Segment Reporting

6 Months Ended

Jun. 30, 2019

The Company’s operations are principally managed on a products basis and include four operating segments, which are the Pharmaceutical, Animal Health, Healthcare Services and Alliances segments. The Pharmaceutical and Animal Health segments are the only 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, primarily administered at physician offices. 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. During 2019, as a result of changes to the Company’s internal reporting structure, certain costs that were previously included in the Pharmaceutical segment are now being included as part of non-segment expenses within Merck Research Laboratories. Prior period Pharmaceutical segment profits have been recast to reflect these changes on a comparable basis.

The Animal Health segment discovers, develops, manufactures and markets animal health products, including pharmaceutical and vaccine products, for the prevention, treatment and control of disease in all major livestock and companion animal species, which the Company sells to veterinarians, distributors and animal producers.

The Healthcare Services segment provides services and solutions that focus on engagement, health analytics and clinical services to improve the value of care delivered to patients.

The Alliances segment primarily includes activity from the Company’s relationship with AstraZeneca LP related to sales of Nexium and Prilosec, which concluded in 2018.

Sales of the Company’s products were as follows:



	Three Months Ended June 30,															Six Months Ended June 30,
	2019							2018								2019							2018
($ in millions)	U.S.			Int’l		Total		U.S.			Int’l			Total		U.S.			Int’l		Total		U.S.			Int’l			Total
Pharmaceutical:
Oncology
Keytruda	$	1,498		$	1,136	$	2,634	$	959		$	707		$	1,667	$	2,782		$	2,121	$	4,903	$	1,797		$	1,333		$	3,131
Emend	67			54		121		89			59			148		130			107		237		168			105			273
Alliance revenue - Lynparza	66			45		111		31			13			44		116			74		190		55			22			76
Alliance revenue - Lenvima	54			43		97		19			16			35		104			67		171		19			16			35
Vaccines
Gardasil/Gardasil 9	456			430		886		302			306			608		818			906		1,724		682			586			1,269
ProQuad/M-M-R II/Varivax	500			174		675		356			70			426		843			328		1,171		668			150			818
RotaTeq	104			68		172		99			57			156		258			125		383		250			99			349
Pneumovax 23	123			47		170		122			71			193		248			107		355		234			137			372
Vaqta	38			20		58		42			23			65		67			39		105		60			42			101
Hospital Acute Care
Bridion	129			149		278		95			145			240		248			285		533		175			269			444
Noxafil	100			93		193		87			100			188		191			192		383		168			195			363
Cubicin	22			45		67		48			46			94		64			91		155		95			97			192
Invanz	18			60		78		87			63			149		31			118		150		177			123			300
Primaxin	—			70		71		—			68			68		1			129		130		5			135			140
Cancidas	3			64		67		4			83			87		4			125		129		7			171			178
Immunology
Simponi	—			214		214		—			233			233		—			422		422		—			464			464
Remicade	—			98		98		—			157			157		—			221		221		—			324			324
Neuroscience
Belsomra	21			55		76		29			42			71		45			98		143		52			73			125
Virology
Isentress/Isentress HD	94			153		247		132			174			305		202			300		502		260			326			586
Zepatier	39			68		108		(10		)	123			113		72			149		221		(10		)	253			243
Cardiovascular
Zetia	6			150		156		8			218			226		6			290		296		25			505			531
Vytorin	3			73		76		3			152			155		6			167		174		11			311			322
Atozet	—			92		92		—			101			101		—			186		186		—			174			174
Adempas	—			104		104		—			75			75		—			194		194		—			143			143
Diabetes
Januvia	471			437		908		503			446			949		855			877		1,732		968			862			1,829
Janumet	166			366		533		209			377			585		333			730		1,063		401			729			1,129
Women’s Health
NuvaRing	206			34		240		187			49			236		391			68		459		357			95			452
Implanon/Nexplanon	136			48		183		114			60			174		285			98		382		242			106			348
Diversified Brands
Singulair	8			153		160		5			180			185		13			338		352		11			350			360
Cozaar/Hyzaar	6			103		109		7			118			125		10			202		213		14			231			245
Nasonex	(1		)	73		72		—			81			81		(2		)	170		168		2			201			203
Arcoxia	—			75		75		—			84			84		—			149		149		—			166			166
Follistim AQ	24			39		63		27			43			70		53			67		121		56			81			138
Other pharmaceutical ⁽¹⁾	401			869		1,268		287			902			1,189		759			1,650		2,406		608			1,770			2,378
Total Pharmaceutical segment sales	4,758			5,702		10,460		3,841			5,442			9,282		8,933			11,190		20,123		7,557			10,644			18,201
Animal Health:
Livestock	145			526		671		107			526			633		261			1,021		1,282		231			1,055			1,286
Companion Animals	190			263		453		204			253			457		367			500		867		387			482			869
Total Animal Health segment sales	335			789		1,124		311			779			1,090		628			1,521		2,149		618			1,537			2,155
Other segment sales ⁽²⁾	47			—		48		56			—			56		86			—		87		140			—			140
Total segment sales	5,140			6,491		11,632		4,208			6,221			10,428		9,647			12,711		22,359		8,315			12,181			20,496
Other ⁽³⁾	4			125		128		54			(18		)	37		12			206		216		80			(74		)	6
	$	5,144		$	6,616	$	11,760	$	4,262		$	6,203		$	10,465	$	9,659		$	12,917	$	22,575	$	8,395		$	12,107		$	20,502

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


⁽¹⁾	Other pharmaceutical primarily reflects sales of other human health pharmaceutical products, including products within the franchises not listed separately.


⁽²⁾	Represents the non-reportable segments of Healthcare Services and Alliances.


⁽³⁾	Other is primarily comprised of miscellaneous corporate revenues, including revenue hedging activities, as well as third-party manufacturing sales.

Product sales are recorded net of the provision for discounts, including chargebacks, which are customer discounts that occur when a contracted customer purchases through an intermediary wholesale purchaser, and rebates that are 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 by a pharmacy to a benefit plan participant. These discounts, in the aggregate, reduced U.S. sales by $2.9 billion and $2.8 billion for the three months ended June 30, 2019 and 2018, respectively, and by $5.5 billion and $5.2 billion for the six months ended June 30, 2019 and 2018, respectively.

Consolidated sales by geographic area where derived are as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
($ in millions)	2019		2018		2019		2018
United States	$	5,144	$	4,262	$	9,659	$	8,395
Europe, Middle East and Africa	3,163		3,144		6,265		6,334
Japan	921		855		1,720		1,592
China	763		559		1,509		1,045
Asia Pacific (other than Japan and China)	716		791		1,461		1,543
Latin America	658		594		1,219		1,126
Other	395		260		742		467
	$	11,760	$	10,465	$	22,575	$	20,502

A reconciliation of segment profits to Income before taxes is as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
($ in millions)	2019			2018			2019			2018
Segment profits:
Pharmaceutical segment	$	7,115		$	5,975		$	13,690		$	11,914
Animal Health segment	405			450			820			864
Other segments	(2		)	26			—			88
Total segment profits	7,518			6,451			14,510			12,866
Other profits (losses)	94			(2		)	124			(89		)
Unallocated:
Interest income	75			81			164			165
Interest expense	(233		)	(194		)	(442		)	(379		)
Depreciation and amortization	(427		)	(332		)	(786		)	(682		)
Research and development	(2,093		)	(2,190		)	(3,935		)	(5,307		)
Amortization of purchase accounting adjustments	(378		)	(732		)	(775		)	(1,464		)
Restructuring costs	(59		)	(228		)	(212		)	(323		)
Other unallocated, net	(1,238		)	(768		)	(2,322		)	(1,355		)
	$	3,259		$	2,086		$	6,326		$	3,432

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 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 sales.

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 of liabilities for contingent consideration, and other miscellaneous income or expense items.