Joint Ventures and Other Equity Method Affiliates

Equity income from affiliates reflects the performance of the Company’s joint ventures and other equity method affiliates including SPMSD (until termination on December 31, 2016) and certain investment funds. Equity income from affiliates was $42 million in 2017, $86 million in 2016 and $205 million in 2015 and is included in Other (income) expense, net (see Note 15).

Investments in affiliates accounted for using the equity method totaled $767 million at December 31, 2017 and $715 million at December 31, 2016.

Sanofi Pasteur MSD

In 1994, Merck and Pasteur Mérieux Connaught (now Sanofi Pasteur S.A.) established an equally-owned joint venture (SPMSD) to market vaccines in Europe and to collaborate in the development of combination vaccines for distribution in Europe. Joint venture vaccine sales were $1.0 billion for 2016 and $923 million for 2015.

On December 31, 2016, Merck and Sanofi Pasteur (Sanofi) terminated SPMSD and ended their joint vaccines operations in Europe. Under the terms of the termination, Merck acquired Sanofi’s 50% interest in SPMSD in exchange for consideration of $657 million comprised of cash, as well as future royalties of 11.5% on net sales of all Merck products that were previously sold by the joint venture through December 31, 2024, which the Company determined had a fair value of $416 million on the date of termination. The Company accounted for this transaction as a step acquisition, which required that Merck remeasure its ownership interest (previously accounted for as an equity method investment) to fair value at the acquisition date. Merck in turn sold to Sanofi its intellectual property rights held by SPMSD in exchange for consideration of $596 million comprised of cash and future royalties of 11.5% on net sales of all Sanofi products that were previously sold by the joint venture through December 31, 2024, which the Company determined had a fair value of $302 million on the date of termination. Excluded from this arrangement are potential future sales of Vaxelis (a jointly developed investigational pediatric hexavalent combination vaccine that was approved by the European Commission in February 2016). The European marketing rights for Vaxelis were transferred to a separate equally-owned joint venture between Sanofi and Merck.

The net impact of the termination of the SPMSD joint venture is as follows:



Products and product rights (8 year useful life)	$	936
Accounts receivable	133
Income taxes payable	(221		)
Deferred income tax liabilities	(147		)
Other, net	47
Net assets acquired	748
Consideration payable to Sanofi, net	(392		)
Derecognition of Merck’s previously held equity investment in SPMSD	(183		)
Increase in net assets	173
Merck’s share of restructuring costs related to the termination	(77		)
Net gain on termination of SPMSD joint venture ⁽¹⁾	$	96

⁽¹⁾ Recorded in Other (income) expense, net.

The estimated fair values of identifiable intangible assets related to products and product rights were determined using an income approach through which fair value is estimated based on market participant expectations of each asset’s projected net cash flows. The projected net cash flows were then discounted to present value utilizing a discount rate of 11.5%. Actual cash flows are likely to be different than those assumed. Of the amount recorded for products and product rights, $468 million related to Gardasil/Gardasil 9.

The fair value of liabilities for contingent consideration related to Merck’s future royalty payments to Sanofi of $416 million (reflected in the consideration payable to Sanofi, net, in the table above) was determined at the acquisition date using unobservable inputs. These inputs include the estimated amount and timing of projected cash flows and a risk-adjusted discount rate of 8% used to present value the cash flows. Changes in the inputs could result in a different fair value measurement.

Based on an existing accounting policy election, Merck did not record the $302 million estimated fair value of contingent future royalties to be received from Sanofi on the sale of Sanofi products, but rather is recognizing such amounts as sales occur and the royalties are earned.

The Company incurred $24 million of transaction costs related to the termination of SPMSD included in Marketing and administrative expenses in 2016.

Pro forma financial information for this transaction has not been presented as the results are not significant when compared with the Company’s financial results.

AstraZeneca LP

In 1982, Merck entered into an agreement with Astra AB (Astra) to develop and market Astra products under a royalty-bearing license. In 1993, Merck’s total sales of Astra products reached a level that triggered the first step in the establishment of a joint venture business carried on by Astra Merck Inc. (AMI), in which Merck and Astra each owned a 50% share. This joint venture, formed in 1994, developed and marketed most of Astra’s new prescription medicines in the United States. In 1998, Merck and Astra completed a restructuring of the ownership and operations of the joint venture whereby Merck acquired Astra’s interest in AMI, renamed KBI Inc. (KBI), and contributed KBI’s operating assets to a new U.S. limited partnership, Astra Pharmaceuticals L.P. (the Partnership), in exchange for a 1% limited partner interest. Astra contributed the net assets of its wholly owned subsidiary, Astra USA, Inc., to the Partnership in exchange for a 99% general partner interest. The Partnership, renamed AstraZeneca LP (AZLP) upon Astra’s 1999 merger with Zeneca Group Plc, became the exclusive distributor of the products for which KBI retained rights. Merck earned revenue based on sales of KBI products and earned certain Partnership returns from AZLP.

On June 30, 2014, AstraZeneca exercised its option to purchase Merck’s interest in KBI (and redeem Merck’s remaining interest in AZLP). A portion of the exercise price, which is subject to a true-up in 2018 based on actual sales of Nexium and Prilosec from closing in 2014 to June 2018, was deferred and recognized as income as the contingency was eliminated as sales occurred. Once the deferred income amount was fully recognized, in 2016, the Company began recognizing income and a corresponding receivable for amounts that will be due to Merck from AstraZeneca based on the sales performance of Nexium and Prilosec subject to the true-up in June 2018. The Company recognized income of $232 million, $98 million and $182 million in 2017, 2016 and 2015, respectively, in Other (income) expense, net related to these amounts. The receivable from AstraZeneca was $325 million at December 31, 2017.