Segment Reporting

3 Months Ended

Mar. 31, 2020

The Company’s operations are principally managed on a products basis and include three operating segments, which are the Pharmaceutical, Animal Health and Healthcare Services 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.

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 and animal producers.

The Healthcare Services segment provided services and solutions that focus on engagement, health analytics and clinical services to improve the value of care delivered to patients. The Company has been in the process of divesting the businesses in the Healthcare Services segment. The remaining businesses were divested during the first quarter of 2020.

Sales of the Company’s products were as follows:



	Three Months Ended March 31,
	2020							2019
($ in millions)	U.S.			Int’l		Total		U.S.			Int’l		Total
Pharmaceutical:
Oncology
Keytruda	$	1,906		$	1,378	$	3,284	$	1,284		$	985	$	2,269
Alliance revenue - Lynparza⁽¹⁾	85			60		145		50			29		79
Alliance revenue - Lenvima⁽¹⁾	90			38		128		50			24		74
Emend	5			38		43		63			53		117
Vaccines
Gardasil/Gardasil 9	461			636		1,097		362			476		838
ProQuad/M-M-R II/Varivax	333			102		435		343			153		496
Pneumovax 23	182			75		256		125			59		185
RotaTeq	140			82		222		154			57		211
Vaqta	30			30		60		29			18		47
Hospital Acute Care
Bridion	143			157		299		119			136		255
Noxafil	8			87		94		91			99		190
Invanz	6			59		64		14			58		72
Prevymis	26			33		60		18			14		32
Cancidas	3			52		55		1			60		61
Primaxin	—			51		51		—			59		59
Cubicin	15			31		46		42			46		88
Zerbaxa	20			16		37		12			14		26
Immunology
Simponi	—			215		215		—			208		208
Remicade	—			88		88		—			123		123
Neuroscience
Belsomra	27			53		79		24			44		67
Virology
Isentress/Isentress HD	75			170		245		108			147		255
Zepatier	18			37		55		33			81		114
Cardiovascular
Zetia	(2		)	147		145		—			140		140
Vytorin	3			50		53		3			94		97
Atozet	—			122		122		—			94		94
Adempas	—			56		56		—			48		48
Alliance revenue - Adempas ⁽²⁾	49			5		53		40			2		42
Diabetes
Januvia	355			419		774		384			440		824
Janumet	113			390		503		167			364		530
Women’s Health
Implanon/Nexplanon	149			45		195		149			50		199
NuvaRing	26			37		63		185			34		219
Diversified Brands
Singulair	5			151		155		5			186		191
Cozaar/Hyzaar	7			95		102		4			99		103
Nasonex	6			65		71		(1		)	97		96
Arcoxia	—			70		70		—			75		75
Follistim AQ	21			21		41		29			28		57
Other pharmaceutical ⁽³⁾	409			780		1,194		328			754		1,082
Total Pharmaceutical segment sales	4,714			5,941		10,655		4,215			5,448		9,663
Animal Health:
Livestock	162			577		739		117			494		611
Companion Animals	222			253		475		177			237		414
Total Animal Health segment sales	384			830		1,214		294			731		1,025
Other segment sales ⁽⁴⁾	23			—		23		39			—		39
Total segment sales	5,121			6,771		11,892		4,548			6,179		10,727
Other ⁽⁵⁾	16			149		165		7			82		89
	$	5,137		$	6,920	$	12,057	$	4,555		$	6,261	$	10,816

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


⁽¹⁾	Alliance revenue represents Merck’s share of profits, which are product sales net of cost of sales and commercialization costs (see Note 3).


⁽²⁾	Alliance revenue 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 3).


⁽³⁾	Other pharmaceutical primarily reflects sales of other human health pharmaceutical products, including products within the franchises not listed separately.


⁽⁴⁾	Represents sales for the Healthcare Services segment. All the businesses in the Healthcare Services segment were divested as of March 31, 2020.


⁽⁵⁾	Other is primarily comprised of miscellaneous corporate revenues, including revenue hedging activities, as well as third-party manufacturing sales. Other in the first quarter of 2020 and 2019 also includes approximately $75 million and $15 million, respectively, related to the sale of the marketing rights for certain products.

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 $3.2 billion and $2.6 billion for the three months ended March 31, 2020 and 2019, respectively.

Consolidated sales by geographic area where derived are as follows:



	Three Months Ended March 31,
($ in millions)	2020		2019
United States	$	5,137	$	4,555
Europe, Middle East and Africa	3,534		3,103
China	864		746
Japan	811		799
Asia Pacific (other than China and Japan)	728		745
Latin America	556		561
Other	427		307
	$	12,057	$	10,816

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



	Three Months Ended March 31,
($ in millions)	2020			2019
Segment profits:
Pharmaceutical segment	$	7,477		$	6,574
Animal Health segment	478			415
Other segment	1			2
Total segment profits	7,956			6,991
Other profits	139			30
Unallocated:
Interest income	25			89
Interest expense	(212		)	(209		)
Depreciation and amortization	(381		)	(359		)
Research and development	(2,097		)	(1,843		)
Amortization of purchase accounting adjustments	(295		)	(397		)
Restructuring costs	(72		)	(153		)
Other unallocated, net	(1,225		)	(1,082		)
	$	3,838		$	3,067

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