significant unobservable inputs, as well as assets or liabilities for which the determination of fair value requires significant judgment or estimation.

If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

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

Financial assets and liabilities measured at fair value on a recurring basis at December 31 are summarized below:

			Fair Value Measurements Using																								Fair Value Measurements Using
			Level 1						Level 2						Level 3						Total						Level 1						Level 2						Level 3						Total
			2022																								2021
Assets
Investments
Commercial paper			$	—					$	498					$	—					$	498					$	—					$	—					$	—					$	—
Foreign government bonds			—						—						—						—						—						2						—						2
Publicly traded equity securities			1,015						—						—						1,015						368						—						—						368
			1,015						498						—						1,513						368						2						—						370
Other assets (1)
U.S. government and agency securities			68						—						—						68						80						—						—						80
Corporate notes and bonds			3						—						—						3						4						—						—						4
Publicly traded equity securities			269						—						—						269						1,279						—						—						1,279
			340						—						—						340						1,363						—						—						1,363
Derivative assets (2)
Forward exchange contracts			—						218						—						218						—						351						—						351
Purchased currency options			—						215						—						215						—						184						—						184
Interest rate swaps			—						—						—						—						—						14						—						14
			—						433						—						433						—						549						—						549
Total assets			$	1,355					$	931					$	—					$	2,286					$	1,731					$	551					$	—					$	2,282
Liabilities
Other liabilities
Contingent consideration			$	—					$	—					$	456					$	456					$	—					$	—					$	777					$	777
Derivative liabilities (2)
Forward exchange contracts			—						402						—						402						—						120						—						120
Written currency options			—						7						—						7						—						1						—						1
			—						409						—						409						—						121						—						121
Total liabilities			$	—					$	409					$	456					$	865					$	—					$	121					$	777					$	898

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

(2) The fair value determination of derivatives includes the impact of the credit risk of counterparties to the derivatives and the Company’s own credit risk, the effects of which were not significant.

As of December 31, 2022 and 2021, Cash and cash equivalents included $11.3 billion and $6.8 billion of cash equivalents, respectively, (which would be considered Level 2 in the fair value hierarchy).

Contingent Consideration

Summarized information about the changes in the fair value of liabilities for contingent consideration associated with business combinations is as follows:

			2022						2021
Fair value January 1			$	777					$	841
Changes in estimated fair value (1)			(146)						57
Payments			(119)						(109)
Other			(56)						(12)
Fair value December 31 (2)			$	456					$	777

(1) Recorded in Cost of sales, Research and development expenses, and Other (income) expense, net*.* Includes cumulative translation adjustments.

(2) At December 31, 2022 and 2021, $368 million and $620 million, respectively, of the liabilities relate to the termination of the Sanofi Pasteur MSD joint venture in 2016. As part of the termination, Merck recorded a liability for contingent future royalty payments of 11.5% on net sales of all Merck products that were previously sold by the joint venture through December 31, 2024. The fair value of this liability is determined utilizing the estimated amount and timing of projected cash flows using a risk-adjusted discount rate to present value the cash flows. Balance at December 31, 2022 includes $122 million recorded as a current liability for amounts expected to be paid within the next 12 months.

The payments of contingent consideration in both years relate to the Sanofi Pasteur MSD liabilities described above.

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Other Fair Value Measurements

Some of the Company’s financial instruments, such as cash and cash equivalents, receivables and payables, are reflected in the balance sheet at carrying value, which approximates fair value due to their short-term nature.

The estimated fair value of loans payable and long-term debt (including current portion) at December 31, 2022, was $26.7 billion compared with a carrying value of $30.7 billion and at December 31, 2021, was $35.7 billion compared with a carrying value of $33.1 billion. Fair value was estimated using recent observable market prices and would be considered Level 2 in the fair value hierarchy.

Concentrations of Credit Risk

On an ongoing basis, the Company monitors concentrations of credit risk associated with corporate and government issuers of securities and financial institutions with which it conducts business. Credit exposure limits are established to limit a concentration with any single issuer or institution. Cash and investments are placed in instruments that meet high credit quality standards, as specified in the Company’s investment policy guidelines.

The majority of the Company’s accounts receivable arise from product sales in the U.S., Europe and China and are primarily due from drug wholesalers and retailers, hospitals and government agencies. The Company monitors the financial performance and creditworthiness of its customers so that it can properly assess and respond to changes in their credit profile. The Company also continues to monitor global economic conditions, including the volatility associated with international sovereign economies, and associated impacts on the financial markets and its business.

The Company’s customers with the largest accounts receivable balances are: McKesson Corporation, AmerisourceBergen Corporation and Cardinal Health, Inc., which represented approximately 21%, 20% and 13%, respectively, of total accounts receivable at December 31, 2022. The Company monitors the creditworthiness of its customers to which it grants credit terms in the normal course of business. Bad debts have been minimal. The Company does not normally require collateral or other security to support credit sales.

The Company has accounts receivable factoring agreements with financial institutions in certain countries to sell accounts receivable. The Company factored $2.5 billion and $2.8 billion of accounts receivable as of December 31, 2022 and 2021, respectively, under these factoring arrangements, which reduced outstanding accounts receivable. The cash received from the financial institutions is reported within operating activities in the Consolidated Statement of Cash Flows. In certain of these factoring arrangements, for ease of administration, the Company will collect customer payments related to the factored receivables, which it then remits to the financial institutions. At December 31, 2022 and 2021, the Company had collected $67 million and $62 million, respectively, on behalf of the financial institutions, which is reflected as restricted cash in Other current assets and the related obligation to remit the cash within Accrued and other current liabilities. The Company remitted the cash to the financial institutions in January 2023 and 2022, respectively. The net cash flows related to these collections are reported as financing activities in the Consolidated Statement of Cash Flows. The cost of factoring such accounts receivable was de minimis.

Derivative financial instruments are executed under International Swaps and Derivatives Association master agreements. The master agreements with several of the Company’s financial institution counterparties also include credit support annexes. These annexes contain provisions that require collateral to be exchanged depending on the value of the derivative assets and liabilities, the Company’s credit rating, and the credit rating of the counterparty. Cash collateral advanced by the Company to various counterparties was $19 million at December 31, 2022. Cash collateral received by the Company from various counterparties was $66 million and $164 million at December 31, 2022 and 2021, respectively. The obligation to return such collateral is recorded in Accrued and other current liabilities.

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8. Inventories

Inventories at December 31 consisted of:

			2022						2021
Finished goods			$	1,841					$	1,747
Raw materials and work in process			7,063						6,220
Supplies			238						196
Total (approximates current cost)			9,142						8,163
Decrease to LIFO cost			(293)						(16)
			$	8,849					$	8,147
Recognized as:
Inventories			$	5,911					$	5,953
Other Assets			2,938						2,194

Inventories valued under the LIFO method comprised approximately $3.4 billion and $3.3 billion at December 31, 2022 and 2021, respectively. Amounts recognized as Other Assets are comprised almost entirely of raw materials and work in process inventories. At December 31, 2022 and 2021, these amounts included $2.4 billion and $1.9 billion, respectively, of inventories not expected to be sold within one year. In addition, these amounts included $516 million and $256 million at December 31, 2022 and 2021, respectively, of inventories produced in preparation for product launches.

9. Goodwill and Other Intangibles

The following table summarizes goodwill activity by segment:

			Pharmaceutical						Animal Health						Total
Balance January 1, 2021			$	15,614					$	3,268					$	18,882
Acquisitions			2,431						5						2,436
Other (1)			(48)						(6)						(54)
Balance December 31, 2021 (2)			17,997						3,267						21,264
Other (1)			(61)						1						(60)
Balance December 31, 2022 (2)			$	17,936					$	3,268					$	21,204

(1) Includes cumulative translation adjustments on goodwill balances.

(2) Accumulated goodwill impairment losses were $531 million at both December 31, 2022 and 2021.

The additions to goodwill in the Pharmaceutical segment in 2021 were primarily related to the acquisition of Acceleron (see Note 4).

Other acquired intangibles at December 31 consisted of:

			2022																		2021
			Gross Carrying Amount						Accumulated Amortization						Net						Gross Carrying Amount						Accumulated Amortization						Net
Products and product rights			$	23,555					$	16,745					$	6,810					$	23,671					$	15,776					$	7,895
IPR&D			7,661						—						7,661						9,281						—						9,281
Trade names			2,879						635						2,244						2,882						493						2,389
Licenses and other			7,651						4,097						3,554						6,604						3,236						3,368
			$	41,746					$	21,477					$	20,269					$	42,438					$	19,505					$	22,933

Some of the more significant acquired intangibles included in products and product rights, on a net basis, related to human health marketed products at December 31, 2022 were Reblozyl, $3.5 billion; Zerbaxa, $406 million; Sivextro, $122 million; Gardasil/Gardasil 9, $120 million; and Bridion, $97 million. Additionally, the Company had $4.6 billion of net acquired intangibles related to animal health at December 31, 2022, of which $2.3 billion related to products and product rights and $2.2 billion was attributable to trade names, primarily related to Allflex. At December 31, 2022, IPR&D primarily relates to MK-7962 (sotatercept), $6.4 billion, obtained through the acquisition of Acceleron in 2021 (see Note 4); MK-7264 (gefapixant), $832 million, obtained through the acquisition of Afferent Pharmaceuticals in 2016; and MK-1026 (nemtabrutinib), $418 million, obtained through the acquisition of ArQule in

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2020 (see below and Note 4). Some of the more significant net intangible assets included in licenses and other above at December 31, 2022 include Lynparza, $1.6 billion, related to a collaboration with AstraZeneca; Lenvima, $814 million, related to a collaboration with Eisai; and Adempas, $633 million, related to a collaboration with Bayer. See Note 5 for additional information related to the intangible assets associated with these collaborations.

In 2020, the Company recorded an impairment charge of $1.6 billion within Cost of sales related to Zerbaxa (ceftolozane and tazobactam) for injection, a combination antibacterial and beta-lactamase inhibitor for the treatment of certain bacterial infections. In December 2020, the Company temporarily suspended sales of Zerbaxa, and subsequently issued a product recall, following the identification of product sterility issues. The recall constituted a triggering event requiring the evaluation of the Zerbaxa intangible asset for impairment. The Company revised its cash flow forecasts for Zerbaxa utilizing certain assumptions around the return to market timeline and anticipated uptake in sales thereafter. These revised cash flow forecasts indicated that the Zerbaxa intangible asset value was not fully recoverable on an undiscounted cash flows basis. The Company utilized market participant assumptions to determine its best estimate of the fair value of the intangible asset related to Zerbaxa that, when compared with its related carrying value, resulted in the impairment charge noted above. The Company also wrote-off inventory of $120 million to Cost of sales in 2020 related to the Zerbaxa recall. A phased resupply of Zerbaxa was initiated in the fourth quarter of 2021 and completed during 2022.

IPR&D that the Company acquires through business combinations represents the fair value assigned to incomplete research projects which, at the time of acquisition, have not reached technological feasibility. Amounts capitalized as IPR&D are accounted for as indefinite-lived intangible assets, subject to impairment testing until completion or abandonment of the projects. Upon successful completion of each IPR&D project, the Company will make a separate determination as to the then-useful life of the asset and begin amortization.

In 2022, the Company recorded $1.7 billion of intangible impairment charges within Research and development expenses, of which $1.6 billion represents IPR&D impairment charges related to nemtabrutinib (MK-1026), a novel, oral BTK inhibitor currently being evaluated for the treatment of B-cell malignancies that was obtained through the 2020 acquisition of ArQule (see Note 4). Following discussions with regulatory authorities in the third quarter, the development period for nemtabrutinib was extended, which constituted a triggering event that required the evaluation of the nemtabrutinib intangible asset for impairment. The Company estimated the current fair value of nemtabrutinib utilizing an income approach which calculates the present value of projected future cash flows. The market participant assumptions used to derive the forecasted cash flows were updated to reflect a delay in the anticipated launch date for nemtabrutinib, which resulted in lower cumulative revenue forecasts and a reduction in the estimated fair value. The revised estimated fair value of nemtabrutinib when compared with its related carrying value resulted in a $807 million impairment charge recorded in the third quarter of 2022. In December 2022, regulatory authorities provided additional feedback with respect to clinical study design that led to a further reassessment of the development plan for nemtabrutinib, which is expected to result in changes to the clinical study design, and corresponding delays in the anticipated approval and launch timelines, which constituted a triggering event. Utilizing an income approach, the forecasted cash flows were updated to reflect a decline in forecasted revenue coupled with an increase in development cost forecasts, which reduced projected cash flows lowering the estimated current fair value of nemtabrutinib. The revised estimated fair value of nemtabrutinib when compared with its then-related carrying value resulted in a $780 million impairment charge. The remaining IPR&D intangible asset related to nemtabrutinib is $418 million. If the assumptions used to estimate the fair value of nemtabrutinib prove to be incorrect and the development of nemtabrutinib does not progress as anticipated thereby adversely affecting projected future cash flows, the Company may record an additional impairment charge in the future and such charge could be material. The Company also recorded an $80 million intangible asset impairment charge related to derazantinib resulting from the termination of the out-licensing agreement and the decision by Merck not to pursue development of derazantinib.

In 2021, the Company recorded a $275 million IPR&D impairment charge related to nemtabrutinib. As part of Merck’s annual impairment assessment of IPR&D intangible assets, the Company estimated the current fair value of nemtabrutinib utilizing projected future cash flows. The market participant assumptions used to derive the forecasted cash flows were updated to reflect the current competitive landscape for nemtabrutinib, including increased expected development costs for additional clinical trial data needed to develop nemtabrutinib, as well as a delay in the anticipated launch date for nemtabrutinib, which collectively reduced the projected future cash flows and estimated fair value. Additionally, the discount rate utilized to determine the current fair value of the asset was reduced to 8.5% to reflect the current risk profile of the asset. The revised estimated fair value of nemtabrutinib when compared with its related carrying value resulted in the IPR&D impairment charge noted above.

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In 2020, the Company recorded a $90 million IPR&D impairment charge related to a decision to discontinue the development program for COVID-19 vaccine candidate V591 following Merck’s review of findings from a Phase 1 clinical study for the vaccine. In the study, V591 was generally well tolerated, but the immune responses were inferior to those seen following natural infection and those reported for other SARS-CoV-2/COVID-19 vaccines. The discontinuation of this development program also resulted in a reversal of the related liability for contingent consideration of $45 million.

The IPR&D projects that remain in development are subject to the inherent risks and uncertainties in drug development and it is possible that the Company will not be able to successfully develop and complete the IPR&D programs and profitably commercialize the underlying product candidates.

The Company may recognize additional non-cash impairment charges in the future related to other marketed products or pipeline programs and such charges could be material.

Aggregate amortization expense primarily recorded within Cost of sales was $2.1 billion in 2022, $1.6 billion in 2021 and $1.8 billion in 2020. The estimated aggregate amortization expense for each of the next five years is as follows: 2023, $1.8 billion; 2024, $1.7 billion; 2025, $1.6 billion; 2026, $1.5 billion; 2027, $1.3 billion.

10. Loans Payable, Long-Term Debt and Leases

Loans Payable

Loans payable at December 31, 2022 included $1.7 billion of notes due in 2023 and $197 million of long-dated notes that are subject to repayment at the option of the holders. Loans payable at December 31, 2021 included $2.3 billion of notes due in 2022 and $149 million of long-dated notes that are subject to repayment at the option of the holders. The weighted-average interest rate of commercial paper borrowings was 0.65% and 0.08% for the years ended December 31, 2022 and 2021, respectively.

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Long-Term Debt

Long-term debt at December 31 consisted of:

			2022						2021
2.75% notes due 2025			$	2,496					$	2,495
2.15% notes due 2031			1,986						1,986
2.75% notes due 2051			1,979						1,979
3.70% notes due 2045			1,978						1,977
3.40% notes due 2029			1,738						1,736
1.70% notes due 2027			1,494						1,493
2.90% notes due 2061			1,483						1,484
4.00% notes due 2049			1,471						1,470
4.15% notes due 2043			1,239						1,239
1.45% notes due 2030			1,237						1,235
2.45% notes due 2050			1,213						1,212
1.875% euro-denominated notes due 2026			1,060						1,123
0.75% notes due 2026			995						993
1.90% notes due 2028			994						994
3.90% notes due 2039			985						984
2.35% notes due 2040			984						983
2.90% notes due 2024			749						748
6.50% notes due 2033			711						715
0.50% euro-denominated notes due 2024			531						563
1.375% euro-denominated notes due 2036			527						559
2.50% euro-denominated notes due 2034			526						558
3.60% notes due 2042			492						491
6.55% notes due 2037			408						409
5.75% notes due 2036			339						338
5.95% debentures due 2028			307						306
5.85% notes due 2039			271						271
6.40% debentures due 2028			250						250
6.30% debentures due 2026			135						135
2.80% notes due 2023			—						1,749
Other			167						215
			$	28,745					$	30,690

Other (as presented in the table above) includes borrowings at variable rates that resulted in effective interest rates of 1.40% and zero for 2022 and 2021, respectively.

With the exception of the 6.30% debentures due 2026, the notes listed in the table above are redeemable in whole or in part, at Merck’s option at any time, at varying redemption prices. Effective as of November 3, 2009, the Company executed a full and unconditional guarantee of the then existing debt of its subsidiary Merck Sharp & Dohme Corp. (MSD) and MSD executed a full and unconditional guarantee of the then existing debt of the Company (excluding commercial paper), including for payments of principal and interest. These guarantees do not extend to debt issued subsequent to that date.

Certain of the Company’s borrowings require that Merck comply with covenants and, at December 31, 2022, the Company was in compliance with these covenants.

The aggregate maturities of long-term debt for each of the next five years are as follows: 2023, $1.7 billion; 2024, $1.3 billion; 2025, $2.5 billion; 2026, $2.2 billion; 2027, $1.5 billion. Interest payments related to these debt obligations are as follows: 2023, $882 million; 2024, $845 million; 2025, $778 million; 2026, $751 million; 2027, $720 million.

The Company has a $6.0 billion credit facility that matures in June 2026. The facility provides backup liquidity for the Company’s commercial paper borrowing facility and is to be used for general corporate purposes. The Company has not drawn funding from this facility.

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Leases

The Company has operating leases primarily for manufacturing facilities, research and development facilities, corporate offices, employee housing, vehicles and certain equipment. The Company determines if an arrangement is a lease at inception. When evaluating contracts for embedded leases, the Company exercises judgment to determine if there is an explicit or implicit identified asset in the contract and if Merck controls the use of that asset. Embedded leases, primarily associated with contract manufacturing organizations, are immaterial. The lease term includes options to extend or terminate the lease when it is reasonably certain that Merck will exercise that option. Real estate leases for facilities have an average remaining lease term of seven years, which include options to extend the leases for up to four years where applicable. Vehicle leases are generally in effect for four years. The Company elected to exclude short-term leases (leases with an initial term of 12 months or less) from the lease assets and liabilities on the balance sheet.

Lease expense for operating lease payments is recognized on a straight-line basis over the term of the lease. Operating lease assets and liabilities are recognized based on the present value of lease payments over the lease term. Since the Company’s leases do not have a readily determinable implicit discount rate, the Company uses its incremental borrowing rate to calculate the present value of lease payments by asset class. On a quarterly basis, an updated incremental borrowing rate is determined based on the average remaining lease term of each asset class and the Company’s pretax cost of debt for that same term. The updated rates for each asset class are applied prospectively to new leases. The Company does not separate lease components (e.g. payments for rent, real estate taxes and insurance costs) from non-lease components (e.g. common-area maintenance costs) in the event that the agreement contains both. Merck includes both the lease and non-lease components for purposes of calculating the right-of-use asset and related lease liability (if the non-lease components are fixed). For vehicle leases and employee housing, the Company applies a portfolio approach to account for the operating lease assets and liabilities.

Certain of the Company’s lease agreements contain variable lease payments that are adjusted periodically for inflation or for actual operating expense true-ups compared with estimated amounts; however, these amounts are immaterial. Sublease income and activity related to sale and leaseback transactions are immaterial. Merck’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Operating lease cost was $334 million in 2022, $343 million in 2021 and $340 million in 2020. Cash paid for amounts included in the measurement of operating lease liabilities was $335 million in 2022, $340 million in 2021 and $334 million in 2020. Operating lease assets obtained in exchange for lease obligations were $57 million in 2022, $117 million in 2021 and $473 million in 2020.

Supplemental balance sheet information related to operating leases is as follows:

December 31			2022						2021
Assets
Other Assets (1)			$	1,346					$	1,586
Liabilities
Accrued and other current liabilities			281						304
Other Noncurrent Liabilities			1,013						1,225
			$	1,294					$	1,529
Weighted-average remaining lease term (years)			7.0						7.0
Weighted-average discount rate			3.1		%				2.6		%

(1) Includes prepaid leases that have no related lease liability.

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Maturities of operating leases liabilities are as follows:

2023			$	323
2024			258
2025			224
2026			157
2027			126
Thereafter			404
Total lease payments			1,492
Less: Imputed interest			198
			$	1,294

At December 31, 2022, the Company had entered into additional real estate operating leases that had not yet commenced; the obligations associated with these leases total $232 million.

11. Contingencies and Environmental Liabilities

The Company is involved in various claims and legal proceedings of a nature considered normal to its business, including product liability, intellectual property, and commercial litigation, as well as certain additional matters including governmental and environmental matters. In the opinion of the Company, it is unlikely that the resolution of these matters will be material to the Company’s financial condition, results of operations or cash flows.

Given the nature of the litigation discussed below and the complexities involved in these matters, the Company is unable to reasonably estimate a possible loss or range of possible loss for such matters until the Company knows, among other factors, (i) what claims, if any, will survive dispositive motion practice, (ii) the extent of the claims, including the size of any potential class, particularly when damages are not specified or are indeterminate, (iii) how the discovery process will affect the litigation, (iv) the settlement posture of the other parties to the litigation and (v) any other factors that may have a material effect on the litigation.

The Company records accruals for contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. These accruals are adjusted periodically as assessments change or additional information becomes available. For product liability claims, a portion of the overall accrual is actuarially determined and considers such factors as past experience, number of claims reported and estimates of claims incurred but not yet reported. Individually significant contingent losses are accrued when probable and reasonably estimable. Legal defense costs expected to be incurred in connection with a loss contingency are accrued when probable and reasonably estimable.

The Company’s decision to obtain insurance coverage is dependent on market conditions, including cost and availability, existing at the time such decisions are made. The Company has evaluated its risks and has determined that the cost of obtaining product liability insurance outweighs the likely benefits of the coverage that is available and, as such, has no insurance for most product liabilities.

Product Liability Litigation

Gardasil/Gardasil 9

As previously disclosed, Merck is a defendant in product liability lawsuits in the U.S. involving Gardasil (Human Papillomavirus Quadrivalent [Types 6, 11, 16 and 18] Vaccine, Recombinant) and Gardasil 9 (Human Papillomavirus 9-valent Vaccine, Recombinant). As of December 31, 2022, approximately 70 cases were filed and pending against Merck in either federal or state court. In these actions, plaintiffs allege, among other things, that they suffered various personal injuries after vaccination with Gardasil or Gardasil 9, with postural orthostatic tachycardia syndrome as a predominate alleged injury. In August 2022, the Judicial Panel on Multidistrict Litigation ordered that Gardasil/Gardasil 9 product liability cases pending in federal courts nationwide be transferred to Judge Robert J. Conrad in the Western District of North Carolina for coordinated pre-trial proceedings. There are fewer than 15 product liability cases pending outside the U.S., including one purported class action in Colombia.

Governmental Proceedings

As previously disclosed, in the fall of 2018, the Company received a records subpoena from the U.S. Attorney’s Office for the District of Vermont (VT USAO) pursuant to Section 248 of the Health Insurance Portability and Accountability Act of 1996 (HIPAA) relating to an investigation of potential health care offenses. The subpoena

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sought information relating to any actual or potential business relationship or arrangement Merck has had with Practice Fusion, Inc. (PFI), a cloud-based, electronic health records (EHR) company that was acquired by Allscripts in January 2018. The Company cooperated with the government and responded to that subpoena. Subsequently, in May 2019, Merck received a second records subpoena from the VT USAO that broadened the government’s information request by seeking information relating to Merck’s relationship with any EHR company. Shortly thereafter, the VT USAO served a Civil Investigation Demand (CID) upon Merck similarly seeking information on the Company’s relationships with EHR vendors. The CID explains that the government is conducting a False Claims Act investigation concerning whether Merck and/or PFI submitted claims to federal health care programs that violate the Federal Anti-Kickback Statute. Merck is cooperating with the government’s investigation.

As previously disclosed, in April 2019, Merck received a set of investigative interrogatories from the California Attorney General’s Office pursuant to its investigation of conduct and agreements that allegedly affected or delayed competition to Lantus in the insulin market. The interrogatories seek information concerning Merck’s development of an insulin glargine product, and its subsequent termination, as well as Merck’s patent litigation against Sanofi S.A. concerning Lantus and the resolution of that litigation. Merck is cooperating with the California Attorney General’s investigation.

As previously disclosed, in June 2020, Merck received a CID from the U.S. Department of Justice. The CID requests answers to interrogatories, as well as various documents, regarding temperature excursions at a third-party storage facility containing certain Merck products. Merck is cooperating with the government’s investigation and intends to produce information and/or documents as necessary in response to the CID.

As previously disclosed, from time to time, the Company’s subsidiaries in China receive inquiries regarding their operations from various Chinese governmental agencies. Some of these inquiries may be related to matters involving other multinational pharmaceutical companies, as well as Chinese entities doing business with such companies. The Company’s policy is to cooperate with these authorities and to provide responses as appropriate.

As previously disclosed, from time to time, the Company receives inquiries and is the subject of preliminary investigation activities from competition and other governmental authorities in markets outside the U.S. These authorities may include regulators, administrative authorities, and law enforcement and other similar officials, and these preliminary investigation activities may include site visits, formal or informal requests or demands for documents or materials, inquiries or interviews and similar matters. Certain of these preliminary inquiries or activities may lead to the commencement of formal proceedings. Should those proceedings be determined adversely to the Company, monetary fines and/or remedial undertakings may be required.

Commercial and Other Litigation

Zetia Antitrust Litigation

As previously disclosed, Merck, MSD, Schering Corporation, Schering-Plough Corporation, and MSP Singapore Company LLC (collectively, the Merck Defendants) are defendants in a number of lawsuits filed in 2018 on behalf of direct and indirect purchasers of Zetia (ezetimibe) alleging violations of federal and state antitrust laws, as well as other state statutory and common law causes of action. The cases were consolidated in a federal multidistrict litigation (the Zetia MDL) before Judge Rebecca Beach Smith in the Eastern District of Virginia.

In November 2019, the direct purchaser plaintiffs and the indirect purchaser plaintiffs filed motions for class certification. In August 2020, the district court granted in part the direct purchasers’ motion for class certification and certified a class of 35 direct purchasers. In August 2021, the Fourth Circuit vacated the district court’s class certification order and remanded for further proceedings consistent with the court’s ruling. In September 2021, the direct purchaser plaintiffs filed a renewed motion for class certification. On January 25, 2022, the magistrate judge recommended that the district court deny the motion for class certification. On February 8, 2022, the direct purchaser plaintiffs filed objections to the recommendation. On April 13, 2022, the district court denied the direct purchaser plaintiffs’ renewed motion for class certification. In August 2021, the district court granted certification of a class of indirect purchasers.

In 2020 and 2021, United Healthcare Services, Inc., Humana Inc., Centene Corporation and others, and Kaiser Foundation Health Plan, Inc. (collectively, the Insurer Plaintiffs), each filed a lawsuit in a jurisdiction outside of the Eastern District of Virginia against the Merck Defendants and others, making similar allegations as those made in the Zetia MDL, as well as additional allegations about Vytorin. These cases have been transferred to the Eastern District of Virginia to proceed with the Zetia MDL.

On February 9, 2022, the Insurer Plaintiffs filed amended complaints. On March 2, 2022, the Merck Defendants, jointly with other defendants, moved to dismiss certain aspects of the Insurer Plaintiffs’ complaints, including any claims for Vytorin damages. That motion to dismiss the Vytorin-related claims is still pending.

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In April 2022, the direct purchaser plaintiffs moved for an order setting a deadline for direct purchasers of Zetia not currently parties to the case to file cases against defendants in order for those cases to be coordinated for trial with the existing direct purchaser plaintiffs and other Zetia MDL plaintiff groups. The court granted that motion, setting a deadline of June 30, 2022 for unnamed direct purchasers to file claims. On June 30, 2022, 23 new entities, many related, brought new complaints against defendants or otherwise sought to intervene.

On February 10, 2023, the district court denied the Merck Defendants’ and Glenmark defendants’ motions for summary judgment. In the cases filed by direct purchaser plaintiffs, retailer plaintiffs, and indirect purchaser plaintiffs, plaintiffs seek up to a maximum of $12.7 billion in damages after trebling. The court has scheduled trial for these plaintiffs (all plaintiffs other than the Insurer Plaintiffs) for April 17, 2023.

Bravecto Litigation

As previously disclosed, in January 2020, the Company was served with a complaint in the U.S. District Court for the District of New Jersey. Following motion practice, the plaintiffs filed a second amended complaint on July 1, 2021, seeking to certify a nationwide class action of purchasers or users of Bravecto (fluralaner) products in the U.S. or its territories between May 1, 2014 and July 1, 2021. Plaintiffs contend Bravecto causes neurological events in dogs and cats and alleges violations of the New Jersey Consumer Fraud Act, Breach of Warranty, Product Liability, and related theories. The Company moved to dismiss or, alternatively, to strike the class allegations from the second amended complaint, and that motion is pending. A similar case was filed in Quebec, Canada in May 2019. The Superior Court certified a class of dog owners in Quebec who gave Bravecto Chew to their dogs between February 16, 2017 and November 2, 2018 whose dogs experienced one of the conditions in the post-marketing adverse reactions section of the labeling approved on November 2, 2018. The Company and plaintiffs each appealed the class certification decision. The Court of Appeal of Quebec heard the appeal on February 7, 2022 and took the matter under advisement.

340B Program Litigation

Merck has filed a complaint in the U.S. District Court for the District of Columbia to challenge the letter Merck received from the Health Resources and Services Administration (HRSA) in May 2022 regarding Merck’s 340B Program integrity initiative. HRSA’s letter to Merck asserts that Merck is in violation of the 340B statute. HRSA further claims that continued failure to provide the 340B price to covered entities using contract pharmacies may result in civil monetary penalties for each instance of alleged overcharging, in addition to repayment for any instance of overcharging. The letter is very similar to letters HRSA has sent to other manufacturers, which letters have been held to be unlawful by multiple federal courts. Merck disagrees with HRSA’s assertion. Merck remains committed to the 340B Program and to providing 340B discounts to eligible covered entities. Merck’s 340B Program integrity initiative is consistent with the requirements of the 340B statute and is intended to ensure the integrity and sustainability of the 340B statute by reducing prohibited duplicate discounts and diversion and putting patients back at the center of the program. Merck continues to offer all of the Company’s covered outpatient drugs to all 340B covered entities for purchase at or below the 340B ceiling price. On September 13, 2022, the court stayed the case pending the D.C. Circuit’s ruling in Novartis Pharmaceuticals Corp. v. Johnson and United Therapeutics Corp. v. Johnson.

Qui Tam Litigation

As previously disclosed, in June 2012, the U.S. District Court for the Eastern District of Pennsylvania unsealed a complaint that had been filed against the Company under the federal False Claims Act by two former employees alleging, among other things, that the Company defrauded the U.S. government by falsifying data in connection with a clinical study conducted on the mumps component of the Company’s M-M-R II vaccine. The complaint alleges the fraud took place between 1999 and 2001. The U.S. government had the right to participate in and take over the prosecution of this lawsuit but notified the court that it declined to exercise that right. The two former employees are pursuing the lawsuit without the involvement of the U.S. government. In addition, as previously disclosed, two putative class action lawsuits on behalf of direct purchasers of the M‑M‑R II vaccine, which charge that the Company misrepresented the efficacy of the M-M-R II vaccine in violation of federal antitrust laws and various state consumer protection laws, are pending in the Eastern District of Pennsylvania. In September 2014, the court denied Merck’s motion to dismiss the False Claims Act suit and granted in part and denied in part its motion to dismiss the then-pending antitrust suit. As a result, both the False Claims Act suit and the antitrust suits proceeded into discovery, which is now complete, and the parties have filed and briefed cross-motions for summary judgment, which are currently pending before the court.

Merck KGaA Litigation

As previously disclosed, in January 2016, to protect its long-established brand rights in the U.S., the Company filed a lawsuit against Merck KGaA, Darmstadt, Germany (KGaA), historically operating as the EMD Group in the U.S., alleging it improperly uses the name “Merck” in the U.S. KGaA has filed suit against the Company in a number of jurisdictions outside of the U.S. alleging, among other things, unfair competition, trademark infringement

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and/or corporate name infringement. In certain of those jurisdictions, KGaA also alleges breach of the parties’ coexistence agreement. The litigation is ongoing in the U.S. with no trial date set, and also ongoing in jurisdictions outside of the U.S.

Patent Litigation

From time to time, generic manufacturers of pharmaceutical products file abbreviated New Drug Applications (NDAs) with the FDA seeking to market generic forms of the Company’s products prior to the expiration of relevant patents owned by the Company. To protect its patent rights, the Company may file patent infringement lawsuits against such generic companies. Similar lawsuits defending the Company’s patent rights may exist in other countries. The Company intends to vigorously defend its patents, which it believes are valid, against infringement by companies attempting to market products prior to the expiration of such patents. As with any litigation, there can be no assurance of the outcomes, which, if adverse, could result in significantly shortened periods of exclusivity for these products and, with respect to products acquired through acquisitions accounted for as business combinations, potentially significant intangible asset impairment charges.

Bridion — As previously disclosed, between January and November 2020, the Company received multiple Paragraph IV Certification Letters under the Hatch-Waxman Act notifying the Company that generic drug companies have filed applications to the FDA seeking pre-patent expiry approval to sell generic versions of Bridion (sugammadex) Injection. In March, April and December 2020, the Company filed patent infringement lawsuits in the U.S. District Courts for the District of New Jersey and the Northern District of West Virginia against those generic companies. All actions in the District of New Jersey have been consolidated. These lawsuits, which assert one or more patents covering sugammadex and methods of using sugammadex, automatically stay FDA approval of the generic applications until June 2023 or until adverse court decisions, if any, whichever may occur earlier. The West Virginia case was jointly dismissed with prejudice on August 8, 2022 in favor of proceeding in New Jersey. The remaining defendants in the New Jersey action have stipulated to infringement of the asserted claims and have stated they are withdrawing all remaining claims and defenses other than a defense seeking to shorten the patent term extension of the sugammadex patent to December 2022. The U.S. District Court for the District of New Jersey held a one-day trial on December 19, 2022 on this remaining patent term extension calculation defense. The court ordered a post-trial briefing on this defense and held closing arguments on February 3, 2023.

The Company has settled with five generic companies providing that these generic companies can bring their generic versions of Bridion to the market in January 2026 (which may be delayed by any applicable pediatric exclusivity) or earlier under certain circumstances. The Company has agreed to stay the lawsuit filed against two generic companies, which in exchange agreed to be bound by a judgment on the merits of the consolidated action in the District of New Jersey. One of the generic companies in the consolidated action requested dismissal of the action against it and the Company did not oppose this request, which was subsequently granted by the court. The Company does not expect this company to bring its generic version of Bridion to the market before January 2026 or later, depending on any applicable pediatric exclusivity, unless the Company receives an adverse court decision.

Januvia, Janumet, Janumet XR — As previously disclosed, the FDA granted pediatric exclusivity with respect to Januvia (sitagliptin), Janumet (sitagliptin/metformin HCl), and Janumet XR (sitagliptin and metformin HCl extended-release), which provides a further six months of exclusivity in the U.S. beyond the expiration of all patents listed in the FDA’s Orange Book. Adding this exclusivity to the term of the key patent protection extended exclusivity on these products to January 2023. However, Januvia, Janumet, and Janumet XR contain sitagliptin phosphate monohydrate and the Company has another patent covering certain phosphate salt and polymorphic forms of sitagliptin that expires in May 2027, including pediatric exclusivity (2027 salt/polymorph patent). In 2019, Par Pharmaceutical filed suit against the Company in the U.S. District Court for the District of New Jersey seeking a declaratory judgment of invalidity of the 2027 salt/polymorph patent. In response, the Company filed a patent infringement lawsuit in the U.S. District Court for the District of Delaware against Par Pharmaceutical and additional companies that also indicated an intent to market generic versions of Januvia, Janumet, and Janumet XR following expiration of key patent protection, but prior to the expiration of the 2027 salt/polymorph patent, and a later granted patent owned by the Company covering the Janumet formulation where its term plus the pediatric exclusivity ends in 2029. The Company also filed a patent infringement lawsuit against Mylan in the Northern District of West Virginia. The Judicial Panel on Multidistrict Litigation entered an order transferring the Company’s lawsuit against Mylan to the U.S. District Court for the District of Delaware for coordinated and consolidated pretrial proceedings with the other cases pending in that district.

Prior to the beginning of the scheduled October 2021 trial in the U.S. District Court for the District of Delaware on invalidity issues, the Company settled with all defendants scheduled to participate in that trial. In the Company’s case against Mylan, a bench trial was held in December 2021 in the U.S. District Court for the Northern District of West Virginia, and the closing arguments were held on April 13, 2022. On September 21, 2022, the District

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Court for the Northern District of West Virginia issued a decision in the Company’s favor, upholding all asserted patent claims. Mylan (now Viatris) has appealed to the U.S. Court of Appeals for the Federal Circuit.

In total, the Company has settled with 22 generic companies providing that these generic companies can bring their generic versions of Januvia and Janumet to the market in May 2026 or earlier under certain circumstances, and their generic versions of Janumet XR to the market in July 2026 or earlier under certain circumstances.

Additionally, in 2019, Mylan filed a petition for inter partes review (IPR) at the U.S. Patent and Trademark Office (USPTO) seeking invalidity of some, but not all, of the claims of the 2027 salt/polymorph patent. The USPTO instituted IPR proceedings in May 2020, finding a reasonable likelihood that the challenged claims are not valid. A trial was held in February 2021 and a final decision was rendered in May 2021, holding that all of the challenged claims were not invalid. Mylan appealed the USPTO’s decision to the U.S. Court of Appeals for the Federal Circuit, and a hearing was held on August 2, 2022. On September 29, 2022, the U.S. Court of Appeals for the Federal Circuit ruled in the Company’s favor, upholding the USPTO’s decision. Mylan submitted a combined petition for panel rehearing and rehearing en banc, for which the Company was invited by the court to provide a response. On February 3, 2023, the court issued a per curiam decision denying both rehearing requests.

In March 2021, the Company filed a patent infringement lawsuit in the U.S. District Court for the District of Delaware against Zydus Worldwide DMCC, Zydus Pharmaceuticals (USA) Inc., and Cadila Healthcare Ltd. (collectively, Zydus). In that lawsuit, the Company alleged infringement of the 2027 salt/polymorph patent based on the filing of Zydus’s NDA seeking approval of its sitagliptin tablets. In December 2022, the parties reached settlement that included dismissal of the case without prejudice enabling Zydus to seek final approval of a non-automatically substitutable product containing a different form of sitagliptin than that used in Januvia, Janumet and Janumet XR.

As a result of these favorable court rulings and settlement agreements related to the later expiring patent directed to the specific sitagliptin salt form of the products, the Company expects that these products will not lose market exclusivity in the U.S. until May 2026. However, certain of the rulings are currently being appealed, and an unfavorable court decision would likely cause the products to lose exclusivity toward the end of 2023.

Generic companies have sought revocation of the Supplementary Protection Certificate (SPC) for Janumet in a number of European countries. In February 2022, a Finnish court referred certain questions to the Court of Justice of the European Union that could determine the validity of the Janumet SPCs in Europe, for which there will be an oral hearing on March 8, 2023. In first instance decisions, the Janumet SPC has been found invalid in Germany and Romania, and has been upheld in Czech Republic and Sweden. Appeals are pending in Germany, Czech Republic and Sweden. The Company has filed for injunctive relief in Belgium, Czech Republic, Finland, France, Greece, Hungary, Ireland, Portugal, Switzerland and Slovakia. An ex-parte preliminary injunction was granted in Finland, which has been subsequently maintained in inter-partes proceedings, Czech Republic and Switzerland, and an inter-partes preliminary injunction has been granted in Ireland. A preliminary injunction was granted in France and the validity of the SPC and the associated patent were held to be prima facie valid. Preliminary injunctions have been refused in Portugal, Greece, Belgium and Hungary. In Belgium, the Company has filed a main infringement action against generic companies and a request for preliminary measures in that action has been refused.

Lynparza — In December 2022, AstraZeneca Pharmaceuticals LP received a Paragraph IV Certification Letter under the Hatch-Waxman Act notifying AstraZeneca that Natco Pharma Limited (Natco) has filed an application to the FDA seeking pre-patent expiry approval to sell generic versions of Lynparza (olaparib) tablet. In February 2023, AstraZeneca and the Company filed a patent infringement lawsuit in the U.S. District Court for the District of New Jersey/Delaware against Natco. This lawsuit, which asserts one or more patents covering olaparib, automatically stays FDA approval of the generic application until June 2025 or until an adverse court decision, if any, whichever may occur earlier.

Other Litigation

There are various other pending legal proceedings involving the Company, principally product liability and intellectual property lawsuits. While it is not feasible to predict the outcome of such proceedings, in the opinion of the Company, either the likelihood of loss is remote or any reasonably possible loss associated with the resolution of such proceedings is not expected to be material to the Company’s financial condition, results of operations or cash flows either individually or in the aggregate.

Legal Defense Reserves

Legal defense costs expected to be incurred in connection with a loss contingency are accrued when probable and reasonably estimable. Some of the significant factors considered in the review of these legal defense reserves are as follows: the actual costs incurred by the Company; the development of the Company’s legal defense strategy and structure in light of the scope of its litigation; the number of cases being brought against the Company;

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the costs and outcomes of completed trials and the most current information regarding anticipated timing, progression, and related costs of pre-trial activities and trials in the associated litigation. The amount of legal defense reserves as of December 31, 2022 and 2021 of approximately $230 million represents the Company’s best estimate of the minimum amount of defense costs to be incurred in connection with its outstanding litigation; however, events such as additional trials and other events that could arise in the course of its litigation could affect the ultimate amount of legal defense costs to be incurred by the Company. The Company will continue to monitor its legal defense costs and review the adequacy of the associated reserves and may determine to increase the reserves at any time in the future if, based upon the factors set forth, it believes it would be appropriate to do so.

Environmental Matters

The Company and its subsidiaries are parties to a number of proceedings brought under the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund, and other federal and state equivalents. These proceedings seek to require the operators of hazardous waste disposal facilities, transporters of waste to the sites and generators of hazardous waste disposed of at the sites to clean up the sites or to reimburse the government for cleanup costs. The Company has been made a party to these proceedings as an alleged generator of waste disposed of at the sites. In each case, the government alleges that the defendants are jointly and severally liable for the cleanup costs. Although joint and several liability is alleged, these proceedings are frequently resolved so that the allocation of cleanup costs among the parties more nearly reflects the relative contributions of the parties to the site situation. The Company’s potential liability varies greatly from site to site. For some sites the potential liability is de minimis and for others the final costs of cleanup have not yet been determined. While it is not feasible to predict the outcome of many of these proceedings brought by federal or state agencies or private litigants, in the opinion of the Company, such proceedings should not ultimately result in any liability which would have a material adverse effect on the financial condition, results of operations or liquidity of the Company. The Company has taken an active role in identifying and accruing for these costs and such amounts do not include any reduction for anticipated recoveries of cleanup costs from former site owners or operators or other recalcitrant potentially responsible parties.

In management’s opinion, the liabilities for all environmental matters that are probable and reasonably estimable have been accrued and totaled $39 million and $40 million at December 31, 2022 and 2021, respectively. These liabilities are undiscounted, do not consider potential recoveries from other parties and will be paid out over the periods of remediation for the applicable sites, which are expected to occur primarily over the next 15 years. Although it is not possible to predict with certainty the outcome of these matters, or the ultimate costs of remediation, management does not believe that any reasonably possible expenditures that may be incurred in excess of the liabilities accrued should exceed approximately $35 million in the aggregate. Management also does not believe that these expenditures should result in a material adverse effect on the Company’s financial condition, results of operations or liquidity for any year.

12. Equity

The Merck certificate of incorporation authorizes 6,500,000,000 shares of common stock and 20,000,000 shares of preferred stock.

Capital Stock

A summary of common stock and treasury stock transactions (shares in millions) is as follows:

			2022												2021												2020
			Common Stock						Treasury Stock						Common Stock						Treasury Stock						Common Stock						Treasury Stock
Balance January 1			3,577						1,049						3,577						1,047						3,577						1,038
Purchases of treasury stock			—						—						—						11						—						16
Issuances (1)			—						(10)						—						(9)						—						(7)
Balance December 31			3,577						1,039						3,577						1,049						3,577						1,047

(1) Issuances primarily reflect activity under share-based compensation plans.

13. Share-Based Compensation Plans

The Company has share-based compensation plans under which the Company grants restricted stock units (RSUs) and performance share units (PSUs) to certain management level employees. In addition, employees

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and non-employee directors may be granted options to purchase shares of Company common stock at the fair market value at the time of grant. These plans were approved by the Company’s shareholders.

At December 31, 2022, 87 million shares collectively were authorized for future grants under the Company’s share-based compensation plans. These awards are settled with treasury shares.

Employee stock options are granted to purchase shares of Company stock at the fair market value at the time of grant. These awards generally vest one-third each year over a three-year period, with a contractual term of 7-10 years. RSUs are stock awards that are granted to employees and entitle the holder to shares of common stock as the awards vest. The fair value of the stock option and RSU awards is determined and fixed on the grant date based on the Company’s stock price. PSUs are stock awards where the ultimate number of shares issued will be contingent on the Company’s performance against a pre-set objective or set of objectives. The fair value of each PSU is determined on the date of grant based on the Company’s stock price. For RSUs and PSUs, dividends declared during the vesting period are payable to the employees only upon vesting. Over the PSU performance period, the number of shares of stock that are expected to be issued will be adjusted based on the probability of achievement of a performance target and final compensation expense will be recognized based on the ultimate number of shares issued. RSU and PSU distributions will be in shares of Company stock after the end of the vesting or performance period, subject to the terms applicable to such awards. PSU awards generally vest after three years. RSU awards generally vest one-third each year over a three-year period.

Total pretax share-based compensation cost recorded in 2022, 2021 and 2020 was $541 million, $498 million and $475 million, respectively. The amounts in 2021 and 2020 include $479 million and $441 million, respectively, related to continuing operations. Income tax benefits for share-based compensation expense recognized in 2022, 2021 and 2020 were $78 million, $69 million and $65 million, respectively.

The Company uses the Black-Scholes option pricing model for determining the fair value of option grants. In applying this model, the Company uses both historical data and current market data to estimate the fair value of its options. The Black-Scholes model requires several assumptions including expected dividend yield, risk-free interest rate, volatility, and term of the options. The expected dividend yield is based on historical patterns of dividend payments. The risk-free interest rate is based on the rate at grant date of zero-coupon U.S. Treasury Notes with a term equal to the expected term of the option. Expected volatility is estimated using a blend of historical and implied volatility. The historical component is based on historical monthly price changes. The implied volatility is obtained from market data on the Company’s traded options. The expected life represents the amount of time that options granted are expected to be outstanding, based on historical and forecasted exercise behavior.

The weighted average exercise price of options granted in 2022, 2021 and 2020 was $87.10, $75.99 and $77.67 per option, respectively. The weighted average fair value of options granted in 2022, 2021 and 2020 was $15.45, $9.80 and $9.93 per option, respectively, and were determined using the following assumptions:

Years Ended December 31			2022						2021						2020
Expected dividend yield			3.1		%				3.1		%				3.1		%
Risk-free interest rate			3.0		%				1.0		%				0.4		%
Expected volatility			22.5		%				20.9		%				22.1		%
Expected life (years)			5.9						5.9						5.8

Summarized information relative to stock option plan activity (options in thousands) is as follows:

			Number of Options						Weighted Average Exercise Price						Weighted Average Remaining Contractual Term (Years)						Aggregate Intrinsic Value
Outstanding January 1, 2022			18,572						$	65.27
Granted			2,326						87.10
Exercised			(6,317)						60.77
Forfeited			(862)						73.11
Outstanding December 31, 2022			13,719						$	70.55					6.5						$	554
Vested and expected to vest December 31, 2022			13,199						$	70.09					6.4						$	539
Exercisable December 31, 2022			8,730						$	65.24					5.4						$	399

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Additional information pertaining to stock option plans is provided in the table below:

Years Ended December 31			2022						2021						2020
Total intrinsic value of stock options exercised			$	225					$	106					$	51
Fair value of stock options vested			30						27						25
Cash received from the exercise of stock options			384						202						89

A summary of nonvested RSU and PSU activity (shares in thousands) is as follows:

						RSUs												PSUs
						Number of Shares						Weighted Average Grant Date Fair Value						Number of Shares						Weighted Average Grant Date Fair Value
Nonvested January 1, 2022						11,790						$	74.88					1,966						$	77.13
Granted						7,170						87.12						951						88.52
Vested						(5,150)						75.40						(725)						87.87
Forfeited						(1,110)						78.65						(171)						77.58
Nonvested December 31, 2022						12,700						$	81.25					2,021						$	78.60
Expected to vest December 31, 2022						11,254						$	80.96					1,895						$	78.26

At December 31, 2022, there was $813 million of total pretax unrecognized compensation expense related to nonvested stock options, RSU and PSU awards which will be recognized over a weighted average period of 1.9 years. For segment reporting, share-based compensation costs are unallocated expenses.

14. Pension and Other Postretirement Benefit Plans

The Company has defined benefit pension plans covering eligible employees in the U.S. and in certain of its international subsidiaries. In addition, the Company provides medical benefits, principally to its eligible U.S. retirees and their dependents, through its other postretirement benefit plans. The Company uses December 31 as the year-end measurement date for all of its pension plans and other postretirement benefit plans.

Net Periodic Benefit Cost

The net periodic benefit cost (credit) for pension and other postretirement benefit plans (including certain costs reported as part of discontinued operations) consisted of the following components:

			Pension Benefits
			U.S.																		International																		Other Postretirement Benefits
Years Ended December 31			2022						2021						2020						2022						2021						2020						2022						2021						2020
Service cost			$	372					$	403					$	360					$	283					$	328					$	297					$	48					$	48					$	52
Interest cost			457						404						431						145						123						136						46						45						57
Expected return on plan assets			(753)						(755)						(774)						(383)						(416)						(414)						(86)						(79)						(75)
Amortization of unrecognized prior service cost			(32)						(38)						(49)						(14)						(16)						(18)						(57)						(63)						(73)
Net loss (gain) amortization			128						298						303						96						142						127						(43)						(42)						(18)
Termination benefits			2						56						10						1						5						3						—						37						2
Curtailments			12						16						10						—						(26)						—						(1)						(29)						(4)
Settlements			239						216						13						1						8						15						—						—						—
Net periodic benefit cost (credit)			$	425					$	600					$	304					$	129					$	148					$	146					$	(93)					$	(83)					$	(59)

Net periodic benefit cost (credit) for pension and other postretirement benefit plans in 2021 includes expenses for curtailments, settlements and termination benefits provided to certain employees in connection with the spin-off of Organon.

In connection with restructuring actions (see Note 6), termination charges were recorded in 2022, 2021 and 2020 on pension and other postretirement benefit plans related to expanded eligibility for certain employees exiting Merck. Also, in connection with these restructuring activities, curtailments and settlements were recorded on certain pension plans. An increase in lump sum payments to U.S. pension plan participants also contributed to the settlements recorded during 2022 and 2021.

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The components of net periodic benefit cost (credit) other than the service cost component are included in Other (income) expense, net (see Note 15), with the exception of certain amounts for termination benefits, curtailments and settlements, which are recorded in Restructuring costs if the event giving rise to the termination benefits, curtailment or settlement is related to restructuring actions or in Income from Discontinued Operations, Net of Taxes and Amounts Attributable to Noncontrolling Interests if related to the spin-off of Organon (each as noted above).

Obligations and Funded Status

Summarized information about the changes in plan assets and benefit obligations, the funded status and the amounts recorded at December 31 is as follows:

			Pension Benefits																								Other Postretirement Benefits
			U.S.												International
			2022						2021						2022						2021						2022						2021
Fair value of plan assets January 1			$	13,067					$	12,672					$	12,195					$	12,009					$	1,292					$	1,221
Actual return on plan assets			(3,129)						1,250						(2,793)						891						(306)						118
Company contributions			293						305						155						189						46						33
Effects of exchange rate changes			—						—						(848)						(671)						—						—
Benefits paid			(219)						(219)						(250)						(233)						(90)						(86)
Settlements			(918)						(941)						(16)						(55)						—						—
Spin-off of Organon			—						—						—						(55)						—						—
Other			—						—						30						120						5						6
Fair value of plan assets December 31			$	9,094					$	13,067					$	8,473					$	12,195					$	947					$	1,292
Benefit obligation January 1			$	13,999					$	14,613					$	11,575					$	12,458					$	1,541					$	1,607
Service cost			372						403						283						328						48						48
Interest cost			457						404						145						123						46						45
Actuarial (gains) losses (1)			(3,851)						(332)						(3,283)						(240)						(392)						(103)
Benefits paid			(219)						(219)						(250)						(233)						(90)						(86)
Effects of exchange rate changes			—						—						(732)						(678)						(1)						(1)
Plan amendments			—						—						4						4						—						—
Curtailments			12						15						—						(38)						—						(12)
Termination benefits			2						56						1						5						—						37
Settlements			(918)						(941)						(16)						(55)						—						—
Spin-off of Organon			—						—						—						(118)						—						—
Other			—						—						28						19						5						6
Benefit obligation December 31			$	9,854					$	13,999					$	7,755					$	11,575					$	1,157					$	1,541
Funded status December 31			$	(760)					$	(932)					$	718					$	620					$	(210)					$	(249)
Recognized as:
Other Assets			$	5					$	9					$	1,052					$	1,395					$	—					$	—
Accrued and other current liabilities			(59)						(64)						(19)						(22)						(8)						(8)
Other Noncurrent Liabilities			(706)						(877)						(315)						(753)						(202)						(241)

(1) Actuarial (gains) losses primarily reflect changes in discount rates.

At December 31, 2022 and 2021, the accumulated benefit obligation was $17.2 billion and $24.9 billion, respectively, for all pension plans, of which $9.7 billion and $13.8 billion, respectively, related to U.S. pension plans.

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Information related to the funded status of selected pension plans at December 31 is as follows:

			U.S.												International
			2022						2021						2022						2021
Pension plans with a projected benefit obligation in excess of plan assets
Projected benefit obligation			$	9,186					$	13,013					$	2,779					$	2,507
Fair value of plan assets			8,421						12,072						2,445						1,731
Pension plans with an accumulated benefit obligation in excess of plan assets
Accumulated benefit obligation			$	9,081					$	12,916					$	1,226					$	2,462
Fair value of plan assets			8,421						12,072						948						1,723

Plan Assets

Entities are required to use a fair value hierarchy which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. There are three levels of inputs used to measure fair value with Level 1 having the highest priority and Level 3 having the lowest:

Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 — Unobservable inputs that are supported by little or no market activity. The Level 3 assets are those whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques with significant unobservable inputs, as well as instruments for which the determination of fair value requires significant judgment or estimation. At December 31, 2022 and 2021, $765 million and $943 million, respectively, or approximately 4% of the Company’s pension investments were categorized as Level 3 assets.

If the inputs used to measure the financial assets fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

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The fair values of the Company’s pension plan assets at December 31 by asset category are as follows:

			Fair Value Measurements Using																														Fair Value Measurements Using
			Level 1						Level 2						Level 3						NAV (1)						Total						Level 1						Level 2						Level 3						NAV (1)						Total
			2022																														2021
U.S. Pension Plans
Cash and cash equivalents			$	49					$	—					$	—					$	98					$	147					$	3					$	—					$	—					$	289					$	292
Investment funds
Developed markets equities			211						—						—						2,443						2,654						236						—						—						3,799						4,035
Emerging markets equities			—						—						—						707						707						—						—						—						919						919
Real estate			—						—						—						131						131						—						—						—						—						—
Equity securities
Developed markets			1,956						—						—						—						1,956						2,915						—						—						—						2,915
Fixed income securities
Government and agency obligations			—						1,934						—						—						1,934						—						2,870						—						—						2,870
Corporate obligations			—						1,438						—						—						1,438						—						2,005						—						—						2,005
Mortgage and asset-backed securities			—						22						—						—						22						—						23						—						—						23
Other investments
Derivatives			—						101						—						—						101						—						—						—						—						—
Other			—						—						4						—						4						2						—						6						—						8
Plan assets at fair value			$	2,216					$	3,495					$	4					$	3,379					$	9,094					$	3,156					$	4,898					$	6					$	5,007					$	13,067
International Pension Plans
Cash and cash equivalents			$	57					$	8					$	—					$	13					$	78					$	82					$	10					$	—					$	18					$	110
Investment funds
Developed markets equities			375						2,957						—						90						3,422						531						4,292						—						121						4,944
Government and agency obligations			177						2,656						—						130						2,963						240						4,025						—						171						4,436
Emerging markets equities			52						—						—						59						111						137						—						—						72						209
Corporate obligations			8						9						—						129						146						9						8						—						171						188
Other fixed income obligations			10						7						—						4						21						15						8						—						3						26
Real estate			—						1						—						10						11						—						1						—						16						17
Equity securities
Developed markets			263						—						—						—						263						369						—						—						—						369
Fixed income securities
Government and agency obligations			—						448						—						—						448						3						591						—						3						597
Corporate obligations			—						157						—						—						157						—						223						—						2						225
Mortgage and asset-backed securities			—						69						—						—						69						—						90						—						—						90
Other investments
Insurance contracts (2)			—						18						761						1						780						—						44						937						1						982
Other			1						3						—						—						4						1						1						—						—						2
Plan assets at fair value			$	943					$	6,333					$	761					$	436					$	8,473					$	1,387					$	9,293					$	937					$	578					$	12,195

(1) Certain investments that were measured at net asset value (NAV) per share or its equivalent have not been classified in the fair value hierarchy. The NAV amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the fair value of plan assets at December 31, 2022 and 2021.

(2) The plans’ Level 3 investments in insurance contracts are generally valued using a crediting rate that approximates market returns and invest in underlying securities whose market values are unobservable and determined using pricing models, discounted cash flow methodologies, or similar techniques.

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The table below provides a summary of the changes in fair value, including transfers in and/or out, of all financial assets measured at fair value using significant unobservable inputs (Level 3) for the Company’s pension plan assets:

			2022																								2021
			Insurance Contracts						Real Estate						Other						Total						Insurance Contracts						Real Estate						Other						Total
U.S. Pension Plans
Balance January 1			$	—					$	—					$	6					$	6					$	—					$	—					$	7					$	7
Actual return on plan assets:
Relating to assets still held at December 31			—						—						(3)						(3)						—						—						(5)						(5)
Relating to assets sold during the year			—						—						2						2						—						—						7						7
Purchases and sales, net			—						—						(1)						(1)						—						—						(3)						(3)
Balance December 31			$	—					$	—					$	4					$	4					$	—					$	—					$	6					$	6
International Pension Plans
Balance January 1			$	937					$	—					$	—					$	937					$	935					$	—					$	—					$	935
Actual return on plan assets:
Relating to assets still held at December 31			(147)						—						—						(147)						(34)						—						—						(34)
Purchases and sales, net			(39)						—												(39)						(42)						—						—						(42)
Transfers into Level 3			10						—												10						78						—						—						78
Balance December 31			$	761					$	—					$	—					$	761					$	937					$	—					$	—					$	937

The fair values of the Company’s other postretirement benefit plan assets at December 31 by asset category are as follows:

			Fair Value Measurements Using																														Fair Value Measurements Using
			Level 1						Level 2						Level 3						NAV (1)						Total						Level 1						Level 2						Level 3						NAV (1)						Total
			2022																														2021
Cash and cash equivalents			$	2					$	—					$	—					$	8					$	10					$	11					$	—					$	—					$	28					$	39
Investment funds
Developed markets equities			22						—						—						257						279						24						—						—						378						402
Emerging markets equities			—						—						—						74						74						—						—						—						92						92
Real estate			—						—						—						14						14						—						—						—						—						—
Government and agency obligations			1						—						—						—						1						1						—						—						—						1
Equity securities																																																									—
Developed markets			206						—						—						—						206						290						—						—						—						290
Fixed income securities
Government and agency obligations			—						212						—						—						212						—						275						—						—						275
Corporate obligations			—						137						—						—						137						—						191						—						—						191
Mortgage and asset-backed securities			—						2						—						—						2						—						2						—						—						2
Other Investments
Derivatives			—						12						—						—						12						—						—						—						—						—
Plan assets at fair value			$	231					$	363					$	—					$	353					$	947					$	326					$	468					$	—					$	498					$	1,292

(1) Certain investments that were measured at net asset value (NAV) per share or its equivalent have not been classified in the fair value hierarchy. The NAV amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the fair value of plan assets at December 31, 2022 and 2021.

The Company has established investment guidelines for its U.S. pension and other postretirement plans to create an asset allocation that is expected to deliver a rate of return sufficient to meet the long-term obligation of each plan, given an acceptable level of risk. The target investment portfolio of the Company’s U.S. pension and other postretirement benefit plans is allocated 25% to 40% in U.S. equities, 10% to 20% in international equities, 35% to 45% in fixed-income investments, and up to 8% in cash and other investments. The portfolio’s equity weighting is consistent with the long-term nature of the plans’ benefit obligations. The expected annual standard deviation of

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returns of the target portfolio, which approximates 10%, reflects both the equity allocation and the diversification benefits among the asset classes in which the portfolio invests. For international pension plans, the targeted investment portfolio varies based on the duration of pension liabilities and local government rules and regulations. Although a significant percentage of plan assets are invested in U.S. equities, concentration risk is mitigated through the use of strategies that are diversified within management guidelines.

Expected Contributions

Contributions during 2023 are expected to be approximately $270 million for U.S. pension plans, approximately $150 million for international pension plans and approximately $20 million for other postretirement benefit plans.

Expected Benefit Payments

Expected benefit payments are as follows:

			U.S. Pension Benefits						International Pension Benefits						Other Postretirement Benefits
2023			$	627					$	271					$	84
2024			634						257						86
2025			650						262						87
2026			676						283						89
2027			694						297						90
2028 — 2032			3,948						1,704						474

Expected benefit payments are based on the same assumptions used to measure the benefit obligations and include estimated future employee service.

Amounts Recognized in Other Comprehensive Income

Net gain/loss amounts reflect differences between expected and actual returns on plan assets as well as the effects of changes in actuarial assumptions. Net gain/loss amounts in excess of certain thresholds are amortized into net periodic benefit cost over the average remaining service life of employees. The following amounts were reflected as components of OCI:

			Pension Plans																																				Other Postretirement Benefit Plans
			U.S.																		International
Years Ended December 31			2022						2021						2020						2022						2021						2020						2022						2021						2020
Net (loss) gain arising during the period			$	(42)					$	813					$	(472)					$	116					$	772					$	(424)					$	—					$	156					$	199
Prior service (cost) credit arising during the period			—						—						—						(4)						(4)						64						—						—						—
			$	(42)					$	813					$	(472)					$	112					$	768					$	(360)					$	—					$	156					$	199
Net loss (gain) amortization included in benefit cost			$	128					$	298					$	303					$	96					$	142					$	127					$	(43)					$	(42)					$	(18)
Prior service credit amortization included in benefit cost			(32)						(38)						(49)						(14)						(16)						(18)						(57)						(63)						(73)
Settlements and curtailments			251						232						23						1						(18)						15						(1)						(29)						(4)
			$	347					$	492					$	277					$	83					$	108					$	124					$	(101)					$	(134)					$	(95)

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Actuarial Assumptions

The Company reassesses its benefit plan assumptions on a regular basis. The weighted average assumptions used in determining U.S. pension and other postretirement benefit plan and international pension plan information are as follows:

			U.S. Pension and Other Postretirement Benefit Plans																		International Pension Plans
December 31			2022						2021						2020						2022						2021						2020
Net periodic benefit cost
Discount rate			3.00		%				2.70		%				3.40		%				1.50		%				1.10		%				1.50		%
Expected rate of return on plan assets			6.70		%				6.70		%				7.30		%				3.70		%				3.80		%				4.40		%
Salary growth rate			4.60		%				4.60		%				4.20		%				2.90		%				2.80		%				2.80		%
Interest crediting rate			5.00		%				4.70		%				4.90		%				3.00		%				3.00		%				2.80		%
Benefit obligation
Discount rate			5.50		%				3.00		%				2.70		%				3.90		%				1.50		%				1.10		%
Salary growth rate			4.60		%				4.60		%				4.60		%				3.20		%				2.90		%				2.80		%
Interest crediting rate			5.30		%				5.00		%				4.70		%				3.30		%				3.00		%				3.00		%

For both the pension and other postretirement benefit plans, the discount rate is evaluated on measurement dates and modified to reflect the prevailing market rate of a portfolio of high-quality fixed-income debt instruments that would provide the future cash flows needed to pay the benefits included in the benefit obligation as they come due. The expected rate of return for both the pension and other postretirement benefit plans represents the average rate of return to be earned on plan assets over the period the benefits included in the benefit obligation are to be paid and is determined on a plan basis. The expected rate of return for each plan is developed considering long-term historical returns data, current market conditions, and actual returns on the plan assets. Using this reference information, the long-term return expectations for each asset category and a weighted-average expected return for each plan’s target portfolio is developed according to the allocation among those investment categories. The expected portfolio performance reflects the contribution of active management as appropriate. For 2023, the expected rate of return for the Company’s U.S. pension and other postretirement benefit plans will be 7.00%, as compared to 6.70% in 2022.

The health care cost trend rate assumptions for other postretirement benefit plans are as follows:

December 31			2022						2021
Health care cost trend rate assumed for next year			7.8		%				6.4		%
Rate to which the cost trend rate is assumed to decline			4.5		%				4.5		%
Year that the trend rate reaches the ultimate trend rate			2038						2032

Savings Plans

The Company also maintains defined contribution savings plans in the U.S. The Company matches a percentage of each employee’s contributions consistent with the provisions of the plan for which the employee is eligible. Total employer contributions to these plans in 2022, 2021 and 2020 were $175 million, $158 million and $158 million, respectively.

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15. Other (Income) Expense, Net

Other (income) expense, net, consisted of:

Years Ended December 31			2022						2021						2020
Interest income			$	(157)					$	(36)					$	(59)
Interest expense			962						806						831
Exchange losses			237						297						145
Loss (income) from investments in equity securities, net (1)			1,419						(1,940)						(1,338)
Net periodic defined benefit plan (credit) cost other than service cost			(279)						(212)						(339)
Other, net			(681)						(256)						(130)
			$	1,501					$	(1,341)					$	(890)

(1) Includes net realized and unrealized gains and losses from investments in equity securities either owned directly or through ownership interests in investment funds. Unrealized gains and losses from investments that are directly owned are determined at the end of the reporting period, while gains and losses from ownership interests in investment funds are accounted for on a one quarter lag. The Company estimates gains of approximately $140 million will be recorded in the first quarter of 2023 from ownership interests in investment funds.

Interest paid was $937 million in 2022, $779 million in 2021 and $822 million in 2020.

16. Taxes on Income

A reconciliation between the effective tax rate for income from continuing operations and the U.S. statutory rate is as follows:

			2022												2021												2020
			Amount						Tax Rate						Amount						Tax Rate						Amount						Tax Rate
U.S. statutory rate applied to income from continuing operations before taxes			$	3,453					21.0		%				$	2,915					21.0		%				$	1,231					21.0		%
Differential arising from:
Foreign earnings			(1,835)						(11.1)						(1,446)						(10.4)						(965)						(16.5)
GILTI and the foreign-derived intangible income deduction			462						2.8						(75)						(0.5)						349						6.0
State taxes			(110)						(0.7)						2						—						57						1.0
R&D tax credit			(81)						(0.5)						(81)						(0.6)						(108)						(1.8)
Tax settlements			(10)						(0.1)						(275)						(2.0)						(13)						(0.2)
Valuation allowances			108						0.7						102						0.7						37						0.6
Restructuring			11						0.1						61						0.4						105						1.8
Acquisition of VelosBio			—						—						(9)						(0.1)						559						9.5
Acquisition of Pandion			—						—						356						2.6						—						—
Acquisition of OncoImmune			—						—						—						—						97						1.7
Other			(80)						(0.5)						(29)						(0.1)						(9)						(0.2)
			$	1,918					11.7		%				$	1,521					11.0		%				$	1,340					22.9		%

Where applicable, the impact of changes in uncertain tax positions is reflected in the reconciling items above.

The Company’s remaining transition tax liability under the Tax Cuts and Jobs Act (TCJA) of 2017, which has been reduced by payments and the utilization of foreign tax credits, was $2.2 billion at December 31, 2022, of which $732 million is included in Income taxes payable and the remainder of $1.5 billion is included in Other Noncurrent Liabilities. As a result of the transition tax under the TCJA, the Company is no longer indefinitely reinvested with respect to its undistributed earnings from foreign subsidiaries and has provided a deferred tax liability for foreign withholding taxes that would apply. The Company remains indefinitely reinvested with respect to its financial statement basis in excess of tax basis of its foreign subsidiaries. A determination of the deferred tax liability with respect to this basis difference is not practicable.

The foreign earnings tax rate differentials in the tax rate reconciliation above primarily reflect the impacts of operations in jurisdictions with different tax rates than the U.S., particularly Ireland and Switzerland, as well as Singapore and Puerto Rico which operate under tax incentive grants (which begin to expire in 2025), thereby yielding

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a favorable impact on the effective tax rate compared with the U.S. statutory rate of 21%. The Company has an additional Cantonal tax holiday in Switzerland that provides for a tax rate reduction and is effective through 2032.

Income from continuing operations before taxes consisted of:

Years Ended December 31			2022						2021						2020
Domestic			$	1,011					$	1,854					$	(3,814)
Foreign			15,433						12,025						9,677
			$	16,444					$	13,879					$	5,863

Taxes on income from continuing operations consisted of:

Years Ended December 31			2022						2021						2020
Current provision
Federal			$	2,265					$	74					$	893
Foreign			1,164						1,273						969
State			57						(13)						44
			3,486						1,334						1,906
Deferred provision
Federal			(1,510)						240						(605)
Foreign			71						(77)						64
State			(129)						24						(25)
			(1,568)						187						(566)
			$	1,918					$	1,521					$	1,340

Deferred income taxes at December 31 consisted of:

			2022												2021
			Assets						Liabilities						Assets						Liabilities
Product intangibles and licenses			$	—					$	2,575					$	—					$	3,207
R&D capitalization			1,341						—						274						—
Inventory related			43						423						119						370
Accelerated depreciation			—						657						—						589
Equity investments			—						92						—						335
Pensions and other postretirement benefits			372						284						487						338
Compensation related			335						—						301						—
Unrecognized tax benefits			91						—						75						—
Net operating losses and other tax credit carryforwards			912						—						867						—
Other			511						267						434						180
Subtotal			3,605						4,298						2,557						5,019
Valuation allowance			(599)												(287)
Total deferred taxes			$	3,006					$	4,298					$	2,270					$	5,019
Net deferred income taxes									$	1,292											$	2,749
Recognized as:
Other Assets			$	503											$	692
Deferred Income Taxes									$	1,795											$	3,441

The Company has net operating loss (NOL) carryforwards in several jurisdictions. As of December 31, 2022, $349 million of deferred tax assets on NOL carryforwards relate to foreign jurisdictions. Valuation allowances of $345 million have been established on these foreign NOL carryforwards and other foreign deferred tax assets. In addition, the Company has $563 million of deferred tax assets relating to various U.S. tax credit carryforwards and

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NOL carryforwards. Valuation allowances of $247 million have been established on these U.S. tax credit carryforwards and NOL carryforwards.

Income taxes paid in 2022, 2021 and 2020 (including amounts attributable to discontinued operations in 2021 and 2020) were $3.2 billion, $2.4 billion and $2.7 billion, respectively. Income taxes paid consisted of:

Years Ended December 31			2022						2021						2020
Domestic (1)			$	1,891					$	1,211					$	977
Foreign			1,348						1,201						1,763
			$	3,239					$	2,412					$	2,740

(1) Includes TCJA transition tax payments.

Tax benefits relating to stock option exercises were $45 million in 2022, $21 million in 2021 and $12 million in 2020.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

			2022						2021						2020
Balance January 1			$	1,529					$	1,537					$	1,225
Additions related to current year positions			344						306						298
Additions related to prior year positions			48						63						110
Reductions for tax positions of prior years (1)			(40)						(230)						(4)
Settlements (1)			(6)						(46)						(70)
Lapse of statute of limitations			(40)						(58)						(22)
Spin-off of Organon			—						(43)						—
Balance December 31			$	1,835					$	1,529					$	1,537

(1) Amount in 2021 reflects a settlement with the IRS discussed below.

If the Company were to recognize the unrecognized tax benefits of $1.8 billion at December 31, 2022, the income tax provision would reflect a favorable net impact of $1.8 billion.

The Company is under examination by numerous tax authorities in various jurisdictions globally. The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits as of December 31, 2022 could decrease by up to approximately $31 million in the next 12 months as a result of various audit closures, settlements or the expiration of the statute of limitations. The ultimate finalization of the Company’s examinations with relevant taxing authorities can include formal administrative and legal proceedings, which could have a significant impact on the timing of the reversal of unrecognized tax benefits. The Company believes that its reserves for uncertain tax positions are adequate to cover existing risks or exposures.

Interest and penalties associated with uncertain tax positions amounted to an expense (benefit) of $54 million in 2022, $(37) million in 2021 and $16 million in 2020. These amounts reflect the beneficial impacts of various tax settlements, including the settlement discussed below. Liabilities for accrued interest and penalties were $256 million and $192 million as of December 31, 2022 and 2021, respectively.

In 2021, the Internal Revenue Service (IRS) concluded its examinations of Merck’s 2015-2016 U.S. federal income tax returns. As a result, the Company was required to make a payment of $190 million (of which $172 million related to continuing operations and $18 million related to discontinued operations). The Company’s reserves for unrecognized tax benefits for the years under examination exceeded the adjustments relating to this examination period and therefore the Company recorded a $236 million net tax benefit in 2021 (of which $207 million related to continuing operations and $29 million related to discontinued operations). This net benefit reflects reductions in reserves for unrecognized tax benefits and other related liabilities for tax positions relating to the years that were under examination.

The IRS is currently conducting examinations of the Company’s tax returns for the years 2017 and 2018. In addition, various state and foreign tax examinations are in progress and for these jurisdictions, the Company’s income tax returns are open for examination for the period 2003 through 2022.

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17. Earnings per Share

The calculations of earnings per share (shares in millions) are as follows:

Years Ended December 31			2022						2021						2020
Net Income from Continuing Operations Attributable to Merck & Co., Inc.			$	14,519					$	12,345					$	4,519
Income from Discontinued Operations, Net of Taxes and Amounts Attributable to Noncontrolling Interests			—						704						2,548
Net Income Attributable to Merck & Co., Inc.			$	14,519					$	13,049					$	7,067
Average common shares outstanding			2,532						2,530						2,530
Common shares issuable (1)			10						8						11
Average common shares outstanding assuming dilution			2,542						2,538						2,541
Basic Earnings per Common Share Attributable to Merck & Co., Inc. Common Shareholders:
Income from Continuing Operations			$	5.73					$	4.88					$	1.79
Income from Discontinued Operations			—						0.28						1.01
Net Income			$	5.73					$	5.16					$	2.79
Earnings per Common Share Assuming Dilution Attributable to Merck & Co., Inc. Common Shareholders:
Income from Continuing Operations			$	5.71					$	4.86					$	1.78
Income from Discontinued Operations			—						0.28						1.00
Net Income			$	5.71					$	5.14					$	2.78

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

In 2022, 2021 and 2020, 2 million, 9 million and 5 million, respectively, of common shares issuable under share-based compensation plans were excluded from the computation of earnings per common share assuming dilution because the effect would have been antidilutive.

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18. Other Comprehensive Income (Loss)

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

			Derivatives						Investments						Employee Benefit Plans						Foreign Currency Translation Adjustment						Accumulated Other Comprehensive Loss
Balance January 1, 2020, net of taxes			$	31					$	18					$	(4,261)					$	(1,981)					$	(6,193)
Other comprehensive income (loss) before reclassification adjustments, pretax			(383)						3						(633)						64						(949)
Tax			84						—						120						89						293
Other comprehensive income (loss) before reclassification adjustments, net of taxes			(299)						3						(513)						153						(656)
Reclassification adjustments, pretax			2			(1)			(21)			(2)			306			(3)			—						287
Tax			—						—						(72)						—						(72)
Reclassification adjustments, net of taxes			2						(21)						234						—						215
Other comprehensive income (loss), net of taxes			(297)						(18)						(279)						153						(441)
Balance at December 31, 2020, net of taxes			(266)						—						(4,540)						(1,828)						(6,634)
Other comprehensive income (loss) before reclassification adjustments, pretax			333						—						1,737						(304)						1,766
Tax			(75)						—						(332)						(119)						(526)
Other comprehensive income (loss) before reclassification adjustments, net of taxes			258						—						1,405						(423)						1,240
Reclassification adjustments, pretax			192			(1)			—						466			(3)			—						658
Tax			(40)						—						(102)						—						(142)
Reclassification adjustments, net of taxes			152						—						364						—						516
Other comprehensive income (loss), net of taxes			410						—						1,769						(423)						1,756
Spin-off of Organon (see Note 3)			—						—						28						421						449
Balance at December 31, 2021, net of taxes			144						—						(2,743)			(4)			(1,830)						(4,429)
Other comprehensive income (loss) before reclassification adjustments, pretax			684						—						70						(584)						170
Tax			(143)						—						12						(19)						(150)
Other comprehensive income (loss) before reclassification adjustments, net of taxes			541						—						82						(603)						20
Reclassification adjustments, pretax			(775)			(1)			—						329			(3)			—						(446)
Tax			163						—						(76)						—						87
Reclassification adjustments, net of taxes			(612)						—						253						—						(359)
Other comprehensive income (loss), net of taxes			(71)						—						335						(603)						(339)
Balance at December 31, 2022, net of taxes			$	73					$	—					$	(2,408)		(4)			$	(2,433)					$	(4,768)

(1) Primarily relates to foreign currency cash flow hedges that were reclassified from AOCL to Sales*.*

(2) Represents net realized gains on the sales of available-for-sale debt securities that were reclassified from AOCL to Other (income) expense, net*.*

(3) Includes net amortization of prior service cost, actuarial gains and losses, settlements and curtailments included in net periodic benefit cost (see Note 14).

(4) Includes pension plan net loss of $3.1 billion and $3.6 billion at December 31, 2022 and 2021, respectively, and other postretirement benefit plan net gain of $446 million and $473 million at December 31, 2022 and 2021, respectively, as well as pension plan prior service credit of $152 million and $190 million at December 31, 2022 and 2021, respectively, and other postretirement benefit plan prior service credit of $135 million and $181 million at December 31, 2022 and 2021, respectively.

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19. Segment Reporting

The Company’s operations are principally managed on a product basis and include two operating segments, Pharmaceutical and Animal Health, both of which are reportable segments.

The Pharmaceutical segment includes human health pharmaceutical and vaccine products. Human health pharmaceutical products consist of therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. The Company sells these human health pharmaceutical products primarily to drug wholesalers and retailers, hospitals, government agencies and managed health care providers such as health maintenance organizations, pharmacy benefit managers and other institutions. Human health vaccine products consist of preventive pediatric, adolescent and adult vaccines. The Company sells these human health vaccines primarily to physicians, wholesalers, physician distributors and government entities. A large component of pediatric and adolescent vaccine sales are made to the U.S. Centers for Disease Control and Prevention Vaccines for Children program, which is funded by the U.S. government. Additionally, the Company sells vaccines to the Federal government for placement into vaccine stockpiles.

The Animal Health segment discovers, develops, manufactures and markets a wide range of veterinary pharmaceutical and vaccine products, as well as health management solutions and services, for the prevention, treatment and control of disease in all major livestock and companion animal species. The Company also offers an extensive suite of digitally connected identification, traceability and monitoring products. The Company sells its products to veterinarians, distributors, animal producers, farmers and pet owners.

The Company previously had a Healthcare Services segment that provided services and solutions focused on engagement, health analytics and clinical services to improve the value of care delivered to patients. The Company divested the remaining businesses in this segment during the first quarter of 2020.

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Sales of the Company’s products were as follows:

Years Ended December 31			2022																		2021																		2020
			U.S.						Int’l						Total						U.S.						Int’l						Total						U.S.						Int’l						Total
Pharmaceutical:
Oncology
Keytruda			$	12,686					$	8,251					$	20,937					$	9,765					$	7,421					$	17,186					$	8,352					$	6,028					$	14,380
Alliance revenue - Lynparza (1)			584						532						1,116						515						473						989						417						308						725
Alliance revenue - Lenvima (1)			579						297						876						417						287						704						359						220						580
Alliance revenue - Reblozyl (2)			123						43						166						—						17						17						—						—						—
Vaccines
Gardasil/Gardasil 9			2,065						4,832						6,897						1,881						3,792						5,673						1,755						2,184						3,938
ProQuad/M-M-R II/Varivax			1,724						518						2,241						1,629						506						2,135						1,378						500						1,878
RotaTeq			508						275						783						473						334						807						486						311						797
Pneumovax 23			346						256						602						547						346						893						727						359						1,087
Vaqta			95						78						173						100						79						179						103						67						170
Hospital Acute Care
Bridion			922						762						1,685						762						770						1,532						583						615						1,198
Prevymis			188						240						428						153						218						370						119						162						281
Dificid			241						22						263						166						10						175						102						7						110
Primaxin			1						238						239						2						258						259						2						248						251
Noxafil			51						187						238						60						199						259						42						287						329
Invanz			4						185						189						(5)						207						202						9						202						211
Cancidas			6						168						174						4						208						212						7						207						213
Zerbaxa			89						79						169						4						(5)						(1)						74						56						130
Cardiovascular
Alliance revenue - Adempas/Verquvo (3)			329						12						341						312						30						342						259						22						281
Adempas			—						238						238						—						252						252						—						220						220
Virology
Lagevrio			1,523						4,161						5,684						632						320						952						—						—						—
Isentress/Isentress HD			274						359						633						294						474						769						326						531						857
Neuroscience
Belsomra			79						179						258						78						241						318						81						247						327
Immunology
Simponi			—						706						706						—						825						825						—						838						838
Remicade			—						207						207						—						299						299						—						330						330
Diabetes
Januvia			1,248						1,565						2,813						1,404						1,920						3,324						1,470						1,836						3,306
Janumet			355						1,344						1,700						367						1,597						1,964						477						1,494						1,971
Other pharmaceutical (4)			969						1,282						2,249						841						1,275						2,118						882						1,321						2,202
Total Pharmaceutical segment sales			24,989						27,016						52,005						20,401						22,353						42,754						18,010						18,600						36,610
Animal Health:
Livestock			710						2,590						3,300						667						2,628						3,295						612						2,327						2,939
Companion Animals			1,112						1,138						2,250						1,091						1,182						2,273						872						892						1,764
Total Animal Health segment sales			1,822						3,728						5,550						1,758						3,810						5,568						1,484						3,219						4,703
Other segment sales (5)			—						—						—						—						—						—						23						—						23
Total segment sales			26,811						30,744						57,555						22,159						26,163						48,322						19,517						21,819						41,336
Other (6)			395						1,333						1,728						266						116						382						71						111						182
			$	27,206					$	32,077					$	59,283					$	22,425					$	26,279					$	48,704					$	19,588					$	21,930					$	41,518

U.S. plus international may not equal total due to rounding.

(1) Alliance revenue for Lynparza and Lenvima represents Merck’s share of profits, which are product sales net of cost of sales and commercialization costs (see Note 5).

(2) Alliance revenue for Reblozyl represents royalties and, for 2022, also includes a payment received related to the achievement of a regulatory approval milestone (see Note 5).

(3) Alliance revenue for Adempas/Verquvo represents Merck’s share of profits from sales in Bayer’s marketing territories, which are product sales net of cost of sales and commercialization costs (see Note 5).

(4) Other pharmaceutical primarily reflects sales of other human health pharmaceutical products, including products within the franchises not listed separately.

(5) Represents sales for the Healthcare Services segment. All the businesses in the Healthcare Services segment were fully divested by the first quarter of 2020.

(6) Other is primarily comprised of miscellaneous corporate revenue, including revenue hedging activities which increased (decreased) sales by $810 million, $(203) million and $(19) million in 2022, 2021 and 2020, respectively, as well as revenue from third-party manufacturing arrangements (including sales to Organon). Other for 2022, 2021 and 2020 also includes $165 million, $218 million and $54 million, respectively, related to upfront and milestone payments received by Merck for out-licensing arrangements.

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Consolidated sales by geographic area where derived are as follows:

Years Ended December 31			2022						2021						2020
United States			$	27,206					$	22,425					$	19,588
Europe, Middle East and Africa			14,493						13,341						11,547
China			5,191						4,378						2,751
Japan			3,629						2,726						2,602
Asia Pacific (other than China and Japan)			3,614						2,407						2,113
Latin America			2,582						2,206						1,890
Other			2,568						1,221						1,027
			$	59,283					$	48,704					$	41,518

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

Years Ended December 31			2022						2021						2020
Segment profits:
Pharmaceutical segment			$	36,852					$	30,977					$	26,106
Animal Health segment			1,963						1,950						1,669
Other segments			—						—						1
Total segment profits			38,815						32,927						27,776
Other profits			1,160						156						75
Unallocated:
Interest income			157						36						59
Interest expense			(962)						(806)						(831)
Amortization			(2,085)						(1,636)						(1,817)
Depreciation			(1,642)						(1,414)						(1,519)
Research and development			(13,011)						(11,692)						(12,911)
Restructuring costs			(337)						(661)						(575)
Other unallocated, net			(5,651)						(3,031)						(4,394)
			$	16,444					$	13,879					$	5,863

Pharmaceutical segment profits are comprised of segment sales less standard costs, as well as selling, general and administrative expenses directly incurred by the segment. Animal Health segment profits are comprised of segment sales, less all cost of sales, as well as selling, general and administrative expenses and research and development costs directly incurred by the segment. For internal management reporting presented to the chief operating decision maker, Merck does not allocate the remaining cost of sales not included in segment profits as described above, research and development expenses incurred in Merck Research Laboratories, the Company’s research and development division that focuses on human health-related activities, or general and administrative expenses, nor the cost of financing these activities. Separate divisions maintain responsibility for monitoring and managing these costs, including depreciation related to fixed assets utilized by these divisions and, therefore, they are not included in segment profits. In addition, costs related to restructuring activities, as well as the amortization of intangible assets and purchase accounting adjustments are not allocated to segments.

Other profits are primarily comprised of miscellaneous corporate profits, as well as operating profits related to third-party manufacturing arrangements.

Other unallocated, net, includes expenses from corporate and manufacturing cost centers, goodwill and other intangible asset impairment charges, gains or losses on sales of businesses, expense or income related to changes in the estimated fair value measurement of liabilities for contingent consideration, and other miscellaneous income or expense items.

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Equity income/loss from affiliates and depreciation included in segment profits is as follows:

			Pharmaceutical						Animal Health						All Other						Total
Year Ended December 31, 2022
Included in segment profits:
Equity income from affiliates			$	39					$	—					$	—					$	39
Depreciation			5						177						—						182
Year Ended December 31, 2021
Included in segment profits:
Equity income from affiliates			$	11					$	—					$	—					$	11
Depreciation			6						158						—						164
Year Ended December 31, 2020
Included in segment profits:
Equity loss from affiliates			$	6					$	—					$	—					$	6
Depreciation			6						143						1						150

Property, plant and equipment, net, by geographic area where located is as follows:

December 31			2022						2021						2020
United States			$	12,891					$	11,759					$	10,394
Europe, Middle East and Africa			6,993						6,081						5,314
Asia Pacific (other than China and Japan)			966						857						737
Latin America			225						199						169
China			207						220						216
Japan			135						159						166
Other			5						4						4
			$	21,422					$	19,279					$	17,000

The Company does not disaggregate assets on a products and services basis for internal management reporting and, therefore, such information is not presented.

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Merck & Co., Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheet of Merck & Co., Inc. and its subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of income, of comprehensive income, of equity and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

U.S. Rebate Accruals - Medicaid, Managed Care and Medicare Part D

As described in Note 2 to the consolidated financial statements, the Company records certain variable consideration including discounts, which are estimated at the time of sale generally using the expected value method. Amounts accrued for aggregate customer discounts are evaluated on a quarterly basis through comparison of information provided by the wholesalers, health maintenance organizations, pharmacy benefit managers, federal and state agencies, and other customers to the amounts accrued. Certain of these discounts representing a portion of the accrual take the form of rebates, which are amounts owed based upon definitive contractual agreements or legal requirements with private sector (Managed Care) and public sector (Medicaid and Medicare Part D) benefit providers, after the final dispensing of the product to a benefit plan participant. The provision for rebates is based on expected patient usage, as well as inventory levels in the distribution channel to determine the contractual obligation to the benefit providers. Management uses historical customer segment utilization mix, sales forecasts, changes to product mix and price, inventory levels in the distribution channel, government pricing calculations and prior payment history in order to estimate the expected provision. The accrued balance relative to the provision for rebates included in accrued and other current liabilities was $2.7 billion as of December 31, 2022, of which the majority relates to U.S. rebate accruals – Medicaid, Managed Care and Medicare Part D.

The principal considerations for our determination that performing procedures relating to U.S. rebate accruals - Medicaid, Managed Care and Medicare Part D is a critical audit matter are the significant judgment by management due to the significant measurement uncertainty involved in developing the rebate accruals, as the accruals are based on assumptions developed using pricing information and historical customer segment utilization mix, and a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating evidence related to these assumptions.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to U.S. rebate accruals - Medicaid, Managed Care and Medicare Part D, including management’s controls over the assumptions used to estimate the corresponding rebate accruals. These procedures also included, among others (i) developing an independent estimate of the rebate accruals by utilizing third party data on historical customer segment utilization mix in the U.S., pricing information, the terms of the specific rebate programs, and the historical trend of actual rebate claims paid, (ii) comparing the independent estimate to the rebate accruals recorded by management, and (iii) testing rebate claims paid, including evaluating those claims for consistency with the contractual terms of the Company’s rebate agreements.

PricewaterhouseCoopers LLP

Florham Park, New Jersey

February 24, 2023

We have served as the Company’s auditor since 2002.

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