Spin-Off of Organon & Co.

9 Months Ended

Sep. 30, 2022

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 and has been treated 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 is providing Organon various services and, similarly, Organon is providing Merck various services. The provision of services under the TSA generally will terminate within 25 months following the spin-off; however, the provision of certain services has been extended to 31 months. 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 is continuing 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 is continuing 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 is (a) manufacturing and supplying certain active pharmaceutical ingredients for Organon, (b) manufacturing and supplying certain formulated pharmaceutical products for Organon, and (c) packaging and labeling certain finished pharmaceutical products for Organon. Similarly, Organon and Merck entered into a number of MSAs pursuant to which Organon is (a) manufacturing and supplying certain formulated pharmaceutical products for Merck, and (b) packaging and labeling certain finished pharmaceutical products for Merck. The terms of the MSAs range in initial duration from four years to ten years.

The amounts included in the condensed consolidated statement of income for the above MSAs include sales of $100 million and $293 million and related cost of sales of $104 million and $312 million for the three and nine months ended September 30, 2022, respectively. The amounts included in the condensed consolidated statement of income for the MSAs in the same periods of 2021 were immaterial. Amounts included in the condensed consolidated statement of income for the TSAs were immaterial for the three and nine months ended September 30, 2022 and September 30, 2021.

The amounts due from Organon under all of the above agreements were $567 million and $964 million at September 30, 2022 and December 31, 2021, respectively, and are reflected in Other current assets. The amounts due to Organon under these agreements were $333 million and $400 million at September 30, 2022 and December 31, 2021, respectively, and are 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 for periods prior to the spin-off on June 2, 2021. Merck incurred separation costs of $556 million for the nine months ended September 30, 2021 related to the spin-off of Organon, 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 functions, as well as investment banking fees.

Details of Income from Discontinued Operations, Net of Taxes and Amounts Attributable to Noncontrolling Interests are as follows:


		Nine Months Ended September 30,
($ in millions)	2021 (1)
Sales		$	2,512
Costs, Expenses and Other
Cost of sales		789
Selling, general and administrative		877
Research and development		103
Restructuring costs		1
Other (income) expense, net		(15)
		1,755
Income from discontinued operations before taxes		757
Income tax benefit		(12)
Income from discontinued operations, net of taxes		769
Less: Income of discontinued operations attributable to noncontrolling interests		3
		$	766

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