Collaborative Arrangements

12 Months Ended

Dec. 31, 2019

Collaborative Arrangements [Abstract]

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 July 2017, Merck and AstraZeneca PLC (AstraZeneca) entered into a global strategic oncology collaboration to co-develop and co-commercialize AstraZeneca’s Lynparza for multiple cancer types. Lynparza is an oral poly (ADP-ribose) polymerase (PARP) inhibitor currently approved for certain types of ovarian and breast cancer. The companies are jointly developing and commercializing Lynparza, both as monotherapy and in combination trials with other potential medicines. 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 will also jointly develop and commercialize AstraZeneca’s selumetinib, an oral, potent, selective inhibitor of MEK, part of the mitogen-activated protein kinase (MAPK) pathway, currently being developed for multiple indications. Under the terms of the agreement, AstraZeneca and Merck will share the development and commercialization costs for Lynparza and selumetinib monotherapy and non-PD-L1/PD-1 combination therapy opportunities.

Gross profits from Lynparza and selumetinib product sales generated through monotherapies or combination therapies are shared equally. Merck will fund all development and commercialization costs of Keytruda in combination with Lynparza or selumetinib. AstraZeneca will fund all development and commercialization costs of Imfinzi in combination with Lynparza or selumetinib. AstraZeneca is the principal on Lynparza sales transactions. Merck records its share of Lynparza 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 of $1.6 billion in 2017 and made payments of $750 million over a multi-year period for certain license options (of which $250 million was paid in December 2017, $400 million was paid in December 2018 and $100 million was paid in December 2019). The Company recorded an aggregate charge of $2.35 billion in Research and development expenses in 2017 related to the upfront payment and license option payments. In addition, the agreement provides for additional contingent payments from Merck to AstraZeneca related to the successful achievement of sales-based and regulatory milestones.

In 2019, Merck determined it was probable that annual sales of Lynparza in the future would trigger a $300 million sales-based milestone payment from Merck to AstraZeneca. Accordingly, in 2019, Merck recorded a $300

million liability and a corresponding increase to the intangible asset related to Lynparza. Prior to 2019, Merck accrued sales-based milestone payments aggregating $700 million, of which $200 million and $250 million was paid to AstraZeneca in 2019 and 2018, respectively, and the remainder of $250 million was paid in January 2020. Potential future sales-based milestone payments of $3.1 billion have not yet been accrued as they are not deemed by the Company to be probable at this time.

In 2019, Lynparza received regulatory approval in the European Union (EU) both as a monotherapy for the treatment of certain adult patients with advanced breast cancer and as a monotherapy for the maintenance treatment of certain adult patients with BRCA-mutated advanced ovarian cancer. Each of these approvals triggered a $30 million capitalized milestone payment from Merck to AstraZeneca. In 2018, Lynparza received regulatory approvals triggering capitalized milestone payments of $140 million in the aggregate from Merck to AstraZeneca. Potential future regulatory milestone payments of $1.7 billion remain under the agreement.

The intangible asset balance related to Lynparza (which includes capitalized sales-based and regulatory milestone payments) was $955 million at December 31, 2019 and is included in Other Intangibles, Net on the Consolidated Balance Sheet. The amount is 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	2019		2018		2017
Alliance revenue	$	444	$	187	$	20

Cost of sales ⁽¹⁾	148		93		4
Selling, general and administrative	138		48		1
Research and development ⁽²⁾	168		152		2,419

December 31	2019		2018
Receivables from AstraZeneca included in Other current assets	$	128	$	52
Payables to AstraZeneca included in Accrued and other current liabilities⁽³⁾	577		405
Payables to AstraZeneca included Other Noncurrent Liabilities ⁽³⁾	—		250

⁽¹⁾ Represents amortization of capitalized milestone payments.

⁽²⁾ Amount for 2017 includes $2.35 billion related to the upfront payment and license option payments.

⁽³⁾ Includes accrued milestone payments.

Eisai

In March 2018, Merck and Eisai announced a strategic collaboration for the worldwide co-development and co-commercialization of Lenvima, 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 Merck’s Keytruda. Eisai records Lenvima product sales globally (Eisai is the principal on Lenvima sales transactions), and Merck and Eisai share gross 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, including for studies evaluating Lenvima as monotherapy, are shared equally by the two companies and reflected in Research and development expenses.

Under the agreement, Merck made an upfront payment to Eisai of $750 million and will make payments of up to $650 million for certain option rights through 2021 (of which $325 million was paid in March 2019, $200 million is expected to be paid in March 2020 and $125 million is expected to be paid in March 2021). The Company recorded an aggregate charge of $1.4 billion in Research and development expenses in 2018 related to the upfront payment and future option payments. In addition, the agreement provides for additional contingent payments from Merck to Eisai related to the successful achievement of sales-based and regulatory milestones.

In 2019, Merck determined it was probable that annual sales of Lenvima in the future would trigger sales-based milestone payments from Merck to Eisai aggregating $682 million. Accordingly, in 2019, Merck recorded $682 million of liabilities and corresponding increases to the intangible asset related to Lenvima. In 2018, Merck accrued sales-based milestone payments aggregating $268 million related to Lenvima. Of these amounts, $50 million was paid

to Eisai in 2019 and an additional $150 million was paid in January 2020. Potential future sales-based milestone payments of $3.0 billion have not yet been accrued as they are not deemed by the Company to be probable at this time.

In 2018, Lenvima received regulatory approvals triggering capitalized milestone payments of $250 million in the aggregate from Merck to Eisai. Potential future regulatory milestone payments of $135 million remain under the agreement.

The intangible asset balance related to Lenvima (which includes capitalized sales-based and regulatory milestone payments) was $956 million at December 31, 2019 and is included in Other Intangibles, Net on the Consolidated Balance Sheet. The amount is being amortized over its estimated useful life through 2026 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	2019		2018
Alliance revenue	$	404	$	149

Cost of sales⁽¹⁾	206		39
Selling, general and administrative	80		13
Research and development ⁽²⁾	189		1,489

December 31	2019		2018
Receivables from Eisai included in Other current assets	$	150	$	71
Payables to Eisai included in Accrued and other current liabilities ⁽³⁾	700		375
Payables to Eisai included in Other Noncurrent Liabilities ⁽³⁾	525		543

⁽¹⁾Represents amortization of capitalized milestone payments.

⁽²⁾Amount for 2018 includes $1.4 billion related to the upfront payment and option payments.

⁽³⁾Includes accrued milestone and future option 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, which is approved to treat pulmonary arterial hypertension and chronic thromboembolic pulmonary hypertension. The two companies have implemented a joint development and commercialization strategy. The collaboration also includes clinical development of Bayer’s vericiguat, which is in Phase 3 trials for worsening heart failure, as well as opt-in rights for other early-stage sGC compounds in development by Bayer. Merck in turn made available its early-stage sGC compounds under similar terms. Under the agreement, Bayer leads commercialization of Adempas in the Americas, while Merck leads commercialization in the rest of the world. For vericiguat and other potential opt-in products, Bayer will lead commercialization in the rest of world and Merck will lead in the Americas. For all products and candidates included in the agreement, both companies will share in development costs and profits on sales and will have the right to co-promote in territories where they are not the lead. Revenue from Adempas includes sales in Merck’s marketing territories, as well as Merck’s share of profits from the sale of Adempas in Bayer’s marketing territories. In addition, the agreement provides for additional contingent payments from Merck to Bayer related to the successful achievement of sales-based milestones.

In 2018, Merck determined it was probable that annual worldwide sales of Adempas in the future would trigger a $375 million sales-based milestone payment from Merck to Bayer. Accordingly, Merck recorded a $375 million liability and a corresponding increase to the intangible asset related to Adempas. In 2018, the Company made a $350 million milestone payment to Bayer, which was accrued for in 2016 when Merck deemed the payment to be probable. There is an additional $400 million potential future sales-based milestone payment that has not yet been accrued as it is not deemed by the Company to be probable at this time.

The intangible asset balance related to Adempas (which includes the acquired intangible asset balance, as well as capitalized sales-based milestone payments) was $883 million at December 31, 2019 and is included in Other Intangibles, Net on the Consolidated Balance Sheet. The amount is being amortized over its estimated useful life through 2027 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	2019		2018		2017
Net product sales recorded by Merck	$	215	$	190	$	149
Merck’s profit share from sales in Bayer’s marketing territories	204		139		151
Total sales	419		329		300

Cost of sales ⁽¹⁾	113		216		99
Selling, general and administrative	41		35		27
Research and development	126		127		101

December 31	2019		2018
Receivables from Bayer included in Other current assets	$	49	$	32
Payables to Bayer included in Other Noncurrent Liabilities ⁽²⁾	375		375

⁽¹⁾ Includes amortization of intangible assets.

⁽²⁾Represents accrued milestone payment.