Spin-Off of Organon & Co.

Jun. 02, 2021

Discontinued Operations and Disposal Groups [Abstract]

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 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 will provide Organon various services and,

similarly, Organon will provide Merck various services. The provision of services under the TSA agreement generally will terminate within 25 months following the spin-off. 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 will continue 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 will continue 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 will (a) manufacture and supply certain active pharmaceutical ingredients for Organon, (b) toll manufacture and supply certain formulated pharmaceutical products for Organon, and (c) package and label certain finished pharmaceutical products for Organon. Similarly, Organon and Merck entered into a number of MSAs pursuant to which Organon will (a) manufacture and supply certain formulated pharmaceutical products for Merck, and (b) package and label certain finished pharmaceutical products for Merck. The terms of the MSAs range in initial duration from four years to ten years.

Amounts included in the condensed consolidated statement of income for the above agreements were immaterial in the second quarter of 2021. The amount due from Organon under the above agreements was $1.6 billion at June 30, 2021 and is reflected in Other current assets. The amount due to Organon under these agreements was $1.0 billion at June 30, 2021 and is 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 condensed consolidated statement of income as Income from Discontinued Operations, Net of Taxes and Amounts Attributable to Noncontrolling Interests through June 2, 2021, the date of the spin-off. Prior periods have been recast to reflect this presentation. As a result of the spin-off of Organon, Merck incurred separation costs of $307 million and $556 million in the three and six months ended June 30, 2021, respectively, and $120 million and $290 million in the three and six months ended June 30, 2020, respectively, 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 system functions, as well as investment banking fees. As of December 31, 2020, the assets and liabilities associated with these businesses are classified as assets and liabilities of discontinued operations in the condensed consolidated balance sheet.

Details of Income from discontinued operations, net of taxes and amounts attributable to noncontrolling interests are as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
($ in millions)	2021 (1)		2020		2021 (1)		2020
Sales	$	1,059	$	1,519	$	2,512	$	3,288
Costs, Expenses and Other
Cost of sales	318		412		789		895
Selling, general and administrative	431		293		877		657
Research and development	50		38		103		72
Restructuring costs	—		1		1		3
Other (income) expense, net	(23)		(4)		(15)		4
	776		740		1,755		1,631
Income from discontinued operations before taxes	283		779		757		1,657
Tax (benefit) provision	(49)		114		(12)		239
Income from discontinued operations, net of taxes	332		665		769		1,418
Less: Income of discontinued operations attributable to noncontrolling interests	—		4		3		9
Income from discontinued operations, net of taxes and amounts attributable to noncontrolling interests	$	332	$	661	$	766	$	1,409

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

Details of assets and liabilities of discontinued operations are as follows:


($ in millions)	December 31, 2020
Cash and cash equivalents	$	12
Accounts receivable, less allowance for doubtful accounts	1,048
Inventories	756
Other current assets	867
Current assets of discontinued operations	$	2,683

Property, plant and equipment, net	$	986
Goodwill	1,356
Other intangibles, net	503
Other assets	330
Noncurrent Assets of Discontinued Operations	$	3,175

Trade accounts payable	$	267
Accrued and other current liabilities	841
Income taxes payable	(22)
Total current liabilities of discontinued operations	$	1,086

Deferred income taxes	$	10
Other noncurrent liabilities	176
Noncurrent Liabilities of Discontinued Operations	$	186

As a result of the spin-off of Organon, Merck distributed net liabilities of $5.1 billion as of June 2, 2021 consisting of debt of $9.4 billion (described above), goodwill of $1.4 billion, property, plant and equipment of $981 million, cash of $929 million, inventory of $815 million, other intangibles, net, of $519 million and other net liabilities of $328 million. The spin-off also resulted in a net decrease to Accumulated other comprehensive loss of $449 million consisting of $421 million for the derecognition of net losses on foreign currency translation adjustments and $28 million associated with employee benefit plans. The distribution of the net liabilities and reduction to Accumulated other comprehensive loss resulted in a net $4.6 billion increase to Other paid-in capital.

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 and non-employee directors were granted options to purchase shares of Company common stock at the fair market value at the time of grant. In connection with the spin-off of Organon, all outstanding Merck stock options, RSUs and PSUs (whether vested or unvested) were converted into adjusted Merck awards for current and former Merck employees or Organon awards for Organon employees. Such adjusted awards preserved the same intrinsic value and general terms and conditions (including vesting) as were in place immediately prior to the adjustments. Approximately 1.3 million RSUs, 1.9 million stock options and 248 thousand PSUs were converted from Merck awards into Organon awards.

Expenses for curtailments, settlements and termination benefits provided to certain employees were incurred in connection with the spin-off. Additionally, the transfer of employees to Organon triggered remeasurements of some of the Company’s pension plans (see Note 11).