Merck

Please r cluding the Analyst's Certification.

Merck (MRK-NYSE) Stock Rating: Market Perform I ndustry Rating: Market Perform

May 17, 2012

Pharmaceuticals

Alex ArfaeiBMO Capital Markets Corp.

[email protected]

Well Positioned for Steady Long-Term Growth; Initiating With MARKET PERFORM

Securities Info Pr ice (16-May) $38.23 Target Price $4352-Wk High/Low $40/$29 Dividend $1.68Mkt Cap (mm) $116,324 Yield 4.4%Shs O/S (mm, BASIC) 3,043 Float O/S (mm) 3,041Options O/S (mm) na ADVol (30-day, 000s ) 12,613

Selected Bond Iss

Investment Thesis Merck should handle its patent cliff better than most its peers. Similar to other

major pharmaceutical companies, Merck will face significant headwinds between

2012 and 2014, including patent expiration of its biggest drug Singulair (11% of

2011 revenues). However, a broad revenue base with robust growth from its

diabetes franchise and to a lesser extent its vaccines should partly offset the impact

until revenues stabilize in 2013. With a diverse pipeline, including a number of

first-in-class drugs in high potential markets, Merck has significant potential

growth drivers. Yes, some of these programs are risky, but most have encouraging

early data and Merck has a good record with first-in-class drugs (e.g., Januvia and

Isentress). Merck is not over dependent on any one particular pipeline drug;

however, we agree that Anacetrapib could be “transformative” in atherosclerosis.

Finally, Merck is strategically well aligned with the key industry macro trends: it

has effectively re-allocated resources to capitalize on growth of emerging markets,

it is among the top-growing pharma companies in Japan, it is building a cancer

pipeline with a focus on personalized therapy, and it is judiciously preparing for the

significant biosimilar opportunity in the second half of this decade.

efer to pages 62 to 64 for Important Disclosures, in

Forecasts We look for revenue declines of 2.3% and 5.2% in 2012 and 2013,

respectively; and low to mid-single-digit growth after 2014.

Valuation With increased focus on long-term growth potential of the pipeline, we use a

DCF model and value MRK shares at $43, in line with 11.5x our 2012E EPS

of $3.78. Our forecast’s average 10-year operating CF growth rate is 2.6%.

Recommendation We are initiating coverage on MRK with a MARKET PERFORM rating and would

hold or wait for a better entry point (~$35). We see downside potential to

consensus estimates for 2013-2014, and most catalysts this year are mid-late 2H12.

The share buyback and dividend should support the stock in the mid-$30s until

additional data elucidates pipeline’s growth potential.

Ind Prc Rat’g Mdys/S&P YTW SpreadMRK 5.95% '28 128 Aa3 / AA 3.69% 174bpMRK 6.40% '28 132 Aa3 / AA 3.70% 174bpBond data from Bloomberg.

Price Performance

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MERCK & CO IN C NEW (MRK)Price: High,L ow, Clos e(US$) Relative to S&P 500

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2007 2008 2009 2010 2011 2012

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Valuation/Financial Data

(FY-Dec.) 2010A 2011A 2012E 2013E EPS Pro Forma $3.42 $3.77 $3.78 $3.40 P/E 10.1x 11.2x First Call Cons. $3.81 $3.70 EPS GAAP $0.28 $2.02 $2.60 $2.09

FCF $2.93 $3.45 $3.78 $3.75 P/FCF 10.1x 10.2x EBITDA ($mm) $21,122 $23,017 $21,816 $9,434 EV/EBITDA 5.3x 12.2x Rev. ($mm) $45,987 $48,047 $46,938 $44,475 EV/Rev 2.5x 2.6x

Quarterly EPS 1Q 2Q 3Q 4Q 2011A $0.92 $0.95 $0.94 $0.97 2012E $0.99Α $0.98 $1.01 $0.79

Balance Sheet Data (31-Mar) Net Debt ($mm) -$915 TotalDebt /EBITDA 0.8x Total Debt ($mm) $17,515 EBITDA/IntExp na Net Debt/Cap. na Price/Book 2.1x Notes: All values in US$. Source: BMO Capital Markets estimates, Bloomberg, Thomson Reuters, and IHS Global Insight.

BMO Capital Markets Merck

Page 2 May 17, 2012

Table of Contents

Merck........................................................................................................................................................... 1 Key Points: Merck Is Well Positioned for Steady Long-Term Growth; Wait for a Better Entry Point ........3

Valuation and Rating: $43 per Share, MARKET PERFORM...................................................................6 Intro to Segment Discussion..........................................................................................................................10 Diabetes Franchise: Key Growth Driver With Upside .................................................................................11

Januvia: The Core of Merck’s Diabetes Franchise...................................................................................11 Infectious Disease Segment: Slowing Growth..............................................................................................17

Isentress: We Expect Slowing Growth Owing to New Competitors .......................................................18 Hep-C Franchise........................................................................................................................................21 Victrelis: Becoming More Competitive in a Rapidly Evolving Market ..................................................23 Vaniprevir (MK-7009): Merck’s Second PI, an Improvement ................................................................24 MK-5172: Merck’s Third and Most Exciting PI ......................................................................................25 PegIntron....................................................................................................................................................25 MK-3415A: A Promising Novel Approach to Address a Major Infection; Probable Launch in 2015...26

Respiratory and Immunology Segment: Will Lose ~50% by 2015..............................................................27 Singulair.....................................................................................................................................................28 Remicade & Simponi ................................................................................................................................28 Remicade ...................................................................................................................................................29 Simponi......................................................................................................................................................30 Nasonex .....................................................................................................................................................31 MK-3222 (Phase 2) ...................................................................................................................................32 Other Respiratory and Immunology Drugs ..............................................................................................32

Cardiovascular Segment: Dynamic Few Years Ahead.................................................................................33 Vytorin and Zetia.......................................................................................................................................34 Tredaptive ..................................................................................................................................................36 Anacetrapib (Phase 3) ...............................................................................................................................37 Vorapaxar ..................................................................................................................................................39

Vaccines Segment: We Expect Near Double-Digit Growth.........................................................................40 Gardasil and V503 (Phase 3).....................................................................................................................41 ProQuad, Varivax, and M-M-R-II ............................................................................................................42 Zostavax and V212 (Phase3) ....................................................................................................................43

Women’s Health & Endocrine: Focus Is on Odanacatib ..............................................................................44 Diversified Brands: Leveraging Former Blockbusters in Japan and Emerging Markets.............................47 Neuroscience and Ophthalmology: Focus Is on Pipeline .............................................................................48 Oncology Segment: Small for Now, but on the Right Track........................................................................50 Merck Biosimilars: Significant Opportunity for 2015-2020 ........................................................................52 Financial Position...........................................................................................................................................54 Key Investment Risks ....................................................................................................................................55 Merck Income Statement: Our Quarterly Estimates (Non-GAAP)..............................................................57 Merck Income Statement: Our Annual Estimates (Non-GAAP) .................................................................58 Merck Balance Sheet .....................................................................................................................................59 Merck Statement of Cash Flows....................................................................................................................60

Company Specific Disclosure.................................................................................................................... 63


Page 3 May 17, 2012

Key Points: Merck Is Well Positioned for Steady Long-Term Growth; Wait for a Better Entry Point

After the 2012-2013 patent cliff, Merck’s revenues should get back to 2011 levels by the

end of 2015, we expect steady growth thereafter. The key headwinds in 2012 and 2013 include Singulair’s patent expiration (US: August 2012, EU: February 2013), full-year impact of lower revenues from Remicade and Simponi in 2012, ongoing austerity measures in EU, negative foreign exchange, and Japanese biennial price cut in 2012. However, a diversified revenue base should allow Merck to handle its patent cliff better than most of its peers. We expect revenues to stabilize by the end of 2013 at around $44.5 billion, 7.5% lower than 2011, and grow thereafter to near 2011 levels by the end of 2015. Merck’s diabetes franchise, vaccines, and diversified revenues (animal health, and consumer products) should drive growth with some contributions from women’s health and endocrine products, as well as biosimilars (2014-2015).

Exhibit 1. Merck’s Broad Revenue Base Should Absorb Near-Term Headwinds; We

Expect Growth After 2013

4.6 4.6 4.5 4.4 4.3 4.4 4.6

2.6 3.3 4.7 5.7 6.7 7.4 7.76 4 4 3 2 2 2

4.0 4.4 4.6 4.5 4.7 4.7 4.6

9.9 10.5 11.2 9.16.2 5.8 5.5

3.6 3.53.9

4.44.9 5.2 5.7

4 44 4

4 4 4

5.9 6.76.8 6.8

6.7 7.37.9

$-

$10

$20

$30

$40

$50

$60

2009A 2010A 2011A 2012E 2013E 2014E 2015E

$ B

illi

on

s

Biosimilars

Diversif ied Revenues

Other Pharmaceuticals

Women's Health and Endocrine

Vaccines

Respiratory and Immunology

Oncology

Neurosciences and Ophthalmology

Infectious Disease

Diversif ied Brands

Diabetes & Obesity

Cardiovascular

Source: Company Reports, BMO Capital Markets estimates.

We see significant upside potential to our forecasts, particularly during 2014 and 2015. In diabetes, the TECOS outcomes trial has the potential to establish Januvia (oral diabetes drug) as the first DPP-IV inhibitor with an outcomes benefit. Moreover, Merck’s once weekly DPP-IV could further establish and protect the diabetes franchise starting in 2015 against other longer-acting competitors, such as the GLP-1 analogues. In infectious diseases, Merck’s MK-3415A is a promising novel approach to treat an increasingly prevalent and difficult to manage infection (Clostridium difficile infection or CDI); sales could exceed our expectations in 2015. In hepatitis-C, Merck’s MK-5172 (protease inhibitors in phase 2b) has potential in being included in an all-oral regimen by 2015 based on its broad activity, once daily dosing and lack of food effect. On the other hand, if interferon-free regimens fail to dominate the Hep-C market, Merck’s PegIntron could perform better than our expectations as our forecasts are below most Street estimates.


Page 4 May 17, 2012

In the cardiovascular segment, the key near-term potential growth driver is the large IMPROVE-IT trial designed to show improved outcomes with Zetia added to generic Zocor. The goal is to reverse the volume decline following the results of the ENHANCE trial suggesting no incremental benefit with Zetia. In light of recent trials highlighting the difficulty in showing incremental CV efficacy on top of statins, we expect mixed results and a flat franchise going forward. We believe that the THRIVE study with Tredaptive has a reasonable chance of meeting its primary endpoint in 4Q12/1Q13 and that reducing flushing is clinically meaningful with niacin treatment. In women’s health, Odanacatib could exceed our modest expectations in the generics dominated osteoporosis market, based on its novel mechanism of action and better tolerability profile. Same goes for Suvorexant in insomnia (phase 3 data expected in June 2012). Suvorexant and Odanacatib can reach the market in 2013 and 2014, respectively. Based on the positive phase 2b, Preladenant for the treatment of Parkinson’s disease could exceed our modest expectations in 2015. Finally, the decline in diversified brands may not be as steep as we forecast, owing to growing demand for branded generics in emerging markets.

Merck is strategically well aligned with the key macro industry trends. It has reallocated resources from mature markets to emerging markets and is effectively leveraging its established products. Merck’s broad products address major medical needs in emerging markets and can enjoy long revenue tails there after losing exclusivity in developed markets. Recent partnerships with some of the leading companies in emerging markets should further establish Merck’s presence there. In Japan, the world’s second-largest biopharmaceutical market growing at a higher rate than the US and Europe, Merck grew revenues by 29% in 2011 owing to six relatively recent product launches. Although we expect some headwinds in Japan (2012 biennial price cuts, weakening yen 2012-2015), Merck’s Japan revenues should grow at a greater rate than other developed markets. Merck’s biosimilars franchise is slightly behind some other players, but the company has intelligently prepared for this significant opportunity in the latter half of this decade. Its Enbrel biosimilar is particularly promising. The same applies to Merck’s oncology franchise, as it is moving toward personalized therapy with a relatively young pipeline.

More than 60% of Merck’s revenues should soon come from international markets;

emerging markets and Japan are key drivers. About 57% of Merck’s 2011 revenues came from international markets, and we expect this to grow to 61%-63% during the next two to three years. The growth will be driven primarily by Japan and emerging markets. Japan currently accounts for about 13% of Merck’s pharmaceuticals revenue and is growing. Emerging markets currently represent 17% of total pharmaceutical sales, with China growing 19% in 1Q12 (y/y), including a 5% benefit from foreign exchange. Favorable foreign exchange (Fx), particularly from Europe and Japan, accounted for half of Merck’s 4% revenue growth in 2011. In 2012, Merck’s goal is to keep operational revenues (i.e., excluding Fx) at or near 2011 levels. However, in February and April, Merck stated that “at current (exchange) levels” revenues will be lower by 2%-3%, or roughly $1.2 billion. Looking ahead to 2013-2015, we expect additional Fx headwind primarily from Europe and Japan.


Page 5 May 17, 2012

Good growth prospects after 2015: Merck’s potentially transformative pipeline drugs and

biosimilars. Merck has identified two of its pipeline products as “potentially transformative candidates.” The most advanced is the CETP inhibitor Anacetrapib in phase 3 for atherosclerosis (vascular disease characterized by elevated lipids). Drugs that inhibit CETP increase HDL (good cholesterol), which is one approach to add incremental efficacy to statins that primarily lower LDL (bad cholesterol). We’re cautiously optimistic about the phase 3 REVEAL study, but recent large trials have illustrated the difficulty in showing incremental improvements in outcomes when LDL is well managed with statins. Anacetrapib seems to be more efficacious than Roche’s Dalcetrapib, which will likely have a two-year head-start. The second potentially transformative drug is MK-8931, which inhibits one of the key enzymes (BACE) involved in production of the beta amyloid proteins believed to be responsible for the symptoms and progression of Alzheimer’s disease (AD). Although Merck’s apparent success in developing an agent that targets BACE is impressive as many others have failed, the clinical data with MK-8931 is extremely limited. Merck has only shared one study with healthy volunteers, but we’ve seen many promising early stage AD drugs fail in clinical development. Until we see data in AD patients, with at least some improvements in cognitive functions, we remain cautious.

Finally, Biosimilars are arguably the greatest biopharma opportunity in the latter half of this decade as biologics with cumulative annual sales of roughly $40-$50 billion will lose patent exclusivity. The high barriers to entry in this market are a key advantage for Merck and some of its peers, and Merck has made significant internal and external investments to develop its biosimilar franchise. The most promising candidate is an Enbrel biosimilar, which is in phase 3 in Korea.


Page 6 May 17, 2012

Valuation and Rating: $43 per Share, MARKET PERFORM

We value MRK shares using our free cash flow to equity (FCFE) model, and support it by a P/E multiple method. Given the fluctuations in revenues and earnings during patent cliff years, and increased focus on the pipeline and longer-term growth prospects, we believe an intrinsic valuation approach (i.e., DCF) is more meaningful than most relative valuation methods. Overall, we forecast that Merck should be able to grow its operating cash flows by an average of 3.5% during 2012-2015. After 2015, we believe Merck can grow operational cash flows by an average of about 2% from 2016-2023. As depicted above, this could be driven by a broad base of products including Suvorexant in insomnia, Odanacatib in osteoporosis, next-generation vaccines for Gardasil and Zostavax, and finally Merck’s biosimilars. The broad product base and late-stage pipeline drugs should help offset Zetia/Vytorin’s loss of exclusivity in 2017. Moreover, we see significant upside potential to our forecasts if one or both of Merck’s potentially transformative products (Anacetrapib and MK-8931) are approved. Our valuation of $43 per share is also in line with a 11.5x P/E multiple of our 2012E non-GAAP EPS of $3.78, which is basically the company’s five-year FY1 P/E average and justified given the breadth of the pipeline, its growth potential, and its relatively lower risk.

We expect MRK shares to perform mostly in line with the broader market in the near term, and pull back to mid-$30s owing to lack of immediate catalysts and competitive developments. Therefore, we believe investors will likely get a better entry point ahead of Merck’s key catalysts, which are mostly in 2H12/1H13. As such, we rate MRK shares MARKET PERFORM as we wait for a better entry point. Moreover, we believe there is some downside potential to 2013 and 2014 consensus estimates. Potential sources of variance include estimated impact of international austerity measures and pricing pressure, as well as our more cautious expectations on the late stage pipeline.


Page 7 May 17, 2012

Exhibit 2. Our Free Cash Flow to Equity (FCFE) Valuation for MRK Shares: $43/Share

FCFE Valuation, $MM 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 >2023Cash flow from operations 12,383 13,362 13,229 12,895 14,191 14,901 14,528 14,964 15,413 15,876 16,193 16,517 16,765 17,016

Y/Y Growth 7.9% -1.0% -2.5% 10.0% 5.0% -2.5% 3.0% 3.0% 3.0% 2.0% 2.0% 1.5% 1.5%CAPEX (1,723) (1,749) (1,775) (1,802) (1,829) (1,856) (1,884) (1,912) (1,941) (1,970) (2,000) (2,030) (2,060) (2,091)Free Cash Flow to the Firm (FCFF) 10,660 11,613 11,454 11,094 12,363 13,045 12,644 13,052 13,472 13,906 14,193 14,487 14,705 14,925Net borrowing (17,515) (1,990) (1,816) (2,026) (2,132) (882) (1,134) (1,300) (1,147) (5,088)Free Cash Flow to Equity (FCFE) 9,623 9,638 9,068 10,231 12,163 11,510 13,052 12,172 13,906 13,046 14,487 9,617 14,925Discount Period 0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5 8.5 9.5 10.5 11.5 12.5Required rate of return on equity 8.1%Discounted FCFE 9,255 8,573 7,461 7,786 8,561 7,494 7,859 6,779 7,163 6,216 6,385 3,920 5,627

Per Share

PV of FCFE (2012-2023) 87,452 $28

Terminal Value at 2023 85,055PV of Terminal Value 32,068 $10Cash & Equivalents 13,531 $4

Investments (Inc. long term investments) 4,899 $2

Vioxx liability reserve & related interest (958) ($0.3)Funding obligation for pension & post-retirement benefit plans

(2,836) ($1)

Total Equity Value 134,157Minority Interest (2,426)Total Merck Stockholders' Equity Value 131,731Diluted shares 3,094Equity value per shareAssumptions: Required Rate of Return on Equity 8.1%

Rf 2.2%Beta 0.87Rm 9%

Terminal Value Growth Rate 1.5%Source: Company Reports, Thompson One, BMO Capital Markets

$43

Source: Merck 2011 Form 10-KSource: Merck 2011 Form 10-K

Does not include short term investments (see below).

BMO Comments:

Corp. notes & bonds $2.03B, Commercial Paper $1.3 B, US gov't and agency securities $1.02B, Equities $0.4B; Almost all level 2. $2.9 billion of debt securities mature within five years. Only $79M foreign gov't debt.

Assumes avg. annual growth rate of 2% between 2016-2023; 2017 is Zetia/Vytron patent exp. year. Long term debt accounted for at maturity dates except for $5 billion maturing between 2026 and 2039, but accounted for as a lump-sum payment in 2023. We also include $1.5 Billion for the AstraZeneca 2012 option.

Assumes terminal growth rate of 1.5% after 2023.


Page 8 May 17, 2012

Exhibit 3. Comparison Table: Merck Underperformed Peers in 2011, But Is in Line YTD

Large-Cap Pharma AbsoluteRelative to S&P 500

AbsoluteRelative to S&P 500

Abbott Laboratories ABT $62.55 $98,416 3.1% 21% 21% 13% 8% 12 10 8 2.4

Bristol-Myers Squibb BMY OP $39 $33.02 $55,774 4.0% 38% 38% -4% -10% 17 15 10 3.1

Eli Lilly LLY MP $37 $40.75 $47,287 4.8% 24% 24% 0% -5% 12 9 8 2.1

Merck MRK MP $43 $38.23 $116,279 4.2% 9% 9% 3% -3% 10 8 6 2.4

Pfizer PFE $22.64 $169,531 3.7% 28% 28% 7% 1% 10 7 6 2.8

Pharma Average 4.0% 24% 24% 4% -2% 12 10 8 2.6

Pharma Median 4.0% 24% 24% 3% -3% 12 9 8 2.4

Large-Cap BiotechAmgen AMGN $70.98 $55,202 1.2% 18% 18% 12% 6% 12 10 8 3.4

Biogen Idec BIIB $136.80 $32,772 0% 64% 64% 24% 19% 22 19 14 6.1

Celgene CELG $70.72 $31,152 0% 14% 14% 5% -1% 15 14 12 5.7

Gilead GILD $51.58 $39,063 0% 13% 13% 26% 21% 14 12 11 4.3

Biotech Average 0% 27% 27% 17% 11% 15 14 11 4.9

Biotech Median 0% 16% 16% 18% 13% 14 13 11 5.0

Values as of closing prices on: 5/16/2012

Source: Thomson One

Valuation Metrics: (Based on 2012 Consensus Estimates)

2011 2012: YTD

Performance: Total Return (Includes dividends)

P/E 1P/

FCFEV/

EBITDAPrice/ FY-1

SalesTicker Price

Market Cap, $MM

Dividend Yield

RatingPrice

Target

Exhibit 4. BMO Forecasts vs. Consensus: Downside Potential to 2013-2014 Consensus Estimates

2010A 2011AActual Actual BMO Street BMO Street BMO Street BMO Street

Revenue $45,987 $48,047 $46,938 $47,164 $44,475 $45,815 $45,448 $46,708 $47,714 $48,094Gross Margin, % 75% 76% 76% 76% 77% 76% 78% 76% 78% 76%Operating Profit 13,741 15,590 15,429 15,517 13,941 14,972 14,680 15,540 16,536 16,304Operating Margin 30% 32% 33% 33% 31% 33% 32% 33% 35% 34%EBITDA 21,122 23,017 21,816 18,605 19,434 18,107 19,404 18,963 20,599 NAPre-tax Income 13,550 15,425 15,224 15,413 13,487 14,635 14,329 15,446 16,386 16,645Net Income 10,715 11,697 11,637 11,606 10,403 11,050 11,082 11,738 12,709 12,549Net Margin 23% 24% 25% 25% 23% 24% 24% 25% 27% 26%EPS $3.42 $3.77 $3.78 $3.81 $3.40 $3.70 $3.65 $4.02 $4.21 $4.39Dividend/share $1.52 $1.52 $1.68 $1.68 $1.68 $1.73 $1.73 $1.80 $1.85 $1.88FCF/share $2.93 $3.45 $3.78 $3.29 $3.75 $2.83 $3.65 $2.59 $4.10 $2.74Net Debt (Ex-LT Investments) 5,681 2,543 65 (2,144) (3,479) (6,604) (5,994) (14,972) (9,712) (19,367)Net Debt (Inc. LT Investments) 3,506 (915) (3,393) N/A (6,937) N/A (9,452) N/A (13,170) N/AROE (non-GAAP) 19% 21% 21% 20% 18% 19% 18% 19% 20% 20%Source: Company Reports, Thompson One, BMO Capital Markets

2012E 2013E 2014E 2015E


Page 9 May 17, 2012

Exhibit 5. Merck’s 2012 Catalysts and Our Thoughts: Most Are in 2H12

Drug Description EventExpected

DateImportance BMO Comments:

Suvorexant

1st in class Orexin receptor

inhibitor for insomnia

Results from 2 pivotal phase 3 trials

2012.06.09-13 (APSS)

Med-High

In Feb. Merck announced the trials had "positive results" but did not elaborate. 1yr safety study showed no serious concerns & maintained efficacy; minimal residual effect vs active comparator. Merck still anticipates filing the drug in 2012. The drug seems effective, but given issues associated with GSK/Actelion's Almorexant (similar MOA), safety will be scrutinized.

Vytorin & Zetia Cholesterolabsorption

inhibitor + statin

Final results of IMPROVE-IT: CV outcomes in ACS

Late 2012/ 1H13

High

Key trial to show superior outcomes for Vytorin vs generic Zocor. We have low expectations for positive outcome, but it could boost franchise sales by 10%-15%; downside if negative 5%-10%. We expect mixed results leading to flat franchise sales.

Tredaptive

Niacin ER & Laropiprant

(anti-flushing agent)

HPS2-THRIVE Phase 3 Data

2012.4Q-2013.1Q (AHA or ACC)

Med-HighReasonable chance to meet outcome endpoint, but risky given difficulty showing incremental efficacy plus statins. It will face difficult competition vs. generic Niaspan. Merck anticipates filing in 1H2013.

Odanacatib

1st in class Cathepsin K

Inhibitor; 1x/week, Oral

Phase 3 fracture trial in osteoporosis: > 16,000 pts vs. placebo

2012.2H / 2013.1Q

High

Two interim analysis planned at 70% and 85% of hip fracture events with criteria for early stopping. Final data likely in 2H2012; Merck anticipates filing in mid-late 2013. Focus will be on comparison of fracture data with generic bisphosphonates and Prolia & tolerability.

MK-31021st in class once weekly

DPP-IV inhibitor

Phase 2 data in diabetes

2012.4Q Med-High

DPP-IV are the best growing new class in diabetes, this has the potential to strengthen Merck's diabetes franchise (currently dependent entirely on Januvia) and protect it vs. more convenient longer acting GLP-1 analogues.

MK-5172Pan-genotypic

protease inhibitor

Phase 2 early data in Hep-C

2012.11 (AASLD)

Med-High

This is a very effective PI, no dose response in Genotype-1 (5-log drop even at lowest dose, looking at 100-200mg QD). Some dose response in Genotype-3, so it may not be as pan-genotypic. Overall, very good prospects based on its broad activity, QD dosing and lack of food effect. One of Merck's potentially transformative drugs.

MK-8931BACE inhibitor for Alzheimer's

disease

Incremental Phase 1/2 data

2012.10' Med-High

Has shown greater than 90% reduction in AB peptides in healthy pts w/out dose limiting side effects; very promising early stage drug trying to be the first disease modifying treatment in a massive market. One of Merck's potentially transformative drugs.

MK-3222Anti-IL23 mAb for psoriasis

Phase 2 data2012.11 (ACR?)

Med

Has the potential to be as efficacious as J&J’s Stelara, one of the leading drugs in psoriasis, but with less serious infections. Competitors: some promising new biologics (IL-17 mAbs like Amgen’s Brodalumab and two others already in phase 3) showing seemingly better efficacy to Stelara and Humira

Source: Company Reports, Thompson One, BMO Capital Markets


Page 10 May 17, 2012

Intro to Segment Discussion

Merck reports individual product sales in various segments grouped by therapeutic focus. Below we provide an in-depth discussion of each segment, including late-stage pipeline drugs, some of which are included in our segment forecasts.

Exhibit 6. Merck Segment Revenue Contribution 2011-2015: Revenues Should Return to 2011 Levels by 2015

2015 Revenues by SegmentBiosimilars, 1%

Other Pharmaceuticals,

8%

Women's Health and Endocrine, 6%

Diabetes & Obesity, 16%

Cardiovascular, 10%

Diversif ied Brands, 4%

Oncology, 2%

Neurosciences and

Ophthalmology, 3%

Infectious Disease, 10%

Vaccines, 12%

Respiratory and Immunology, 12%

Diversified Revenues, 16%

2011 Revenues by Segment

Diversified Revenues,

15%

Respiratory and

Immunology, 24%

Vaccines, 8% Infectious Disease, 10%

Neurosciences and

Ophthalmology, 2%

Oncology, 3%

Diversified Brands, 7%

Cardiovascular, 9%

Diabetes & Obesity, 10%

Women's Health and Endocrine,

5%

Other Pharmaceuticals,

7%

Merck Revenue Growth Contribution by Segment: 2011-2015

(7,000) (6,000) (5,000) (4,000) (3,000) (2,000) (1,000) 0 1,000 2,000 3,000 4,000

WW Revenues

Cardiovascular

Diabetes & Obesity

Diversified Brands

Infectious Disease

Neurosciences and Ophthalmology

Oncology

Respiratory and Immunology

Vaccines

Women's Health and Endocrine

Other Pharmaceuticals

Diversified Revenues

Biosimilars

Y/Y Revenue Change, $MM

Diversified Revenues = Animal Health, Consumer, Other Revenues including AstraZeneca JV

Source: Company Reports, BMO Capital Markets estimates.


Page 11 May 17, 2012

Diabetes Franchise: Key Growth Driver With Upside

Januvia: The Core of Merck’s Diabetes Franchise

Diabetes is one of the most attractive global pharmaceutical markets and is expected to reach roughly $50 billion by 2015 (Source: IMS). Merck is the undisputed leader in the DPP-IV inhibitor class, which is the best growing class among the new treatment options for Type-2 diabetes. The franchise is centered on Januvia (sitagliptin), and is currently made up of Januvia, Janumet (Januvia + metformin combo), and the recently approved Juvisync (Januvia + generic Zocor). In 2011, Merck’s Januvia franchise accounted for 10% of global revenues and $1.3 billion, or 65% of Merck’s year-over-year revenue growth of $2.06 billion, offsetting declining or flat revenues from other key brands. The Januvia franchise benefited from: 1) its market leadership by virtue of its near three-year monopoly in the US market from October 2006 to September 2009, 2) the continued growth of the DPP-IV class at the expense of the glitazones, and 3) continued international growth, particularly in Japan (launched late 2009) and Europe.

Exhibit 7. Our Diabetes and Obesity Segment Forecast: We Expect Steady Growth

2010A 2011A 2012E 2013E 2014E 2015E

Diabetes and Obesity $3,339 $4,686 $5,731 $6,732 $7,415 $7,746Y/Y Growth 29% 40% 22% 17% 10% 4%

Operational Growth 38% 24% 18% 10% 5%Fx 2% -2% 0% 0% -1%

% of Pharma Revenue 9% 11% 14% 18% 19% 19%% of WW Revenue 7% 10% 12% 15% 16% 16%

US $2,140 $2,537 $2,946 $3,326 $3,689 $4,018Y/Y Growth 14% 19% 16% 13% 11% 9%

% of Segment Revenue 64% 54% 51% 49% 50% 52% Int'l $1,201 $2,150 $2,786 $3,406 $3,726 $3,728

Y/Y Growth 70% 79% 30% 22% 9% 0%Operational Growth 74% 34% 23% 9% 1%

Fx 5% -4% -1% 0% -1%% of Segment Revenue 36% 46% 49% 51% 50% 48%

Januvia,$MM $2,385 $3,324 $4,096 $4,889 $5,447 $5,743Y/Y Growth 24% 39% 23% 19% 11% 5%


US $1,564 $1,825 $2,100 $2,353 $2,600 $2,847Y/Y Growth 11% 17% 15% 12% 11% 9%

% of Segment Revenue 66% 55% 51% 48% 48% 50% Int'l $822 $1,499 $1,997 $2,536 $2,847 $2,896



Janumet, $MM $954 $1,362 $1,635 $1,842 $1,968 $2,003Y/Y Growth 45% 43% 20% 13% 7% 2%


US $576 $712 $846 $973 $1,089 $1,171Y/Y Growth 22% 24% 19% 15% 12% 7%

% of Segment Revenue 60% 52% 52% 53% 55% 58% Int'l $379 $651 $789 $869 $879 $832

Y/Y Growth 103% 72% 21% 10% 1% -5%Operational Growth 67% 25% 11% 1% -4%


Source: Company Reports, BMO Capital Markets.


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Brief Diabetes Backgrounder

One of the Most Attractive Pharmaceutical Markets; Roughly $50 Billion by 2015. Diabetes is a chronic metabolic disease characterized by abnormally high levels of glucose (sugar) in the blood that can damage blood vessels and cause CV disease, as well as damage to the kidneys, eyes and nerves. The two types of diabetes are referred to as insulin dependent (Type-1) and non-insulin dependent (Type-2) diabetes. Insulin is a hormone produced by the beta cells in the pancreas and its primary role is to tightly control blood glucose by facilitating its entry in body’s cells. Without insulin our cells cannot absorb glucose. Type-1 diabetes is typically seen in younger patients and is characterized by lack of sufficient insulin caused by damage to the beta cells. Thus, Type-1 diabetes is frequently treated with synthetic insulin. Type-2 diabetes, also called adult onset diabetes, is often caused by sedentary lifestyle and characterized by the inability of muscle and fat cells to use insulin efficiently. In type-2 diabetes, there is also a steady decline of insulin secretion from beta cells as disease progresses. As such, treatment of Type-2 diabetes depends more on the patient type.

The staggering size and related costs of diabetes make it one of the most attractive

pharmaceutical markets. Diabetes is a global epidemic with roughly 300 million patients worldwide, estimated to rise to 440 million by 2030 (Source: American Diabetes Association). In the US, diabetes affects approximately about 20% of the population over 65, and the estimated annual cost of care exceed $100 billion driven by the disease’s wide range of complications. Diabetes is the third leading cause of death in the US after heart disease and cancer. Given its staggering cost, pharmacoeconomic analyses typically find that most effective diabetes treatment interventions are cost saving, and this in turn often leads to pricing leverage as well as favorable access and reimbursement. These factors make diabetes one of the most attractive global pharmaceutical markets. According to IMS, global spending on diabetes drugs increased in recent years to roughly $35 billion with the 2006-2010 CAGR of roughly 12%. The market is expected to increase to roughly $43 to $48 billion by 2015. Treatments are broadly grouped in three categories: insulin, oral drugs, and the relatively new GLP-1 agonists.

Treatment. Diabetes treatment depends on its type and severity but the ultimate goal is control of blood glucose to minimize long-term complications. The current guidelines for treatment of diabetes recommend lowering blood glucose, as frequently measured by hemoglobin A1c (A1c), to less than 7%. Lowering A1C to below or around 7% has been shown to reduce serious complications. Type-1 diabetes is often treated with various types of rapid, intermediate and long-acting insulin products combined with life style changes. On the other hand, most Type-2 diabetic patients get metformin at diagnosis (see table below for explanation) along with lifestyle interventions. If the Type-2 patient does not achieve or maintain the A1C target, a second oral agent like a sulfonylurea is often added, or perhaps a Glitazone, a DPP-IV inhibitor, a GLP-1 receptor agonist, or insulin in more advanced disease. Data suggest that roughly half of treated patients do not reach their glucose target, thus requiring frequent use of combination therapy. Some of the newer drugs (i.e., other than metformin and Sulfonylureas) can be used alone and in combination, and each class has its own advantages and disadvantages (discussed below). On average each new class of non-insulin agents added to initial therapy (often metformin +/- Sulfonylurea) lowers A1C by an additional 1% (Source: ADA Guidelines). Fixed dose combinations of some newer agents with metformin and Sulfonylureas are available to enhance compliance (e.g., Merck’s Janumet = Januvia + metformin).


Page 13 May 17, 2012

Overall, the treatment approach and even the A1C target itself are often individualized. Factors influencing treatment choice include duration and progression of disease, age/life expectancy, co-morbid conditions, CV disease or related complications, patient preference (adherence history), and cost. Physicians tend to be more aggressive with a young healthy person in their 40s or 50s and try get to an A1c level of even less than 6% if the patient doesn’t get hypoglycemia (dangerously low glucose levels). However, in older patients with advanced diabetes on insulin and at risk of potentially dangerous hypoglycemia, physicians often accept a higher A1C target. Therefore, small differences in A1c reduction between agents seem secondary to the overall suitability of a medication for a particular patient.

DPP-IV Inhibitors: Capitalizing on Avandia’s Misfortunes. Merck’s Januvia was the first DPP-IV inhibitor to receive FDA approval in the US in October, 2006. Janumet, the fixed dose combination of Januvia plus metformin, was launched shortly later in 2007. Fortunately for Merck, shortly after Januvia’s approval, the world’s leading Type-2 diabetes drug at the time, GlaxoSmithKline’s Avandia (rosiglitazone) was linked with significant CV safety issues, which culminated in the FDA significantly restricting its use in 2010 and market withdrawal in Europe. Moreover, in 2008, both Avandia and Actos (i.e., the glitazones) were associated with increased risk of bone fractures. Following the safety issues of glitazones, the FDA took a more conservative stance on approval of future diabetes drugs, such as Novartis’ DPP-IV inhibitor vildagliptin in 2007 and Takeda’s alogliptin in 2009. As a result, Merck had a near three-year monopoly in the US DPP-IV market, until AstraZeneca and BMS’s Onglyza launched in September 2009. During this time, Merck was able to gain significant share from the glitazones to rapidly grow its Januvia/Janumet franchise. Interestingly, the launch of Onglyza, and more recently Tradjenta from Boehringer Ingelheim and Lilly, appear to have re-accelerated the growth of the DPP-IV class and seem to have only modestly slowed down Januvia/Janumet’s growth. Overall, the DPP-IV market is expected to double from 2010-2016 (Source: IMS).


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Exhibit 8. Leading Type-2 Diabetes Treatment Approaches and Related Non-Insulin Drugs

Rx Approach:

Increase pancreatic insulin

Decrease glucose release from liver

Increase sensitivity to insulin

Slow stomach emptying to delay carbohydrate digestion &

absorption

Decrease carbohydrate

absorption from intestines

Drug Class: Sulfonylureas (Su) & Meglitinides (Meg)

Biguanides GlitazonesIncretin mimetics & DPP-IV

inhibitorsAlpha glucosidase

inhibitors

ActionsStimulate pancreatic beta cells to increase insulin secretion

Reduces glucose production & int. absorption; increases insulin action

Improve the sensitivity of muscle and fat cells to insulin

Mimic Amylin or GLP-1 action (i.e. Glucose dep. Insulin secretion), or prevent GLP-1 breakdown by DPP-IV inhibition

Inhibits an enzyme that breaksdown carbs in small intestine

Key Drugs (Top sellers in bold)

Su: Amaryl, DiaBeta, Glucotrol. Meg: Prandin, Starlix

Glucophage (metformin)

Actos and Avandia

GLP-1s: Exenatide (Byetta, Bydureon); Victoza. DPP-IV: Januvia, Galvus, Onglyza, Tradjenta. Amylin analogue: Symlin

Basen (voglibose), Precose (acarbose), Glyset (miglitol)

DosingSU: Oral, QD; Meg: upto 3x/day

Oral, QD Oral, QD

GLP-1s: 1x or 2x daily or weekly injection. DPP-IVs: oral, QD; Symlin: 3 injections /day before meals

Oral, 3x/day before meals

AdvantagesWell tolerated, fast, long acting, lowers CV events/deaths; cheap

No hypoglycemia, no weight gain, lowers CV events; suppresses appetite; can be used in combo; cheap

No liver problems like Rezulin (prior drug), fast, 1st line approval, can use in combo w other oral drugs & insulin. Raise HDL, lower TGs. No hypoglycemia

GLP-1 has broad activity (i.e. slows stomach emptying, liver glucose release, carb absorption, etc). GLP-1s have shown sig. weight loss, DPP-IV's so far no effect on weight

Can be used alone or in combination with a Su; non-systemic drug

Disadvantages

Non glucuse dep insulin secretion inc risk of Hypoglycemia; sulfa allergies (Su); weight gain, dosing (Meg)

Not for pts w kidney disease, caution in pts w liver impairment; GI side effects (diarrhea, abdominal Pain)

Avandia: Inc. risk of heart attack and stroke. Both not for pts w liver disease and heart failure. Both: weight gain, bone fractures, edema; Actos: bladder cancer. Relatively expensive.

GLP-1s: GI side effects (nausea, vomiting, diarrhea), Inj. dosing; DPP-IV's: some inflammation of the pancreas, angioedema, no effect on weight; Symlin: nausea. Relatively expensive.

Not as effective as single Rx; have to add Sul, GI side effects ~75% of pts, dosing

Market Share Comments

Su gradually decling, but still very significant; ~30% of TRx often in combo

Backbone of care & growing, ~47% of US TRx but often in combo

Class declining after Avandia CV safety issues: share down from ~25% in 1Q07 to ~9% in 4Q11

DPP-IV Inhibitors Are The Best Growing Class, Taking Share From Glitazones; GLP-1s growing from a smaller base of ~2% after Victoza's launch

Very small part of the market

Notes: Hypoglycemia = abnormally low and dangerous levels of blood sugar; QD = Once DailyMOA = Mechanism of ActionSource: 2012 ADA Guidelines, Product prescribing information, BMO Capital Markets


Page 15 May 17, 2012

Exhibit 9. US Type-2 Diabetes Market Dynamics: DPP-IV Inhibitors Are the Best Growing New Class, Taking Share From Glitazones

DPP-IVs Are The Best Growing Class in Diabetes Taking Share From Glitazones

0.

2.

4.

6.

8.

10.

12.

14.

16.

Q2 20

06

Q4 20

06

Q2 20

07

Q4 20

07

Q2 20

08

Q4 20

08

Q2 20

09

Q4 20

09

Q2 20

10

Q4 20

10

Q2 20

11

Q4 20

11

TR

x (

Mill

ion

s)/

Qtr

Plain Biguanides (e.g.Metformin)Plain Sulfonylurea

Met + SU Combo

Glitazones (Plain &Combo)DPP-IV's (Plain & Combo)

GLP-1 Agonists

Other

Diabetes Market TRx Share

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Q2 20

06

Q4 20

06

Q2 20

07

Q4 20

07

Q2 20

08

Q4 20

08

Q2 20

09

Q4 20

09

Q2 20

10

Q4 20

10

Q2 20

11

Q4 20

11

Plain Biguanides (e.g.Metformin)Plain Sulfonylurea

Met + SU Combo

Glitazones (Plain & Combo)

DPP-IV's (Plain & Combo)

GLP-1 Agonists

Other

Source: IMS Data, BMO Capital Markets


Page 16 May 17, 2012

We believe the Januvia franchise is poised for continued growth through 2015 because:

1. The DPP-IV class as a whole is rapidly growing and expected to roughly double by

2016. This is owing to not only a continued shift away from glitazones, but also introduction of newer drugs that will likely grow the market as Onglyza did following its 2009 US launch.

2. Merck’s combination drugs should further establish Januvia (sitagliptin) in Type-2

diabetes. Diabetes patients are often on multiple treatments for not only glucose control, but also lipids and hypertension. As such, combination pills that improve patient compliance and provide physicians sufficient dosing flexibility should perform well (e.g., Janumet). Merck is a leader in fixed combinations of commonly used diabetes drugs. Building on Janumet’s success, Merck recently got FDA approval for Janumet XR (extended-release), and Juvisync, which combines Januvia with generic Zocor (simvastatin). Recall, cholesterol management is one of the key components of diabetes care, and simvastatin has been extensively studied and frequently used in diabetes. A combination of Januvia plus generic Lipitor (atorvastatin), called MK431E, is now in phase 3, and Merck anticipates filing in the US in 2014.

3. The ongoing TECOS outcomes trial could provide an additional boost. The Trial to Evaluate Cardiovascular Outcomes with Sitagliptin (TECOS) is ongoing with roughly 14,000 patients. Merck’s ad-hoc analyses of smaller trials suggest there is a potential for a cardiovascular benefit with sitagliptin (probably shared with other DPP-IV). Although, the trial is very likely to rule out CV safety issues with sitagliptin, we remain cautious about a demonstrated CV benefit. Nonetheless, this would provide a significant market boost for the sitagliptin franchise, and represents an upside to our forecasts. According to clinicaltrials.gov, the estimated study completion date is December 2014.

4. Merck has an exciting once-weekly DPP-IV inhibitor in late-stage development. MK3102 is currently in phase 2b, and we anticipate initiation of phase 3 in 2012. Early pharmacodynamics data strongly suggest that this once weekly drug will have efficacy comparable to Januvia. It is still too early for us to include it in our forecasts, but we acknowledge that it could be a game changer in the growing DPP-IV market.

Our forecast for the Januvia Franchise is based on overall demand for sitagliptin.

We base our Januvia franchise forecasts on the current growth trends of Januvia and Janumet, which reflect underlying demand for sitagliptin containing regimens. We believe all the combination products will have roughly the similar economic impact for Merck. This is based on the identical current pricing of these drugs and the nominal cost of generic components in the combination pills (e.g. Janumet and Juvisync). Moreover, we believe that most patients who receive a Januvia containing combination drug would have probably been treated with Januvia or Janumet plus the other drugs (such as statins) as a multi-pill regimen. Therefore, we forecast Januvia and Janumet based on current market dynamics, with the assumption that the franchise sales include the newer combination drugs. Finally, we do not anticipate a rapid shift in these dynamics as a result of generic glitazones or once weekly GLP-1 analogues. This is based on the ongoing safety concerns with glitazones and lack of material impact on DPP-IVs following the launch of GLP-1 analogues. Although GLP-1s are more effective and have better weight loss (e.g. Victoza), they are all injectable and have their own unique side effects (nausea, other GI), which make them less appealing to primary care physicians who treat the vast majority of diabetics.


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Infectious Disease Segment: Slowing Growth

The Infections Disease segment accounts for roughly 10% of Merck’s revenues, and has been performing reasonably well with y/y growth of 8% and 7% in 2010 and 2011, respectively. Roughly two-thirds of the segment sales come from international sales, where 2011 performance was boosted with favorable foreign exchange. We expect adverse foreign exchange to slow growth in 2012. Moreover, as we discuss below, the key drivers in this segment will be facing significant competition, which should also dampen growth. The focus is on Merck’s HIV and HCV therapies, as well as its innovative antimicrobials.

Exhibit 10. Our Infectious Disease Segment Forecast: We Expect Slowing Growth (Note: As of 1Q12, Crixivan & Rebetol sales were no longer individually reported by Merck, most likely owing to declining sales)

2010A 2011A 2012E 2013E 2014E 2015E

Infectious Disease $4,350 $4,638 $4,529 $4,712 $4,701 $4,603Y/Y Growth 8% 7% -2% 4% 0% -2%

Operational Growth 3% 0% 4% 0% -1%Fx 4% -3% 0% 0% -

US $1,371 $1,521 $1,794 $1,948 $1,949 $1,9271%

Y/Y Growth 11% 18% 9% 0% -1%% of Segment Revenue 32% 33% 40% 41% 41% 42%

Int'l $2,980 $3,117 $2,734 $2,765 $2,752 $2,677Y/Y Growth 5% -12% 1% 0% -3%

Operational Growth -1% -8% 2% -1% -1%Fx 5% -4% -1% 0% -1%

% of Segment Revenue 68% 67% 60% 59% 59% 58% Source: Company Reports, BMO Capital Markets.

2010A 2011A 2012E 2013E 2014E 2015E

Infectious Disease 4,350 4,638 4,529 4,712 4,701 4,603Isentress 1,090 1,359 1,509 1,622 1,659 1,599PegIntron 737 658 588 536 489 442Cancidas 611 640 584 539 500 471Primaxin 610 515 345 271 224 183Invanz 362 407 448 496 540 576Avelox 316 321 267 265 146 24Noxafil 198 231 258 300 346 394MK-3415A 0 0 0 0 0 75Victrelis 0 139 531 683 796 840



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Infectious Disease Segment

Isentress: We Expect Slowing Growth Owing to New Competitors

Isentress, is the largest drug in Merck’s Infections Disease Segment, and has served as its primary value driver. In 2011, Isentress sales grew 25% to $1.4, accounting for about 4% of Merck’s revenues. Isentress is an integrase inhibitor that works by inhibiting the insertion of HIV DNA into human DNA by the integrase enzyme; thus, limiting the ability of the HIV virus to replicate and infect new cells.

Brief Backgrounder on HIV Treatment

The treatment of HIV can seem complex as it usually involves combination therapy. Each drug component in a typical combination has a specific target, and the data have consistently shown that combination therapy is superior to monotherapy in controlling HIV and slowing or preventing progression to AIDS. There are more than 20 approved HIV drugs in 6 classes available to physicians to design combination regimens (see below). The selection of a regimen is often individualized based on efficacy, toxicity, pill burden, dosing frequency, drug-drug interaction potential, resistance-testing results, and co-morbid conditions. There are a number of fixed dose single pill combinations available that have made treatment more convenient, which many have argued has increased compliance and therefore disease management.

The preferred HIV regimens. Our discussion below is a simplified version of the current DHHS guidelines, which are widely adopted in clinical practice and drive re-imbursement decisions. The backbone of the most widely used combinations is a double NRTI combination, and the preferred option is Gilead’s Truvada (tenofovir + emtricitabine), which is available as a single pill. Truvada is often combined with other classes of drugs in the leading regimens.

The preferred HIV regimens in treatment naïve patients based on DHHS guidelines are:

• Sustiva + Truvada: Available as a single pill Atripla, the leading treatment option.

• Norvir (ritonavir)-boosted Reyataz + Truvada: Not available as a single pill, must be taken with food, and must be boosted with another drug to increase activity.

• Norvir boosted Prezista (darunavir) + Truvada: Another PI with an overall inferior profile to Reyataz that must also be boosted and taken with food.

• Isentress + Truvada: Isentress is the first and only integrase inhibitor so far with encouraging results; however, others are close to market.


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Exhibit 11. Overview of Leading HIV Drugs

Class Drug Company Advantages Disadvantages

NNRTISustiva

(efavirenz)BMS, Gilead

• Virologic responses equivalent or superior to all comparators to date• Once-daily dosing• Coformulated with Truvada as a preferred initial regimen

• Neuropsychiatric side effects• Birth defects (avoid in case of pregnancy)• Dyslipidemia (lipid effects) • Greater risk of resistance than with PIs

NNRTIEdurant

(rilpivirine)Gilead,

J&J

• Once-daily dosing• Coformulated with Truvada• Compared with Sustiva:- Fewer discontinuations for CNSadverse effects- Fewer lipid effects- Fewer rashes

• More failures in patients high viral load pts vs. Sustiva• More mutations at failure vs. Sustiva• Must take with meal• Absorption depends on lower gastric pH. • Contraindicated with PPIs• Associated depression reported

PIReyataz

(atazanavir) + booster

BMS

• Fewer adverse effects on lipids than other PIs• Once-daily dosing• Low pill burden (two pills per day)• Good GI tolerability• PI's in general have higher barrier to resistance. Reyataz signature mutation (I50L) not associated with broad PI cross resistance.

• Some jaundice • Kidney stones• Skin rash• Must take with food• Absorption depends on food and low gastric pH.

INSTIIsentress

(raltegravir)Merck

• Virologic response noninferior to Sustiva• Fewer drug-related adverse events and lipid changes than Sustiva• No food effect• Fewer drug-drug interactions than PI- or NNRTI-based regimens

• Less long-term experience in ART-naive patients than with boosted PI- orNNRTI-based regimens• Twice-daily dosing• Lower genetic barrier to resistance than with boosted PI-based regimens• No data with NRTIs other than TDF/FTC in ART-naive patients

Notes: NRTI = nucleoside/nucleotide reverse transcriptase inhibitors, NNTRI = non-nucleoside reverse transcriptase inhibitors, PI = protease inhibitors, INSTI = integrase strand transfer inhibitors. Source: Summarized from Guidelines for the use of antiretroviral agents in HIV-1-infected adults and adolescents by DHHS published October 14, 2011; BMO Capital Markets

Emerging Competitors for Isentress

There are many other drugs in late-stage development in HIV hoping to capture some of the success of the current leading drugs. Gilead’s fixed-dose Quad regimen is one of the most anticipated. The combination consists of Elvitegravir, Cobicistat, and Truvada. Gilead's Elvitegravir is an HIV integrase inhibitor similar to Isentress, and Cobicistat (an inhibitor of Cytochrome P450 3A CYP3A) is basically a booster that allows once daily dosing for Elvitegravir. Overall, Quad is non-inferior to both Atripla and boosted Reyataz, but has a better lipid profile. Moreover, Elvitegravir is non-inferior to Merck’s Isentress, with comparable discontinuations. As mentioned Isentress is dosed twice daily, and Quad is once-daily, but Isentress does not have to be boosted as elvitegravir does. Quad’s US PDUFA date is August 27, 2012; approval is widely expected followed by launch probably in late 3Q12.

GSK’s phase 3 integrase inhibitor is Dolutegravir and its differentiating feature is that it can be also be dosed once daily but it does not require boosting like Elvitegravir. Dolutegravir is currently in phase 3 (SAILING, SPRING-2 and SINGLE trials) and could reach the market by 2014. Similar to Gilead’s Quad, Dolutegravir is also being developed as an oral fixed-dose combination tablet comprising the reverse transcriptase inhibitors lamivudine and abacavir plus


Page 20 May 17, 2012

Dolutegravir. Overall, Dolutegravir should be a strong competitor to both Isentress and Quad given its low milligram dosing and activity in treating resistant HIV strains; however, we’ll learn a lot more once the phase 3 results are available.

Our Isentress Forecast: We Expect Slowing Growth Owing to Competitors

Since Isentress was the first-in-class and the only integrase inhibitor approved so far treatment of HIV, Merck hopes to leverage its long-term efficacy and safety vs. the new comers. In the US, Isentress has about 14% patient share according to Merck. We expect growth to slow down in late 2012 and 2014, owing to market entrance of Gilead’s Quad and GSK’s Dolutegravir.

Exhibit 12. Our Isentress Forecast

2010A 2011A 2012E 2013E 2014E 2015EIsentress $1,090 $1,359 $1,509 $1,622 $1,659 $1,599

Y/Y Growth 45% 25% 11% 8% 2% -4%Operational Growth 22% 13% 8% 2% -3%

Fx 3% -2% 0% 0% -1% US $554 $682 $806 $904 $962 $957

Y/Y Growth 23% 18% 12% 6% -1%% of Product Revenue 51% 50% 53% 56% 58% 60%

Int'l $536 $677 $702 $718 $697 $642Y/Y Growth 26% 4% 2% -3% -8%

Operational Growth 21% 8% 3% -3% -7%Fx 5% -4% -1% 0% -1%

% of Product Revenue 49% 50% 47% 44% 42% 40% Source: Company Reports, BMO Capital Markets.


Page 21 May 17, 2012


Hep-C Franchise

Merck’s HCV franchise primarily consists of three protease inhibitors (PIs): Victrelis (approved in 2011), Vaniprevir (MK-7009, phase 3 in Japan), and MK-5172 (phase 2b). As we will discuss below, we have modest expectations for Victrelis given the rapidly changing competitive environment. Vaniprevir seems like a niche product, but MK-5172 has significant potential in being included in the most sought after prize in HCV treatment: an all-oral regimen. Finally, we expect Merck’s PegIntron will continue to gradually decline in sales as more physicians and patients wait for interferon free treatment options in HCV (likely by 2014-2015).

Brief Backgrounder on Hep-C

In recent years, the Hepatitis-C (Hep-C) market has been one of the most dynamic markets in biopharmaceuticals. From a scientific perspective, the development and recent approvals of Merck’s Victrelis (boceprevir) and Vertex’ Incivek (telaprevir) changed the treatment paradigm. From a financial perspective, Incivek made Vertex a multi-billion dollar company even before having a single drug approved in the market. We saw a similar rise with Pharmasset Inc. prior to being acquired by Gilead in November 2011 for $11.2 billion, and with Inhibitex when it was acquired by BMS in January 2012 for $2.5 billion, a 163% premium to its last closing price.

Hepatitis C virus (HCV) currently infects over 180 million individuals worldwide (3% prevalence) and is the leading cause of liver disease. There is considerable geographic disparity in HCV prevalence. In the US, an estimated 4 to 5.2 million patients are infected with HCV. In Western Europe, HCV prevalence ranges from 0.4 to 3% of the population, but it is higher in Eastern Europe and the Middle East, including up to 13% in Egypt. Intravenous drug use, poorly screened blood transfusions, and sexual transmission are common methods of HCV infection. Therefore, there are a significant number of patients with co-infections of HCV and HIV. Infection with HCV tends to be chronic 75%-85% of the time and chronic HCV is associated with significantly increased risk for chronic liver disease, cirrhosis, and hepatocellular carcinoma (type of liver cancer). HCV can result in death in 1%-5% of its patients and is also the leading cause of liver transplants in the US. The infection is often asymptomatic until it inflicts significant damage to the liver; thus, HCV has often been referred to as a silent killer since most patients have no knowledge of their infection.

In Hep-C, HCV Genotype matters. At the moment, six HCV genotypes and a large number of subtypes (a to f) are known and not surprisingly, their prevalence varies by geography. Genotype-1 (subtypes 1a and 1b) is the most prevalent genotype worldwide; genotype 1a is more common in the US while genotype 1b is highly prevalent in Japan and Europe. Genotype-2 is often observed in Mediterranean region. Genotype-3a is common in the India while Genotype-4 has usually been found in Egypt and Africa but its prevalence is increasing in European intravenous drug users. Finally genotypes-5 HCV are relative rare, and genotypes 6 are mainly observed in south China. As we will discuss below, the HCV genotype is often an important predictor of response to treatment.


Page 22 May 17, 2012

Unlike most other chronic viral infections, HCV is curable. The goal is HCV treatment is to achieve sustained virologic response, or SVR, which is defined as undetectable HCV RNA 24 weeks after completion of treatment. The former standard treatment was pegylated interferon and ribavirin (Peg/Riba); however, it is poorly tolerated and has mixed efficacy across the major HCV genotypes: SVR rate of about 45% in genotype-1 patients treated for 48 weeks, and 75%-85% in genotypes 2 or 3 when treated for 24 weeks. Treatment response for genotype 4 patients is often in between the above ranges.

Other factors that determine response to treatment include: 1) serum concentration of HCV RNA at the time of initiation of antiviral therapy, where patients with low baseline HCV RNA levels, usually defined as <800,000 IU/ml, tend to respond better; 2) age, 3) race (African- Americans have lower response rate than Caucasians), 4) gender, 5) obesity, 6) degree of liver disease (hepatic fibrosis), and 7) immuno-depression (e.g. in patients co-infected with HIV). Therefore, SVR comparisons between different trials must, as always, be conducted

cautiously.

Much of the recent research by various companies has been focused on eliminating interferon from the regimen because of its various side effects including flulike symptoms and depression, which can be difficult to endure for up to 48 weeks. Similarly, ribavirin is associated with increased risk of anemia and birth defects, and it is taken twice daily. The side effects associated with Peg/Riba are the primary reason many patients either don’t start or discontinue HCV treatment. Obviously a successful interferon and/or ribavirin-free all oral treatment would gain considerable share of the large HCV market.

Exhibit 24. Commonly Used Acronyms and Definitions in HCV

Response Acronym

Full Term Definition & Importance

SVR Sustained Virologic ResponseUndetectable HCV-RNA, 24 weeks after the completion of therapy by a sensitive HCV-RNA assay

EVR Early Virologic ResponseRapid initial decline in viral level: 99% or greater decrease in HCV RNA at 12 weeks of antiviral therapy. If HCV RNA undetectable, 84% probability of SVR.

cEVR complete EVRHCV RNA undetectable at 12 weeks; cEVR has a positive predictive value of 72% for SVR

pEVR partial EVR99% decrease in HCV RNA level at 12 weeks, but still detectable; 21% predictive value of SVR

RVR Rapid Viral ResponseA negative qualitative PCR assay at week 4; about 90% in mono- infected patients and 82% in coinfected patients achieve SVR.

eRVR extended RVRUndetectable HCV RNA at both week 4 and week 12 of therapy

= <2 log10 reduction in HCV RNA at Week 12 during a prior Peg/Riba therapy; most difficult to treat.

≥2 log10 reduction in HCV RNA at Week 12, but not achieving undetectable HCV RNA at the end of a prior Peg/Riba therapy.

Having undetectable HCV RNA at the end of a prior Peg/Riba regimen, but detectable HCV RNA within 24 weeks of follow-up

Source: Stanislas P. et al. Contributions to Nephrology 2012; FDA Draft Guidance for Industry (2010)

Various Definitions for HCV Patients Previously Treated with Peg/Riba

Null responder

Partial Responder

Relapser


Page 23 May 17, 2012

Infectious Disease Segment: Hep-C Franchise

Victrelis: Becoming More Competitive in a Rapidly Evolving Market

Merck’s Victrelis (boceprevir) was approved in both the US and EU in May 2011 for the treatment of chronic hepatitis-C (Hep-C), and it was followed shortly by Vertex’s Incivek (telaprevir). These drugs work by targeting the Hep-C virus (HCV) non-structural (NS) 3/4A protease, a key protein for HCV replication. Both protease inhibitors (PIs) have clearly demonstrated a 20%-30% increase in the SVR rate of the commercially important genotype 1- infected patients. However, there are important differences between them that has led to considerably greater market share and sales for Vertex’ Incivek. In summary, Incivek seems more efficacious, more convenient (less pills and shorter treatment duration with simpler algorithms) and is associated with fewer cases of anemia. However, Incivek is associated with more rashes, which can be severe in about 4% of patients. These differences have allowed Vertex to price Incivek at a significant premium to Victrelis, which as many argue is justified based on its shorter duration of therapy, higher EVR rate, and better anemia data. Although both treatments have response guided approaches, the Incivek regimen is simpler and shorter.

Victrelis is becoming more competitive in null responders, but…

Merck is trying to make Victrelis more competitive with Incivek by first focusing on null responders. Recent SVR data from Merck’s PROVIDE study, which evaluated Victrelis plus Peg/Riba showed SVR of 38% (16/42), which is similar to that seen with Incivek. To improve on these results, Merck is conducting a phase IIa study of Victrelis + Mericitabine (NS5B polymerase inhibitor, Roche Pharma) plus Peg/Riba in null responders. The goal is achieving SVR with 24 or 48 weeks of therapy.

Mericitabine (RG7128) is the most advanced NS5B nucleotide inhibitor (commonly called “nuc”) in clinical testing to date. This class of agents is among the most sought after in HCV because they bind at the active site of a key enzyme needed for viral replication. The active site of HCV RNA polymerase tends to be highly conserved among HCV genotypes, suggesting these drugs could have broad activity. A phase 1 trial (INFORM-1), which combined Mericitabine with RG7227, another NS3 protease inhibitor, showed encouraging results in a few null responders. Therefore, we are optimistic about its combination with Victrelis; however given the combination of two active drugs and Peg/Riba, we have concerns about the tolerability of this regimen.

…the HCV treatment landscape is rapidly changing; the goal is eliminating interferon,

and perhaps ribavirin, and we’re not sure if Victrelis fits this paradigm.

There are several new potent HCV treatments that have entered clinical trials that seem to have a superior clinical profile to Victrelis. At the recent European Association for the Study of Liver Diseases (EASL), BMS and Gilead reported impressive results from their open-label phase 2a trial (AI-444040) evaluating the combination of Daclatasvir and GS-7977 in 88 treatment naïve HCV patients. The trial showed that the all oral, interferon-free regimen of Daclatasvir plus GS-7977 (with or without ribavirin) administered for 24 weeks achieved SVR4 in 100% of genotype-1 patients and 40/44 (91%) of genotype 2/3 patients. Notably, the addition of ribavirin contributed adverse effects but had no effect on virologic response. The study was amended in November 2011 to also include 12-week treatment arms, and that data is highly anticipated by


Page 24 May 17, 2012

the end of 2012, likely at American Association for the Study of Liver Diseases (AASLD) in November. Other all oral regimens, such as Abbott's ABT-072 and ABT-333 (non-nucleoside polymerase inhibitors) plus Norvir and ribavirin, have shown SVR-12 rates of 93%-95% in treatment naïve HCV genotype-1 patients, and 47% in non-responders.

Our Victrelis Forecast: Peak Sales of $840 Million

Overall, we have relatively modest expectations for Victrelis even though it is becoming more competitive with new data. Victrelis has been approved in more than 40 countries and is completing registration in emerging markets (Asia, Russia). We expect Victrelis to grow in the near term primarily owing to its first mover advantage in many international markets. However, newer and more effective treatment options are on the way, and as such, we believe Victrelis will face significant competitive pressure starting in 2014-2015.

Exhibit 13. Our Victrelis Forecast

2010A 2011A 2012E 2013E 2014E 2015EVictrelis $0 $139 $531 $683 $796 $840

Y/Y Growth 282% 29% 16% 6%Operational Growth 284% 29% 16% 6%

Fx -2% 0% 0% -1% US $79 $292 $352 $394 $423

Y/Y Growth 270% 20% 12% 7%% of Product Revenue 57% 55% 51% 49% 50%

Int'l $60 $239 $332 $402 $417Y/Y Growth 298% 39% 21% 4%

Operational Growth 303% 39% 21% 5%Fx -4% -1% 0% -1%

% of Product Revenue 43% 45% 49% 51% 50%

Source: Company Reports, BMO Capital Markets, Pharmaceuticals Analyst: Alex Arfaei, 212.885.4033

Vaniprevir (MK-7009): Merck’s Second PI, an Improvement

Vaniprevir is an oral, twice daily PI, in phase-3 development in Japan. In a phase 2 study in Japanese genotype 1 patients (likely 1b), Vaniprevir plus Peg/Riba showed good RVR of 95% vs. 20% for Peg/Riba. The key differentiator for this PI is that unlike Victrelis, it is BID and seems to be associated with fewer cases of anemia. However, patients receiving the 600mg dose of Vaniprevir reported higher rates of vomiting, constipation, nausea, and diarrhea. Based on the results, the twice-daily 300 mg dose of Vaniprevir was selected as the Phase 3 dose in Japanese patients. A Japanese filing is expected in 2014 and as such we don’t expect approval until 2015. Although, Vaniprevir is certainly an active drug, it doesn’t stand out too much among other late-stage HCV drugs in development, which also seem to be better tolerated. As such we don’t include it in our forecast prior to phase 3 data.


Page 25 May 17, 2012

Infectious Disease Segment: Hep-C Franchise

MK-5172: Merck’s Third and Most Exciting PI

MK-5172 is a promising, first pan-genotypic NS3/4A PI in development for Hep-C. The drug is very potent, as demonstrated by its over 5-log fold decrease in HCV RNA after 7 days of monotherapy. Moreover, it works in patients infected either genotype 1 or genotype 3, and preclinical data support activity against genotypes 2, 4, 5, and 6. Importantly, the drug has a high barrier to resistance and retains activity against mutated HCV that lead to failure with the current leading PIs (Incivek and Victrelis). MK-5172 will also be far more convenient to take than Incivek and Victrelis because it is taken once a day for 12 weeks and has no food effect. MK-5172 is currently in phase 2b testing. We acknowledge that its pan-genotypic activity and convenient dosing regimen make MK-5172 an attractive potential component for an all oral HCV treatment. We believe Merck will likely partner this drug, perhaps with Roche, to explore its potential in an all-oral regimen.

PegIntron

Exhibit 14. Our PegIntron Forecast: We Expect Declining Sales as More Patients and

Physicians Wait for Interferon-free HCV Treatment Regimens

2010A 2011A 2012E 2013E 2014E 2015EPegIntron $737 $658 $588 $536 $489 $442

Y/Y Growth -13% -11% -11% -9% -9% -10%Operational Growth -15% -7% -8% -9% -9%

Fx 5% -4% -1% 0% -1% US $98 $72 $80 $72 $64 $56

Y/Y Growth -27% 11% -10% -11% -13%% of Segment Revenue 13% 11% 14% 13% 13% 13%

Int'l $639 $586 $508 $464 $425 $386Y/Y Growth -8% -13% -9% -8% -9%

Operational Growth -14% -9% -8% -9% -8%Fx 5% -4% -1% 0% -1%



Page 26 May 17, 2012

Infectious Diseases Segment: Innovative Antimicrobials

MK-3415A: A Promising Novel Approach to Address a Major Infection; Probable Launch in 2015

MK-3415A is a combination of fully human monoclonal Antibodies (mAbs) against two toxins (A and B) produced by the bacterium Clostridium difficile. The incidence of Clostridium difficile infection (CDI) has more than doubled during the past 15 years, making it the most common bacterial cause of diarrhea in the US, particularly in hospitals and nursing homes. Importantly, the increased incidence is also causing increased mortality that is in part related more virulent strains that are more difficult to manage, and host vulnerability as many patients tend to be old and immuno-compromised. Current treatments for CDI are widely considered inadequate as CDI often recurs and no drugs are currently approved for prevention of recurrence.

In a phase 2b trial, treatment with MK-3515A lowered the risk of recurrent infection by 72% (25% with placebo vs. 7% w the MK-3415A; p < 0.001). Importantly, patients with multiple recurrences were more likely to benefit, with a relative reduction of 82% in the recurrence rate, as compared with the placebo group. The adverse-event profile of MK-3515A was similar to that of placebo. “The trial results are impressive.” (Kyne, L. NEJM Editorial, 2010).

Merck has already begun the phase 3 pivotal program for MK-3451A and anticipates filing the drug in 2014. Since MK-3415A will need to be injected, it will likely be more useful in the hospital setting. Moreover, we note that there are a number of other CDI treatment options in clinical development. We currently include $75 million for the drug in our 2015 forecasts, and look forward to the phase 3 data in 2H13/1H14.


Page 27 May 17, 2012

Respiratory and Immunology Segment: Will Lose ~50% by 2015

With revenues of $11.2 billion in 2011, Respiratory and Immunology is Merck’s largest segment accounting for 30% of pharmaceutical and 23% of overall revenues. The segment has also been a key driver, accounting for 36% of Merck’s y/y revenue growth in 2011, second to the diabetes franchise. About 60% of sales come from international markets, and as such we estimate that roughly 3% of the segment’s 7% y/y growth in 2011 came from favorable foreign exchange, which we expect should reverse in 2012.

By 2015 this segment will lose about 50% of its 2011 revenues, mostly owing to Singulair

loss of exclusivity in the US and Europe.

About 90% of current US sales are from Singulair and Nasonex, which will both lose exclusivity in 2012 and 2014, respectively. (Nasonex may keep exclusivity until 2018 owing to other patents). Therefore, by 2015 most of the segment’s current US revenues will likely be gone. In international markets, this segment has a new base after relinquishing about 30% of the Remicade and Simponi sales to J&J in 2011 per a settlement. However, international sales will also be under pressure as Singulair loses exclusivity in Europe on February 2013, and the Remicade/Simponi franchise faces intensifying competition.

Exhibit 15. We Forecast Merck’s Respiratory and Immunology Segment Will Lose ~50% of

Its 2011 Revenues by 2015 With Little Contribution From the Pipeline

2010A 2011A 2012E 2013E 2014E 2015E

Respiratory and Immunology $10,467 $11,208 $9,127 $6,220 $5,788 $5,526Y/Y Growth 5% 7% -19% -32% -7% -5%

Operational Growth 4% -16% -31% -7% -3%Fx 3% -2% 0% 0% -1%

US $4,467 $4,763 $3,489 $945 $491 $284Y/Y Growth 7% -27% -73% -48% -42%

% of Segment Revenue 43% 42% 38% 15% 8% 5% Int'l $6,000 $6,444 $5,638 $5,274 $5,297 $5,242

Y/Y Growth 7% -13% -6% 0% -1%Operational Growth 2% -8% -6% 0% 0%



2010A 2011A 2012E 2013E 2014E 2015E

Respiratory and Immunology 10,467 11,208 9,127 6,220 5,788 5,526Singulair 4,987 5,479 4,145 1,264 1,138 1,124

Remicade 2,714 2,667 2,156 2,250 2,327 2,309

Nasonex 1,220 1,287 1,278 1,266 928 695

Clarinex 624 621 450 277 233 193

Arcoxia 399 432 412 407 401 389

Simponi 97 264 334 409 469 496

Asmanex 208 206 187 173 74 35

Proventil 210 155 0 0 0 0

Dulera 8 97 165 174 179 184

Allergy Immunotherapies (AITs) - - - - 38 100 Source: Company Reports, BMO Capital Markets.


Page 28 May 17, 2012

Respiratory and Immunology Segment

Singulair

Merck’s current top drug is Singulair, for the chronic treatment of asthma and relief of allergy symptoms. Singulair has recently accounted for nearly half of this segment, most of its growth, and 11% of Merck’s overall revenues. Singulair will lose patent expiration in the US in August 2012 and EU in February 2013, and sales are expected to decline rapidly. Merck has been taking fairly aggressive price increases in the US prior to Singulair’s patent expiration in August 2012. However, Singulair should remain a $1 billion-plus drug for Merck owing to sales from Japan and emerging markets, which were roughly $1.1 billion in 2011 and expected to grow. We forecast sales of $1.1-$1.3 billion for Singulair between 2013 and 2015 prior to its Japan patent expiration in 2016. Foreign exchange and Japan price cuts are some of the headwinds facing Singulair in 2012.

Exhibit 16. Our Singulair Forecast: Should Remain a $1 Billion+ Drug For Merck After US

Patent Expiration in 2012 2010A 2011A 2012E 2013E 2014E 2015E

Singulair $4,987 $5,479 $4,145 $1,264 $1,138 $1,124Y/Y Growth 7% 10% -24% -70% -10% -1%

Operational Growth 8% -23% -69% -10% 0%Fx 2% -1% 0% 0% -

US $3,219 $3,537 $2,443 $48 $0 $0Y/Y Growth 10% -31% -98% -100%

% of Product Revenue 65% 65% 59% 4% 0% 0% Int'l $1,768 $1,942 $1,703 $1,216 $1,138 $1,124

Y/Y Growth 10% -12% -29% -6% -1%Operational Growth 4% -8% -28% -7% 0%

Fx 5% -4% -1% 0% -1%% of Product Revenue 35% 35% 41% 96% 100% 100%

1%

Source: company reports, BMO Capital Markets.

Remicade & Simponi

Remicade in autoimmune inflammatory diseases has accounted for about 25% of segment sales and 6% of Merck’s revenues. However, its contribution will decline owing not only owing to Merck relinquishing about 30% of the sales to J&J starting in July 2011, but also other headwinds including probable entry of Pfizer’s oral treatment option, Tofacitinib, in 2H12/1H13 and probable biosimilars in Europe by 2015. Remicade’s next generation drug, Simponi, is still in its launch phase and should grow well, but as we discuss below, it will also face similar headwinds.


Page 29 May 17, 2012

Brief Backgrounder on RA

Rheumatoid arthritis (RA) is a chronic, inflammatory, systemic autoimmune disorder, which means the body's immune system mistakenly attacks its own healthy tissue. The average prevalence of RA is roughly 1% of adults, and it is more common among middle aged women. The disease has a chronic course in more than 75% of patients but can be aggressively severe and crippling in as many as 15% of patients. RA is a costly disease. Up to 30% of RA patients become permanently work disabled within the first 2-3 years of disease.

There is no cure for RA but there are treatments that considerably slow the progression of disease. Therefore, the current medical consensus advocates aggressive early treatment by suppressing the inflammation of RA with DMARDs (disease-modifying anti-rheumatic drugs) with increased recent focus on combination therapy. Methotrexate (MTX) is the most commonly used DMARD and considered first-line therapy with studies showing pain, swelling and functional improvements. However, only about 30% of patients respond to first-line MTX treatment, the rest will need treatment with other agents such as biologics. Patients are typically treated with TNF alpha inhibitors as second-line therapy, but again these agents only work in one-third to half of the cases. Given the significant costs of RA, biopharma companies have considerable pricing leverage for their biologics, making RA one of the largest ($20 billion-plus) biopharma markets.

In Mid-2011, Merck Relinquished ~30% of Remicade & Simponi Sales to J&J

In 2009, Merck announced plans to acquire Schering-Plough and J&J decided to take legal action over the combined company's rights to sell Remicade and its next generation drug, Simponi, outside the US. Following a recent settlement, effective July 1, 2011, Merck retained exclusive marketing rights for Remicade and Simponi throughout Europe, Russia, and Turkey; which represented roughly 70% of Merck’s 2010 reported revenue of $2.8 billion from the two drugs. However, Merck relinquished marketing rights in territories including Canada, Central and South America, the Middle East, Africa, and Asia Pacific, which in turn represented roughly 30% of sales. (Mitsubishi Tanabe Pharma continues to have distribution rights, in Japan). Moreover, beginning July 1, 2011, all profit derived from Merck’s exclusive distribution of the two products in its retained territories will be equally divided between Merck and J&J whereas the prior split was 58%/42% favoring Merck but on a sliding scale, which would have eventually reached 50/50 in 2014. Merck also paid J&J a one-time $500 million payment in April 2011.

Remicade

Remicade (Infliximab) is a humanized TNF mAb that was first launched by J&J in 1998 to treat Crohn’s disease (CD) and was later approved in combination with Methotrexate for the treatment of RA in the US (1999) and Europe (2000). Schering-Plough (now Merck) held exclusive rights outside the US. Later in 2004, Remicade received approval for first-line treatment of moderate to severe RA. Similar to Enbrel and Humira, Remicade’s label has expanded considerably to include other related diseases such as plaque psoriasis (Pso), ankylosing spondylitis (AS), and psoriatic arthritis (PsA). Remicade is administered intravenously (3 mg/kg) for an induction regimen at 0, 2, and 6 weeks, followed by a maintenance regimen of every 4 or 8 weeks thereafter. Although, Remicade’s maintenance


Page 30 May 17, 2012

regimen of once every 4 or 8 weeks is less frequent than Enbrel's self-subcutaneous injection once or twice weekly and Humira’s subcutaneous injection once every second week, Remicade has to be administered by infusion over a period of at least two hours. Therefore, Humira remains the most convenient choice among the top three anti-TNFs.

Remicade Performance and Forecast

In recent quarters, Remicade has demonstrated strong y/y growth driven largely by its leading share in its gastrointestinal indications (UC and Crohn's disease). In CD, Remicade primarily competes with Abbott’s Humira and more recently UCB’s Cimzia. Cimzia was the first biologic administered by monthly subcutaneous injection as a treatment for CD, and given its relatively cheaper cost and lower cost of administration, Cimzia should establish itself well in the CD market. Notably, Enbrel is not indicated for CD, and primarily competes with Remicade in RA, Pso, PsA, and AS. However, J&J’s Stelara (IL-12/23) is taking share from TNFs after demonstrating superior efficacy over Enbrel in a head to head study in moderate to severe Pso. In RA, PsA and AS, Merck and J&J are also focusing on Remicade’s follow-on drug, Simponi.

We expect continued growth for Remicade in the ex-US retained territories, driven by its GI indications until 2015 when the European patent expires. However, continued austerity measures and pricing pressure will be headwinds for Remicade, particularly since it is more expensive by virtue of its IV infusion method of administration. There is a high probability for Remicade biosimilars in Europe given the relatively clearer path to market. In November 2010 Nippon Kayaku and Celltrion signed an agreement to develop and commercialize biosimilar versions of Remicade in Japan. The RA and related autoimmune market is also becoming increasingly crowded with oral options, such as Pfizer’s tofacitinib expected in 2H12/early 2013. We believe tofacitinib will likely be priced at a discount relative to the TNF’s, and should therefore garner significant share.

Exhibit 17. Our Remicade Forecast: 2012 Sales Lower Per Impact of J&J Deal

2010A 2011A 2012E 2013E 2014E 2015ERemicade $2,714 $2,667 $2,156 $2,250 $2,327 $2,309

Y/Y Growth 17% -2% -19% 4% 3% -1%Operational Growth -7% -15% 5% 3% 1%

Fx 5% -4% -1% 0% -1% Source: Company Reports, BMO Capital Markets.

Simponi

Simponi, J&J’s follow-on drug to Remicade, is a fully human mAb targeting TNF approved and launched in 2009 for the treatment of moderate to severe RA, AS, and PsA. In addition to its lower hypersensitivity potential, Simponi is administered subcutaneously once a month, which makes it more convenient than Remicade, Enbrel, and Humira. In January 2011, Simponi’s label was broadened in EU for first line use in RA the reduction in the rate of progression of joint damage as measured by X-ray in RA patients. Simponi has also shown that it works well in patients that have failed other TNF drugs.

Simponi is still in its launch phase, but it is competing with the leading TNF inhibitors that are fairly well established in the market. Moreover, other than improved convenience and lower allergic reactions, Simponi does not seem to have any other major advantages over Humira and


Page 31 May 17, 2012

Enbrel. We expect Simponi to become a $400+ million drug for Merck by 2015; however, given the competitive environment (new oral agents, probable biosimilar entries in 2015), we doubt its sales will reach that of the leading TNF inhibitors.

Exhibit 18. Our Simponi Forecast: 2012 Sales Lower Owing to Full-Year Impact of J&J

Deal; Headwinds Ahead

2010A 2011A 2012E 2013E 2014E 2015ESimponi $97 $264 $334 $409 $469 $496

Y/Y Growth 172% 27% 22% 15% 6%Operational Growth 167% 31% 23% 14% 7%

Fx 5% -4% -1% 0% -1%S C R t BMO C it l M k t Ph ti l A l t Al A f i 212 885 4033


Personalized Therapy Could Significantly Lower TNF Utilization

TNF inhibitors are very effective agents; however, they only work in roughly 40%-50% of treated patients. Given their high cost, there is a significant opportunity to find biomarkers that would predict which patients are most likely to respond to TNF inhibitors. In fact, broad-based consortium called BATTER-UP, which includes academia, biotech (Biogen), Pharma (J&J and Roche), a diagnostic company and a pharmacy benefits manager, is looking to validate an eight-gene biomarker signature to predict differential response to treatment with TNF alpha inhibitors. After some recruiting delays, the consortium hopes to report results in 2013. (Source: BioCentury, 12/5/11)

If efforts to find a predictive biomarker for response to TNF treatment are successful,

then we would expect the entire class to decline. TNF inhibitors are typically reserved for moderate to severe RA patients (roughly 25% of all RA patients) with inadequate response to MTX (~60% to 70% of treated patients). Once an RA patient progresses on MTX, the TNF inhibitors are essentially the default treatment option. However, if a biomarker suggests that such a patient is less likely to respond to TNF inhibitors, then physicians are more likely to try other biologics, such as Bristol-Myers Squibb’s Orencia or Roche’s Acterma first. Therefore, we believe a predictive biomarker would have a net negative impact as more patients will be excluded from treatment relative to those identified as likely to respond.

Nasonex

Nasonex is an inhaled corticosteroid for the treatment of indoor and outdoor nasal allergy symptoms. It was first launched in the UK in 1997 and has since been launched in many world markets. In the US volume has been declining, likely owing to impact of generic versions of similar products, but Merck has partly offset this with price increases. Nasonex loses exclusivity in the US in 2014. In 2008, Nasonex was launched in Japan. In 2011, strong volume growth in Japan and Latin America, combined with positive Fx, drove the product’s 18% y/y growth in international sales. We expect Nasonex revenues to stay roughly flat at around $1.2-$1.3 billion until loss of US exclusivity in 2014.


Page 32 May 17, 2012

Respiratory and Immunology Segment

Exhibit 19. Our Nasonex Forecast: Flat Sales Until US Loss of Exclusivity in 2014

2010A 2011A 2012E 2013E 2014E 2015ENasonex $1,220 $1,287 $1,278 $1,266 $928 $695

Y/Y Growth 5% -1% -1% -27% -25%Operational Growth 3% 2% -1% -27% -24%

Fx 3% -2% 0% 0% -1% US $639 $602 $603 $578 $231 $0

Y/Y Growth -6% 0% -4% -60% -100%% of Segment Revenue 52% 47% 47% 46% 25% 0%

Int'l $581 $684 $676 $688 $697 $695Y/Y Growth 18% -1% 2% 1% 0%

Operational Growth 12% 3% 2% 1% 1%Fx 5% -4% -1% 0% -1%


MK-3222 (Phase 2)

Merck’s MK-3222 is a monoclonal antibody (mAb) targeting interleukin-23 (IL-23) in development for psoriasis. The mAb is similar to one of the leading drugs in psoriasis, J&J’s Stelara in that they both block the activity of IL-23, an important inflammation cytokine. However, unlike Stelara, MK-3222 does not block IL-12, which is an important T-cell stimulating factor that is believed to play an important role against certain infections, including tuberculosis. In fact this is the primary safety concern with biologics like Stelara and TNF alpha inhibitors; they typically have infection rates of 25%-45% and have black box warnings for serious infections. Therefore, if MK-3222 can demonstrate similar efficacy to Stelara or Humira but with a lower infection rate, then it would certainly have significant potential.

However, we note that psoriasis is becoming increasingly competitive with some promising new biologics. Amgen’s Brodalumab (IL-17 mAb) appears to be somewhat more efficacious than Stelara and Humira based on indirect comparison of its phase 2 data; however, safety data, particularly on infection rates, is still limited. Based on the rapidly evolving competitive landscape, we look forward to phase 2 data for MK-3222 to better assess its potential in psoriasis. Merck plans to start phase 3 trials in 2012, which would put the drug somewhat behind all the IL-17 mAbs already in phase 3 (i.e., Novartis's Secukinumab and Eli Lilly's Ixekizumab).

Other Respiratory and Immunology Drugs

Other smaller products in this segment either have low growth expectations (e.g., Arcoxia, Dulera) or declining owing to current or eventual generic competition (Asmanex, Proventil). In the late-stage pipeline, we have low expectations for Merck’s allergy immunotherapy tables (AITs) currently in phase 3 because their added benefit vs. placebo (16%-30% symptom reduction) is rather modest considering the long duration of treatment (1-3 years), side effects (local allergic reactions) and other alternatives for these patients. The leading drug is the Grass AIT (sold as Grazax by Merck’s partner in Europe) and Merck anticipates filing for US approval in 2013. We currently include $100 million in our 2015 forecast for Merck’s AITs.


Page 33 May 17, 2012

Cardiovascular Segment: Dynamic Few Years Ahead

In 2010 and 2011, Merck’s cardiovascular (CV) franchise generated roughly $4.5 billion, accounting for about 10% of the company’s revenues. The segment is currently almost entirely made up of Vytorin and Zetia and anchored by the latter since Vytorin is simply the combination of Zetia and generic Zocor. Sales have been under pressure following the ENHANCE trial casting doubt on the incremental benefit of adding Zetia to statins. Merck has partly offset lower US volume with price increases, but that strategy is not sustainable. Moreover, Fx tailwind in 2011 will likely reverse in 2012. The key potential growth driver is the large IMPROVE-IT trial designed to show improved outcomes vs. statins, but we think the results will likely be mixed; thus, we expect the franchise to remain roughly flat.

As for late-stage pipeline, we are optimistic about Tredaptive, Merck’s better tolerated extended release niacin, but it will face difficult competition vs. generic Niaspan. We forecast Tredaptive near-peak sales of $420 million in 2015. We believe Anacetrapib (another add-on drug to improve the effectiveness of statins) is Merck’s most exciting CV drug in development, but it is too far away (~2016). There is a good chance that Anacetrapib will show better outcomes in the ongoing REVEAL trial, but we also recognize the difficulty of doing this when LDL is well managed with statins. Anacetrapib has the potential to replace or exceed the $4 billion/year from the Zetia/Vytorin franchise, but it wouldn’t do so until 2018-2019; thus, there will likely be a significant gap in Merck’s CV franchise starting 2017 when Zetia and Vytorin lose exclusivity. Finally, we have very low expectations for Vorapaxar, Merck’s thrombin receptor antagonist for treatment of acute coronary syndrome (ACS), based on modest reductions in CV events and significantly higher risk of serious bleeding. In contrast to some significant Street forecasts ($1-2 billion), we do not include Vorapaxar in our forecasts.

Exhibit 20. Merck’s Cardiovascular Segment: $4.3 - $4.6 Billion/Year Until 2017

2010A 2011A 2012E 2013E 2014E 2015E

Cardiovascular $4,577 $4,541 $4,390 $4,311 $4,410 $4,626

Y/Y Growth -1% -3% -2% 2% 5%

Zetia + Vytorin $4,311 $4,311 $4,202 $4,153 $4,155 $4,184

% of Segment Revenue 94% 95% 96% 96% 94% 90%

US $2,549 $2,318 $2,122 $2,013 $2,096 $2,332

Y/Y Growth -9% -8% -5% 4% 11%


Int'l $2,028 $2,223 $2,268 $2,298 $2,313 $2,294

Y/Y Growth 10% 2% 1% 1% -1%


2010A 2011A 2012E 2013E 2014E 2015E

Cardiovascular 4,577 4,541 4,390 4,311 4,410 4,626Zetia 2,297 2,428 2,470 2,508 2,539 2,558Vytorin 2,014 1,883 1,732 1,644 1,615 1,627Integrilin 266 230 188 159 125 21Tredaptive 0 0 0 0 130 420

Source: Company Reports, BMO Capital Markets


Page 34 May 17, 2012

Cardiovascular Segment

Vytorin and Zetia

We Expect the $4 Billion Franchise to Remain Roughly Flat

Vytorin and Zetia are currently the key drugs in Merck’s CV franchise. Zetia is the first in a new class of cholesterol-lowering agents that inhibit cholesterol absorption. It was launched in the US in 2002 and marketed as Ezetrol outside the US. Vytorin is a combination product containing the active ingredients of Zetia and Zocor, Merck’s old gold standard statin, which competed with Lipitor prior to losing patent exclusivity in 2006. Merck launched Vytorin in 2004 to preserve some of the Zocor revenues prior to losing exclusivity in the US; the drug is marketed as Inegy outside the US. In 2000, Merck and Schering-Plough (SP) partnered for the development of Zetia and its combination with Zocor. In 2009, Merck acquired SP and now has full ownership of the franchise.

Performance: Under Pressure Since the Controversial ENHANCE Results in 2008

With combined global sales of roughly $4.3 billion, the products represented roughly 9% of Merck’s 2011 revenues. Although both drugs used to have similar sales of $2.2-$2.3 billion in 2008, Zetia has continued its low to mid single-digit growth as it can be used with other statins like Lipitor to enhance cholesterol lowering; however, Vytorin sales declined following the announcement of the ENHANCE trial in January 2008. ENHANCE was an imaging trial in 720 patients with heterozygous familial hypercholesterolemia, a rare genetic condition that causes very high levels of LDL “bad” cholesterol and greatly increases the risk for premature coronary artery disease. Although, Vytorin lowered LDL cholesterol significantly more than generic Zocor alone, there was no significant difference between the treatments on the primary endpoint, which was a change in the thickness of carotid artery walls (a measure of vascular disease) over two years as measured by ultrasound. The results and the near two-year delay in their full release were controversial and led to a number of legal fraud claims against Merck and SP, some of which Merck has settled.

The Rationale Behind Our Flat Forecast

In January 2009, the FDA completed its review of ENHANCE and stated that the results did not change its position that elevated LDL cholesterol is a risk factor for cardiovascular disease and that lowering LDL cholesterol reduces the risk for cardiovascular disease. In other words, Vytorin’s superior lowering of LDL vs. generic Zocor is good but we just don’t know what it means in terms of lowering heart attacks and other CV events. This critical question will be answered in the ongoing IMPROVE-IT study, which is evaluating CV outcomes in over 18,000 patients with Acute Coronary Syndrome (ACS). The anticipated completion date for the trial is 2013; however, following another interim analysis by the data safety monitoring board after 75% of the 5,250 primary endpoint clinical events Merck suggested that the timeline could change. Final results are expected in late 2012 or 1H13.


Page 35 May 17, 2012


The IMPROVE-IT Trial Will Likely Show Mixed Results

Overall, we believe there is a fairly low probability that Vytorin will show superiority vs. generic Zocor in the IMPROVE-IT trial. Zocor is a powerful statin and there is conflicting data regarding how much incremental LDL reduction is needed to show a significant improvement in CV events. Nonetheless, we acknowledge that a positive outcome would undoubtedly boost the franchise sales, perhaps by as much as 10%-15%. A negative outcome, suggesting no incremental benefit will likely lower sales by about 10%-15%. However, the more likely outcome is mixed results suggesting some improvements, in which case, the franchise should remain near current levels. Zetia and Vytorin are very closely priced, so it wouldn’t make much of a difference to Merck which drug physicians choose since the costs of the simvastatin component of Vytorin should be small. The recent availability of generic Lipitor is an opportunity for Zetia because the combination is now more affordable.

Vytorin in Chronic Kidney Disease (CKD): Lack of Specific Indication Limits Upside

Potential

The FDA recently allowed Merck to include the results of the SHARP trial (Study of Heart and Renal Protection) in the Vytorin product label. This was a randomized, placebo controlled, double-blind trial that investigated the effect of Vytorin on the time to a first major vascular event (MVE) in 9,438 patients with moderate to severe chronic kidney disease (CKD) who did not have a history of heart attacks or coronary revascularization. In the primary intent-to-treat analysis, 15% of Vytorin patients experienced an MVE vs. 18% of placebo patients, corresponding to a statistically significant relative risk reduction of 16% (p=0.001).

Overall, we believe Vytorin’s benefit in the SHARP trial is modest especially given the

comparison to placebo. We note that the FDA did not grant Vytorin an indication in this setting, despite a unanimous recommendation from its advisory committee in November, 2011. Moreover, the FDA did not update Zetia’s label because SHARP studied the combination of Zocor and Zetia vs. placebo, it was not designed to assess the independent contributions of each drug to the observed effect. Therefore, we doubt significant upside for the franchise based on the results of the SHARP trial.

Our Vytorin & Zetia Forecast: Roughly $4.1-$4.2 Billion Until Late 2016 Without IMPROVE-

IT Upside

Vytorin sales have been under more pressure since the results of the ENHANCE trial, driven primarily by significantly lower US volume. Merck has partly offset this with rather aggressive price increases for both drugs in the US, which we doubt are sustainable. Ex-US Vytorin and Zetia sales were boosted with a favorable foreign exchange in 2011, but we forecast this will likely reverse in 2012. Overall, we forecast modestly declining sales for Vytorin, and mostly flat sales for Zetia. Our forecasts do not include any incremental upside from the IMPROVE-IT trial, which could boost annual sales by 10%-15%. Merck will lose exclusivity for Vytorin and Zetia on December 12, 2016 per a patent a settlement with Glenmark, which allows it to launch its generic versions prior to the drugs’ patent expiration in April 2017.


Page 36 May 17, 2012


Exhibit 21. Our Vytorin & Zetia Forecast: Roughly $4.2 Billion/Yr; Fx Headwinds in 2012

2010A 2011A 2012E 2013E 2014E 2015EZetia $2,297 $2,428 $2,470 $2,508 $2,539 $2,558


Fx 2% -2% 0% 0% -1% US $1,228 $1,223 $1,231 $1,243 $1,256 $1,281

Y/Y Growth 0% 1% 1% 1% 2%Volume -6% -5% -3% -2% -1%

Price 6% 6% 4% 3%% of Product Revenue 53% 50% 50% 50% 49% 50%

Int'l $1,070 $1,205 $1,238 $1,265 $1,283 $1,277Y/Y Growth 13% 3% 2% 1% -1%


% of Product Revenue 47% 50% 50% 50% 51% 50%

2010A 2011A 2012E 2013E 2014E 2015E

3%

Vytorin $2,014 $1,883 $1,732 $1,644 $1,615 $1,627Y/Y Growth -5% -7% -8% -5% -2% 1%

Operational Growth -9% -6% -5% -2% 2%Fx 2% -2% 0% 0% -1%

US $1,076 $888 $719 $627 $602 $626Y/Y Growth -17% -19% -13% -4% 4%

Volume -27% -24% -16% -8% 0%Price 9% 5% 3% 4%

% of Product Revenue 53% 47% 42% 38% 37% 38% Int'l $937 $995 $1,013 $1,017 $1,014 $1,001

Y/Y Growth 6% 2% 0% 0% -1%Operational Growth 1% 6% 1% -1% 0%

Fx 5% -4% -1% 0% -1%% of Product Revenue 47% 53% 58% 62% 63% 62%

4%


Tredaptive

Good Concept, but Will Have Tough Competition vs. Generic Niaspan; We Forecast $420

Million Near-Peak Sales in 2015

Tredaptive is a combination of extended release niacin (also called nicotinic acid) and laropiprant, an anti-flushing agent. The drug is being developed for the treatment of elevated lipids. The niacin component is known to demonstrate some clinical benefit by lowering LDL (bad) cholesterol, and other important lipids while increasing HDL (good) cholesterol. However, niacin also has well known tolerability issues, flushing in particular. The laropiprant component of Tredaptive has demonstrated that it can reduce the flushing caused by niacin even after extended periods. Niacin containing drugs generate annual sales exceeding $1.1 billion despite tolerability issues. The leading drug is Abbott’s Niaspan (sustained-release niacin), which had 2011 US sales of $976 million.


Page 37 May 17, 2012


Optimistic About THRIVE, but It Could Be Too Little, Too Late

Tredaptive has already been approved in 60 countries worldwide including the EU in 2008, for use in combination with statins (when statin monotherapy is not sufficient) and it can be given alone if patients cannot tolerate statins. We note Merck does not release Tredaptive ex-US sales in its filings. In the US, the FDA issued a “not approvable” letter to Merck in 2008 asking for more data. Some of the concerns related to the long-term safety of laropiprant. To address the issues, Merck is conducting the large THRIVE study in more than 25,000 patients, adding the drug to generic Zocor (simvastatin) and comparing it vs. simvastatin alone. In 2011, a similar trial called AIM HIGH with Niaspan failed to show a reduction of cardiac events, and this has cast doubt on the outcome of the THRIVE study. Merck highlights important differences in the way LDL was managed in the two trials and sample size (25,000 vs. 3,300). The THRIVE trial does not allow post-randomization adjustments of statins or Zetia, whereas AIM HIGH did allow this, thus, minimizing LDL difference between the two arms. The idea is that THRIVE will allow for LDL difference between treatments, which should theoretically provide Tredaptive an opportunity to show incremental benefits on top of simvastatin. Moreover, by virtue of its large size, THRIVE is 95% powered to detect a 15% risk reduction, whereas AIM HIGH was 85% powered to detect a 25% risk reduction.

We believe that THRIVE has a reasonable chance of meeting its primary endpoint and

that reducing flushing is clinically meaningful with niacin treatment. The THRIVE results are expected by the end of 2012, and Merck expects to file the drug in 1H13; thus, approval could be in 2H13/1H14. However, we are cautious about Tredaptive’s potential. Launching Tredaptive with outcome data would certainly be a positive, but physicians and payers are unlikely to attribute much of the outcome to the laropiprant component of Tredaptive. They are more likely to see it as a validation of niacin’s benefits, in our opinion. Niaspan is expected to lose US patent exclusivity in September 2013, and we expect many payers will demand that patients try generic Niaspan first and only go on Tredaptive if they cannot tolerate Niaspan. Abbott argues that the flushing with Niaspan can be reduce by the use of aspirin, which most CV patients already take, and that in pivotal trials, less than 6% of patients discontinued treatment because of flushing. We believe generic Niaspan competition will dampen Tredaptive’s peak sales potential to roughly $500 million in 2017.

Anacetrapib (Phase 3)

Merck’s Most Exciting CV Drug in Development; but a Bit Far Away (~2016)

Anacetrapib is a cholesteryl ester transfer protein (CETP) inhibitor, in phase 3 for the treatment patients with vascular disease characterized by elevated lipids. Drugs that inhibit CETP increase HDL (good cholesterol), which is one approach to add incremental efficacy to statins that primarily lower LDL (bad cholesterol). However, there is considerable doubt about the class following the failure of the first CETP inhibitor, Pfizer's much-hyped torcetrapib, which showed a 60% increase in cardiovascular mortality in the phase 3 ILLUMINATE trial in combination with Lipitor. The trial led Pfizer to terminate the program in 2006. However,


Page 38 May 17, 2012

subsequent studies indicate that torcetrapib’s adverse events were likely caused by its off-target activity, and are not necessarily shared by other members of the class that are more selective.

Anacetrapib is an oral, potent, highly selective CETP inhibitor that that has not shown the

same adverse event profile as Torcetrapib. In a phase 3 trial called DEFINE, treatment with Anacetrapib led to very significant increase in HDL cholesterol and significant reductions in LDL cholesterol and other lipid parameters. These patients were already well managed with statins, but the addition of Anacetrapib led to a (placebo adjusted) 138% increase in HDL cholesterol, 40% decrease in LDL cholesterol, and 32% decrease of non-HDL cholesterol levels. These effects are for the most part greater than those seen with other CETP inhibitors, including phase 2 data from Roche’s late-stage CETP inhibitor Dalcetrapib (Cannon, C. NEJM, 2010). Importantly, Anacetrapib was not associated with the rate of mortality and adverse cardiovascular effects seen with Pfizer’s Torcetrapib. Unlike Torcetrapib, Anacetrapib did not alter blood pressure, electrolyte levels, or serum aldosterone levels; all of which are proposed as reasons for higher rate of CV events seen with Torcetrapib.

We’re optimistic about REVEAL, but it is tough to show incremental improvements in

outcomes when LDL is well managed with statins. Anacetrapib is currently in a large outcomes study called REVEAL with 30,000 patients evaluating the effects of the drug when added to Lipitor (now generic). The primary endpoint is coronary death, MI or coronary vascularization. The REVEAL trial is expected to last roughly four years, with data expected in 2014-2015. Based on the DEFINE results, particularly the impressive improvement in revascularization, we believe there is a good possibility that REVEAL will meet its primary endpoint. However, we note that in light of the negative outcome of the AIM-HIGH trial with Niaspan, it will be very difficult to show incremental clinical benefit when patients’ LDL is well managed (~60mg per deciliter) with a powerful statin like Lipitor. The large size of the REVEAL trial alleviates this risk to some extent by boosting the trial’s power to detect a signal.

Anacetrapib seems to be more efficacious than Roche’s Dalcetrapib, which will likely

have a two-year head-start. Anacetrapib seems superior in terms of raising HDL and lowering LDL. Roche plans to file Dalcetrapib in 2013, which suggests it could be roughly two years ahead of Anacetrapib. Both products have the potential to be blockbusters, and the difference will depend on the outcome data, in our opinion.

Anacetrapib could replace or exceed the $4 Billion/yr from Merck’s Vytorin/Zetia

franchise, but there will be a gap. Given that Merck plans to file Anacetrapib on or after 2015, we do not include it in our forecasts. The drug’s potential will be almost entirely dependant on its ability to improve outcomes, which is being evaluated in the ongoing REVEAL trial. However, we believe that the product has the potential to eventually replace and perhaps exceed the $4 billion in sales from Merck’s Vytorin/Zetia franchise when they lose exclusivity in December 2016. We do not expect Anacetrapib to reach those levels until at least 2018-2019; therefore, there will most likely be a significant revenue gap in Merck’s CV franchise from 2017-2019.


Page 39 May 17, 2012


Vorapaxar

Interesting Novel Approach, but Data So Far Suggests Limited Potential

Vorapaxar represents a new approach to platelet inhibition by targeting Thrombin. Thrombin activates platelets through two protease-activated receptors (PARs), PAR-1, and PAR-4. Pre-clinical data suggests PAR-1 is the more potent activator. Vorapaxar is an investigational oral PAR-1 antagonist (i.e., blocker) that inhibits thrombin-induced platelet activation. Merck recently completed two phase 3 trials with vorapaxar: The TRACER trial in acute coronary syndrome (ACS), and the TRA-2P in patients with a known history of atherosclerosis (i.e., had a prior heart attack, stroke or peripheral artery disease or PAD). Both trials were evaluating the addition of vorapaxar to standard of care, which in most cases is Plavix plus aspirin.

The TRACER (Thrombin Receptor Antagonist for Clinical Event Reduction in Acute Coronary Syndrome) trial was stopped early because vorapaxar significantly increased bleeding, including major bleeding and intracranial hemorrhage (ICH). Similarly, in January 2011, the data safety monitoring board of the TRA-2P trial recommended patients with history of stroke or new stroke discontinue study drug. While the trial met its primary endpoint, the benefit was modest (12% relative risk reduction) and there was a significant increase in moderate to severe bleeding, including intracranial hemorrhage among patients taking vorapaxar in addition to standard of care. The silver lining was that there was a lower risk of severe bleeding in patients without a history of stroke. Merck is evaluating next steps.

We have low expectations for vorapaxar and do not include it in our forecasts. We doubt the incremental efficacy of adding this drug to Plavix and aspirin is worth the safety risks, especially in light of Brilinta’s potential in this patient population. We agree with the sentiment that “the inhibition of multiple pathways in thrombus formation may be associated with an unacceptable risk of bleeding, even if it offers an improvement in the reduction of ischemic events” (Tricoci P. 2012, NEJM). We note that in the TRACER trial, “in the subgroup of patients who were not receiving a P2Y12 inhibitor (like Plavix) at randomization, the hazard of bleeding was not increased, and the observed effect on efficacy tended to be more pronounced” (Tricoci P. 2012, NEJM). Therefore, there could be some potential for this drug with other combinations or at least without a drug like Plavix. Nonetheless, we have low expectations for Vorapaxar, and do not include it in our forecasts.


Page 40 May 17, 2012

Vaccines Segment: We Expect Near Double-Digit Growth

Merck's Vaccine segment, as reported, represents about 8% of revenues and accounted for 19% of the company’s year-over-year growth in 2011. The reported segment does not include sales of vaccines sold in most major European markets through Merck’s joint venture with Sanofi, the results of which are reflected in Merck’s equity income from affiliates. Therefore, more than 80% of Merck’s reported vaccine revenues are currently from the US; however, the international component is growing well owing to emerging markets.

Gardasil, a vaccine that prevents certain disease related to the human papilloma virus (HPV), is the key vaccine as it accounts for nearly one third of the segment and growing well. We believe Gardasil and its next generation vaccine, V503, have good growth potential since V503 significantly improves Gardasil’s protection against HPV related cervical cancers from 70% to over 87%. We believe V503 will be approved in 2013 and forecast that the combined franchise will generate $1.8 billion by 2015 compared with $1.2 billion for Gardasil alone in 2011. International markets represent a significant growth opportunity.

Merck’s ProQuad, Varivax and M-M-R-II vaccines have accounted for 30%-40% of vaccine revenues during 2008-2011, with annual sales ranging between $1.2 and $1.4 billion. The key vaccine in this group is Varivax, a vaccine that helps prevent chickenpox. Varivax accounts for roughly for roughly 70% of the trio’s sales. Going forward, we forecast low to mid single-digit growth from this group. Finally, we expect mid-low double-digit growth from Zostavax (a vaccine that helps prevent the shingles) and its next generation vaccine, V212, as more patients become eligible for treatment with the franchise’s broader label.

Exhibit 22. Our Merck Vaccine Segment Forecast: We Expect Near Double-Digit Growth

2010A 2011A 2012E 2013E 2014E 2015E

Vaccines $3,505 $3,894 $4,414 $4,907 $5,219 $5,709Y/Y Growth -3% 11% 13% 11% 6% 9%

Operational Growth 10% 14% 11% 6% 10%Fx 1% -1% 0% 0% 0

US $3,007 $3,182 $3,313 $3,490 $3,675 $4,018%

Y/Y Growth 6% 4% 5% 5% 9%% of Segment Revenue 86% 82% 75% 71% 70% 70%

Int'l $502 $714 $1,102 $1,418 $1,544 $1,692Y/Y Growth 42% 54% 29% 9% 10%


% of Segment Revenue 14% 18% 25% 29% 30% 30%S C R t BMO C it l M k t Ph ti l A l t Al A f i 212 885 4033


2010A 2011A 2012E 2013E 2014E 2015E

Vaccines 3,505 3,894 4,414 4,907 5,219 5,709Gardasil and V503 989 1,210 1,480 1,660 1,852 2,024ProQuad/M-M-R II/Varivax 1,378 1,202 1,257 1,315 1,375 1,436RotaTeq 519 652 701 756 819 898Pneumovax 376 498 532 466 409 359Zostavax & V212 243 332 444 710 764 917V419 - - - - - 75



Page 41 May 17, 2012

Vaccines Segment

Gardasil and V503 (Phase 3)

Gardasil: Leading the HPV Market With a Differentiated Profile

Merck’s Gardasil is a vaccine that prevents certain diseases, such as genital warts and cancers, caused by four types of human papilloma virus (HPV types 6, 11, 16 and 18). HPV types 6 and 11 cause about 90% of genital warts, while HPV types 16 and 18 cause about 70% of cervical cancer cases. In the US, Gardasil was launched in 2006 initially for women aged 9-26, and later in October 2009 it received FDA approval for boys and men aged 9-26 years. The FDA has repeatedly refused to approve the vaccine for women aged 27-45 despite good supportive data; however, other regulatory agencies such as Health Canada have done so. Although, the safety of the vaccine has come under question on a number of occasions, the FDA and CDC continue to consider the vaccine safe and effective with a favorable risk/benefit profile. Gardasil is now available in over 100 countries, including many developing nations where Merck is providing the vaccine at a significant discount.

Gardasil's main competitor is GSK's Cervarix, which has similar benefits and shares the same patents. Cervarix also prevents cervical cancer associated with HPV types 16 and 18; however, since it does not vaccinate against HPV types 6 and 11, it does not prevent genital warts caused by these HPV types. On the other hand, in boys and young men ages 9 to 26, Gardasil helps protect against 90% of genital wart cases. Cervarix is not indicated in males. This is a significant marketing advantage for Merck since it makes Gardasil more relevant for sexually active individuals. The FDA delayed approval of Cervarix until the end of 2009 owing to safety concerns about one of its additives, and that essentially gave Merck a near three-year monopoly in the large US market. In international markets, Cervarix was first launched in Australia in 2007 followed shortly by Europe and over 90 other countries, including Japan, by the end of 2009. As a result, in 2010 Merck’s Gardasil revenues declined 12% owing to competitive impact of Cervarix in the US and Australia. However, Gardasil sales in 2011 grew 22% to exceed $1.2 billion, driven by increased vaccination of males 9 to 26 years of age in the US. Merck is planning regulatory submissions for the use of Gardasil in males in other countries.

V503: Should Grow the Franchise

Gardasil does not cover all HPV strains so women will still need to have regular cervical screenings. To improve on Gardasil, Merck is developing a follow-on vaccine, V503, which is effective against 5 additional types of HPV. Merck estimates that the improvement should increase the protection against HPV related cervical cancers from 70% to over 87%, which would indeed make V503 the best in class. The Phase 3 program for V503 is comprised of five studies: the first four safety and immunogenicity studies are successfully completed. The phase 3 event driven efficacy study with 14,000 patients is ongoing, and notably, it is a head-to-head comparison of V503 vs. Gardasil. Since the study is evaluating protection against high grade cervical dysplasia related to the five new HPV subtypes in V503, it will most likely be successful. Finally, the V503 program also supports filing for indication in males.


Page 42 May 17, 2012

Vaccines Segment

Our Forecast for Gardasil and V503

Merck anticipates filing V503 in 2012, and we expect approval in 2013. The improved vaccine should give Merck significant negotiating leverage with private and government payers and undoubtedly differentiate it further vs. Cervarix. Merck believes V503 should help the franchise gain share in international markets and protect its share in the US market. Overall, we estimate mid-low double-digit annual growth for the combined franchise but acknowledge there is significant upside potential, particularly in international markets. Recent launch in Japan significantly boosted sales in 1Q12, and the company expects Japan to be a key growth driver.

Finally, we note Merck pays royalties on worldwide Gardasil sales of 21% to 27%, owing to certain third-party license agreements, including with GSK. These royalties vary by country and are included in Merck’s materials and production costs.

Exhibit 23. Our Gardasil Forecast: We Expect Mid-Low Double-Digit Growth

2010A 2011A 2012E 2013E 2014E 2015EGardasil and V503 $989 $1,210 $1,480 $1,660 $1,852 $2,024

Y/Y Growth -12% 22% 22% 12% 12% 9%Operational Growth 21% 23% 12% 11% 10%

Fx 1% -1% 0% 0% 0% US $723 $881 $1,014 $1,136 $1,272 $1,399

Y/Y Growth 22% 15% 12% 12% 10%% of Segment Revenue 73% 73% 68% 68% 69% 69%

Int'l $267 $329 $466 $524 $580 $625Y/Y Growth 23% 42% 12% 11% 8%



Source: company reports, BMO Capital Markets.

ProQuad, Varivax, and M-M-R-II

These vaccines have accounted for 30%-40% of Merck’s vaccine revenues during 2008-2011, with annual sales ranging between $1.2 and $1.4 billion. The key vaccine in this group is Varivax, which accounts for roughly for roughly 70% of sales. Varivax is a live attenuated chickenpox (varicella) vaccine that helps prevent the illness. Varivax generated sales of $831 million in 2011, $929 million in 2010, and $1.0 billion in 2009. Sales for 2010 and 2009 reflect some revenue (less than $65 million) as a result of government purchases for the CDC’s Strategic National Stockpile. Going forward we expect annual sales of roughly $900-$950 million from Varivax.

Merck’s M-M-R-II vaccine helps protect against measles, mumps and rubella, and it has generated annual sales of $315-$337 million during the last three years. Finally, ProQuad is a combination vaccine of Varivax and M-M-R-II; however, its sales have been affected by supply constraints related to the common varicella component, which also goes into another vaccine Zostavax (discussed below). Going forward, we forecast low to mid single-digit growth from this group of vaccines.


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Vaccines Segment Exhibit 24. Our ProQuad, Varivax and M-M-R-II Forecast

2010A 2011A 2012E 2013E 2014E 2015EProQuad/M-M-R II/Varivax $1,378 $1,202 $1,257 $1,315 $1,375 $1,436

Y/Y Growth 1% -13% 5% 5% 5% 4%Operational Growth -13% 5% 5% 4% 5%

Fx 0% 0% 0% 0% 0% US $1,305 $1,108 $1,145 $1,191 $1,239 $1,288

Y/Y Growth -15% 3% 4% 4% 4%% of Segment Revenue 95% 92% 91% 91% 90% 90%

Int'l $74 $94 $112 $124 $136 $148Y/Y Growth 27% 19% 11% 10% 9%



Zostavax and V212 (Phase3)

Zostavax is a vaccine that helps prevent shingles (herpes zoster) in adults 50 years or older. Shingles is characterized by a painful, blistering, often large rash caused by the resurfacing of same virus that causes chickenpox. The virus stays dormant in the body and in some patients resurfaces to cause shingles. The triggers are not well understood; however, immuno-compromised individuals are at greater risk.

Merck launched Zostavax in the US in 2006, and the vaccine is growing well. Sales were $227 million in 2009, $243 million in 2010, and $322 million in 2011. Importantly, sales in all of these years were affected by supply issues; however, Merck recently reported that it has filled all backorders and resumed a normal supply schedule. In March 2011, the FDA approved an expanded age indication and now Zostavax is indicated for the prevention of shingles in individuals 50 years of age and older. Merck is increasing its promotional efforts for Zostavax in the US but no broad international launches or immunization programs are currently planned for 2012. We expect continued growth for Zostavax in the US owing to the broader age label. Moreover, we expect growing international sales starting in 2013 owing to completion of the new manufacturing facility in Durham.

Merck’s V212 (in phase 3) utilizes the same attenuated Varicella-Zoster virus strain used in the Varivax and Zostavax vaccines, with the addition of a proprietary inactivation step to make the vaccine suitable for immuno-compromised patients. Because Zostavax is a live vaccine, it is contraindicated for immuno-compromised patients; however, these are the patients at greatest risk for getting shingles since it is an opportunistic infection. The proof of concept data looks encouraging and Merck is completing phase 3 trials with the goal of the first filing in 2014. We believe V212 has a good chance of growing the Zostavax franchise starting in 2015/2016.

Exhibit 25: Our Zostavax and V212 Forecast: We Expect Continued Growth with the

Broader Label, Line-expansion (V212) and International Launches

2010A 2011A 2012E 2013E 2014E 2015EZostavax & V212 $243 $332 $444 $710 $764 $917

Y/Y Growth -12% 37% 34% 60% 8% 20% US $243 $320 $365 $409 $450 $587 Int'l $0 $12 $79 $301 $314 $330 Source: Company Reports, BMO Capital Markets.


Page 44 May 17, 2012

Women’s Health & Endocrine: Focus Is on Odanacatib

Merck’s Women’s Health and Endocrine segment is relatively small, accounting for about 5% of revenues. The lead product is the former osteoporosis gold standard Fosamax, which has lost exclusivity is key markets and thus declining. The rest of the products include a range of contraceptive and fertility products, which are in aggregate growing at a CAGR of 5%-6%. The most important pipeline drug in this segment is Odanacatib, a novel, first-in-class treatment for osteoporosis. Merck has identified this drug as one of the highlights of its pipeline. Odanacatib is currently in phase 3 with data expected by the end of 2012 or 1H13. Merck anticipates regulatory filings in 1H13, which indicates that it could be approved in 2014.

Odanacatib’s key difference vs. the current standard of care (bisphosphonates) is that it seems to inhibit bone resorption without suppressing bone formation to the same extent; thus, arguably resulting in improved bone strength, which should in turn lead to fewer fractures. Odanacatib also seems to be better tolerated and associated with fewer safety issues. We are optimistic about Odanacatib, and believe that the results from the phase 3 fracture trial should show a significant fracture improvement vs. placebo. However, physicians and payers will make indirect comparisons with other treatments already available, and the value hurdle for adoption will be high given the number of generic alternatives that will be on the market by the time Odanacatib is launched. For now, we estimate sales of $90 million in 2014 and $300 million in 2015, modestly better than recent competitor Prolia’s early performance. We will revisit our forecast when the phase-3 data elucidate the drug’s clinical profile.

Exhibit 26. Our Forecast for Merck’s Women’s Health and Endocrine Segment: Focus Will

Be on Odanacatib in Osteoporosis

2010A 2011A 2012E 2013E 2014E 2015E

Women's Health and Endocrine $2,458 $2,572 $2,435 $2,374 $2,520 $2,902

Y/Y Growth -2% 5% -5% -3% 6% 15%Operational Growth 1% -2% -2% 6% 16%

Fx 4% -3% 0% 0% - US $686 $702 $690 $682 $793 $1,021

Y/Y Growth 2% -2% -1% 16% 29%% of Se

1%

gment Revenue 28% 27% 28% 29% 31% 35% Int'l $1,769 $1,868 $1,745 $1,693 $1,727 $1,881

Y/Y Growth 6% -7% -3% 2% 9%Operational Growth 0% -2% -2% 2% 10%



2010A 2011A 2012E 2013E 2014E 2015E

Women's Health and Endocrine 2,458 2,572 2,435 2,374 2,520 2,902

Fosamax 926 855 720 637 557 494NuvaRing 559 623 635 655 673 709Follistim AQ 528 531 461 419 383 348Implanon 236 295 330 358 386 414Cerazette 209 268 289 305 321 337Odanacatib (Ph 3 PMO) 0 0 0 0 90 300Elonva (Ph 3) 0 0 0 0 110 300



Page 45 May 17, 2012

Brief backgrounder on osteoporosis

Postmenopausal osteoporosis (PMO) is a large disease that affects roughly 200 million women worldwide. The disease is characterized by an imbalance of bone resorption over bone formation, resulting in decreased bone mineral density (BMD), and overall weakness of the bone that leads to fractures. The most important goal in treatment of osteoporosis is prevention of fractures, particularly hip fractures, which are associated with increased morbidity and mortality. The most widely used treatments are bisphosphonates, which have been the standard of care for nearly 15 years. Bisphosphonates not only improve BMD, but also reduce both vertebral and hip fractures as well as overall back pain related to vertebral compressions. Merck’s Fosamax was one of the leading bisphosphonates; however, it has lost exclusivity in all major markets and is widely available as a generic. Next generation bisphosphonates have similar efficacy, but are more potent and available as more convenient once a month and even once a year injection therapies. Many of these will also become generic in the next few years, including once monthly Boniva in 2012.

The latest entrant is Amgen’s Prolia, which is another novel therapy (a fully human monoclonal antibody to RANK Ligand) that also inhibits bone resorption. It has demonstrated superior BMD increases to Fosamax, but the overall fracture data seems similar. Prolia’s key advantage is its once-every six months dosing and better tolerability. However, a relatively narrow label owing to FDA safety concerns, and reimbursement challenges have dampened Prolia’s launch trajectory. In its first full year on the market, Amgen reported Prolia sales of $203 million in 2011.

Odanacatib: A Promising Drug Entering a Competitive and Increasingly Generic Market

Odanacatib inhibits cathepsin K, an important enzyme in osteoclasts that mediates the degradation of bone matrix by these cells. Odanacatib selectively and reversibly inhibits cathepsin K and has shown that it can rapidly decrease bone resorption in preclinical and phase 1 studies. Odanacatib’s key difference vs. bisphosphonates is that it seems to inhibit bone resorption without suppressing bone formation. In early clinical trials so far, Odanacatib has produced less reduction of both markers of bone resorption and bone formation versus historical data with Fosamax. In other words, Odanacatib doesn’t seem to be suppressing bone remodeling to the same extent. Moreover, in contrast to Fosamax, Odanacatib has shown progressive increases in BMD at multiple important sites over five years. However, this is hardly conclusive as it is a cross trial comparison, and as the FDA repeatedly reminds the medical community “BMD data results are not meant to imply fracture efficacy and should not be extrapolated to predict differences in fracture efficacy.” (Source: Prolia website).

Odanacatib clearly has good activity in osteoporosis. However, the success of this drug will depend largely on fracture data. The drug’s mechanism of action and the cumulative data are promising and suggest that it should have a fracture benefit. The phase 3 placebo controlled fracture trial with 16,000 patients is ongoing and is being monitored by an external data monitoring committee. Two interim analyses are planned in 2012; therefore, we could have results by the end of 2012. Merck anticipates filing by the end of 2013.

We believe Odanacatib will have a fracture benefit vs. placebo; however, the clinical significance of the results will be subject to much debate given that the trial is placebo controlled. The lack of an active control such as Fosamax is disappointing; however, a head-to-


Page 46 May 17, 2012

head trial vs. a bisphosphonate powered for superiority would likely require a much larger sample and longer treatment duration (based on the observed BMD increase difference between year 3 and year 5 of Odanacatib and Fosamax treatment). Assessment of bone quality and fracture types will be the focus on the efficacy side. Bisphosphonates have been linked to excessive suppression of bone turnover, which can lead to atypical fractures.

The other key differentiating factor will be safety and tolerability. Roughly 10%-25% of patients cannot tolerate bisphosphonates owing to GI side effects. Bisphosphonates are also associated with increased risk of osteonecrosis of jaw (ONJ); thus, there may be an opportunity for Odanacatib to compete on safety and tolerability.


Page 47 May 17, 2012

Diversified Brands: Leveraging Former Blockbusters in Japan and Emerging Markets Merck's diversified brands segment (called established products by other companies like Pfizer) is made up of pharmaceutical products that are either approaching the expiration of their marketing exclusivity or are no longer protected by patents in developed markets, but continue to be a core part of the company’s products in other international markets. Current notable products in this group include Zocor (a statin for lowering cholesterol), Cozaar/Hyzaar (combination drug for hypertension), Vasotec (for hypertension), and Claritin (for allergies); all former blockbusters and former standards of treatment in their respective therapeutic area.

Diversified brands are particularly important in Japan and emerging markets. We estimate that a significant portion of sales come from Japan, where there is low adoption of generics allowing continued meaningful sales from branded drugs. In emerging markets, the vast global clinical experience coupled with cheaper prices following patent expirations in developed markets are the key growth drivers. Even in certain emerging markets where generic alternatives are available, many physicians choose the brands (if reasonably priced) based on familiarity and comfort with the brand and quality concerns with domestic generics. We note that the members of this group will change as other large drugs approach patent expiration in developed markets. Nonetheless, in 2011 diversified brands accounted for roughly $3.6 billion or 7% of Merck’s revenues. Roughly 92% of the segment sales are from international markets, thus, we estimate sales were significantly boosted by favorable foreign exchange. We expect sales from the current products in this segment to decline as members lose market share to generic alternatives. Moreover, we believe foreign exchange will be a headwind in 2012, particularly given that we estimate a significant portion of sales come from Japan.

Exhibit 27. Our Forecast for Merck’s Diversified Brands

2010A 2011A 2012E 2013E 2014E 2015E

Diversified Brands, $MM $4,008 $3,574 $2,923 $2,381 $2,038 $1,821

Y/Y Growth -31% -11% -18% -19% -14% -11%Operational Growth -15% -14% -18% -15% -9%

Fx 5% -4% -1% 0% -1% US $602 $286 $179 $80 $38 $34

Y/Y Growth -52% -37% -55% -52% -11%% of Segment Revenue 15% 8% 6% 3% 2% 2%

Int'l $3,406 $3,288 $2,744 $2,301 $2,000 $1,787Y/Y Growth -3% -17% -16% -13% -11%

Operational Growth -9% -12% -15% -13% -9%Fx 5% -4% -1% 0% -1%


2010A 2011A 2012E 2013E 2014E 2015E

Diversified Brands, $MM 4,008 3,574 2,923 2,381 2,038 1,821

Cozaar/Hyzaar 2,105 1,663 1,244 950 774 675

Zocor 468 455 372 313 258 205

Propecia 446 447 421 300 243 233

Claritin Rx 296 314 257 219 189 162

Remeron 222 241 210 193 179 164

Vasotec/Vaseretic 255 231 209 199 190 179

Proscar 216 223 209 206 206 203 Source: Company Reports, BMO Capital Markets.


Page 48 May 17, 2012

Neuroscience and Ophthalmology: Focus Is on Pipeline

Merck’s Neuroscience and Ophthalmology segment only accounts for roughly 2% of revenues, and it is declining as leading drug Maxalt (for migraines) loses share to generic competitors and itself loses patent exclusivity in major markets in 2012 and 2013. The focus will be on key late stage pipeline drugs, including Suvorexant for insomnia, Bridion for reversal of neuromuscular blockage in surgery, MK-8931 for Alzheimer’s disease, and Preladenant for Parkinson’s disease.

Exhibit 28. Our Forecast for Merck’s Neuroscience and Ophthalmology Franchise

2010A 2011A 2012E 2013E 2014E 2015E

Neurosciences and Ophthalmology 1,034 1,117 1,322 872 1,087 1,470

Maxalt 550 638 586 113 91 93

Cosopt/Trusopt 484 477 475 317 275 297

Preladenant (Ph 3 Parkinson's) - - - - - 125

Suvorexant (Ph 3 insomnia) - - - - 170 360

Bridion 0 200 262 442 551 595


Bridion: We Expect FDA Approval in 2013

Bridion is a Schering-Plough legacy pipeline drug for the reversal of certain muscle relaxants used during surgery. It has been approved in over 68 countries and performing well in Japan. In 2008, the FDA surprisingly issued a non-approvable letter for the drug owing to certain safety concerns, such as allergic reactions. Merck has completed additional trials to address the FDA’s concerns, and plans to file Bridion by the end of 2012. We believe FDA approval in 2013 is likely and based on the drug’s ex-US performance, we forecast that Bridion can reach sales of roughly $600 million by 2015.

MK-8931 for Alzheimer’s Disease: Potentially Transformative? Yes, but Way Too Early

Merck’s MK-8931 is an early-stage drug that has the potential to be a disease modifying treatment for Alzheimer’s Disease (AD). This is one of the most promising biopharmaceutical markets, in our view, given the growing prevalence of the disease (5 million in the US, 35 million worldwide) and its staggering costs of care ($138 billion in the US in 2011; Source: Merck). Merck has identified MK-8931 as one of its two potentially transformative pipeline candidates. The drug inhibits BACE-1, one of the enzymes in the brain involved in processing of amyloid-beta (AB) proteins that form the characteristic amyloid plaques in brains of AD patients. AB plaques are believed to play a key role in the disease. Although we recognize that BACE is certainly an attractive target, and Merck’s apparent success in developing an agent that targets it is impressive as many others have failed, the clinical data with MK-8931 is extremely limited. Merck has only shared one study with healthy volunteers, which showed the drug lowers AB proteins in cerebral spinal fluid (CSF) by more than 90%. This suggests there is less AB protein being produced with MK-8931, which means less of it can accumulate as plaques in the brain of AD patients. However, we’ve seen many promising early-stage AD drugs fail in clinical development, and until we see data in AD patients, with at least some improvements in cognitive functions, we remain cautious.


Page 49 May 17, 2012

Suvorexant (Phase 3 Insomnia): Encouraging Profile, Safety Will Be Key

Suvorexant is Merck’s Orexin receptor antagonist and it just completed its phase 3 trials for treatment of insomnia. This is another attractive market, affecting about 10%-15% of the US general population, with sub-optimal treatments. The market is currently dominated by generic Ambien, followed by other newer non-benzodiazepines, like Lunesta and Sonata. These drugs were considered a significant advance in the treatment of insomnia because although they had a similar mechanism to some of the older yet effective benzodiazepines (increase the inhibitory actions of the neurotransmitter GABA), they had fewer side effects mostly owing to their short duration of action.

Merck’s Suvorexant works via a different mechanism, inhibition of the actions of the neuro-peptides (chemical messengers) that produces wakefulness: orexin A and orexin B. Importantly, Suvorexant seems to have a different mechanism of action from Almorexant, GSK and Actelion’s orexin receptor 1 and 2 antagonist, which was discontinued at phase 3 owing to safety signals. In a phase IIb trial presented at the 2010 Associated Professional Sleep Societies Meeting, Suvorexant demonstrated significantly improved sleep efficiency in insomnia subjects compared with placebo at one night and at four weeks. So far, the drug seems well tolerated and lacks the next-day side effects, such as impaired driving, seen with Lunesta. On February 2012, Merck announced that the two pivotal trials showed “positive results” and that the company still anticipates filing the drug in 2012. At this point, it is not precisely clear whether the trial met is primary endpoint of change from baseline in subjective total sleep time and time to sleep onset, wake time after persistent sleep onset, and latency to onset of persistent sleep at one and three months. Overall, the drug seems approvable; however, given the novelty of the mechanism and safety issues associated with Almorexant, the safety profile of Suvorexant will undoubtedly be scrutinized. We cautiously forecast Suvorexant sales of $170 million and $360 million in 2014 and 2015, respectively.

Preladenant in Parkinson’s Disease: Interesting Mechanism, Good Phase 2, Looking

Forward to Phase 3 Data

Parkinson's disease (PD) is a progressive neurodegenerative disorder that affects 1%-2% of people over 60. It is often characterized by motor movements, such as tremors and muscle rigidity. Most of the current therapies are dopamine based; however, none have been proven to modify the course of the disease and they are associated with significant side effects (worsening dyskinesia or involuntary movements). The adenosine-2A receptor is a recently identified target for treatment of PD, and the data so far suggest that its blockade may have a potential therapeutic effect. Merck’s Preladenant is an adenosine 2A receptor antagonist, and in preclinical studies with animal models it demonstrated that it can reverse the motor impairments induced by dopamine depletion or antagonism. Importantly, in a phase 2b trial, Preladenant met its major endpoints by reducing OFF time and increasing ON time in dopamine treated PD patients, without worsening dyskinesia. As such, the drug is being evaluated in phase 3 as an add-on therapy to dopamine in patients with moderate to severe PD, and as monotherapy in patients with early PD. Merck anticipates filing the drug in 2014, suggesting phase 3 results could be available in late 2013/1H2014. Based on the positive phase 2b, we are cautiously optimistic about Preladenant and include sales of $125 million in our 2015 forecast.


Page 50 May 17, 2012

Oncology Segment: Small for Now, but on the Right Track

Merck’s Oncology segment only accounts for roughly 3% of global revenues and is declining, as current mature products face patent expirations and increased competition. However, Merck has identified oncology as a strategic priority and has a fairly promising early-stage pipeline. Merck plans to increase its use of biomarkers in clinical trials to select the patients that are more likely to respond to a particular drug or combination of drugs. During its 2011 R&D day, management said “only when we have achieved a high response rate in a biomarker based sub-population will we proceed into later development.” Moreover, Merck is increasing its use of targeted combination therapies to enhance efficacy and prevent the development of resistance. This is an increasingly common and rational treatment strategy in cancer given the redundancy and heterogeneity of signaling pathways responsible for tumor growth and proliferation.

Merck’s recently announced global partnership with Endocyte to develop and commercialize the phase 3 asset Vintafolide (EC145) is aligned with its strategy of developing personalized targeted therapies. Vintafolide is a conjugate consisting of folate (vitamin B9) linked to a potent chemotherapy agent (DAVLBH). The folate receptor is expressed more frequently in a wide variety of cancers including ovarian, NSCLC, breast, colon and kidney, and Vintafolide is designed to preferentially target the chemotherapy agent to the cancer cells that actively take up folate via the folate receptor. Vintafolide is currently being evaluated in a phase 3 clinical trial for platinum-resistant ovarian cancer (PROCEED trial) and a phase 2 trial for non-small cell lung cancer (NSCLC). Both studies are also using Endocyte's investigational companion molecular imaging agent, Etarfolatide (EC20), to identify tumors that over-express folate receptors. Based on very positive PFS results in the phase 2 PRECEDENT trial, we are optimistic about Vintafolide in ovarian cancer. Results for the phase 3 are expected in 2013, and we currently assign about $200 million for the drug in 2015.

The recent negative FDA advisory vote on Taltorvic (ridaforolimus, an mTOR inhibitor) was not surprising given the drug’s modest benefits in for maintenance treatment of metastatic soft tissue or bone sarcomas in patients who had a favorable response to standard chemotherapy. Taltorvic is also in multiple phase 2 trials including endometrial cancer, breast cancer, and NSCLC. Given the drug’s activity so far, we conservatively assign $100 million for Taltorvic in 2015. However, we look forward to data from Merck’s earlier stage cancer drugs that are more aligned with its stated personalized therapy strategy. Although, it is still too early to assign any meaningful value for each of these drugs, we recognize the potential in the approach.

Exhibit 29. Our Forecasts for Merck’s Oncology Drugs: Modest Expectations for Now

2010A 2011A 2012E 2013E 2014E 2015E

Oncology 1,652 1,548 1,313 1,233 955 1,085

Temodar 1,065 935 860 740 421 352

Emend 378 419 452 493 534 433

Intron A 209 194 176 165 155 145

Ridaforolimus - - - - - 100

Vintafolide (Chemo-folate conjugate) - - - - - 200



Page 51 May 17, 2012

Exhibit 30. Merck’s Early Clinical Oncology Programs Include Rational Combination

Treatments in Biomarker Selected Sub-Populations

Drugs and mechanism Indication Patient Selection Criteria StatusData

ExpectedRidaforolimus + IGF-1R mAb (MK-0646) dalotuzumab

Breast cancer ER+, enriched for high Ki 67 Phase 1/2 Nov-13

AKT inhibitor (MK-2206) + IGF-1R mAb (dalotuzumab)

Platinum resistantovarian cancer

RNA based biomarker Phase 1 Mar-14

Ridaforolimus + IGF-1R mAb (dalotuzumab)

Platinum resistantovarian cancer

RNA based biomarker

Notch inhibitor (MK-0752) + IGF-1R mAb (dalotuzumab)

Colon cancerK-ras wildtype +RNA based biomarker

Ridaforolimus + AKT inhibitor (MK-2206)

Hormone RefractoryProstate cancer

Immunohistochemistry basedbiomarker

Ridaforolimus + AKT inhibitor (MK-2206)

Breast cancerER+, low RAS RNA signature,high Ki 67

Wee1 inhibitor (MK-1775) + carboplatin + paclitaxel

Cisplatin sensitiveovarian cancer

p53 mutantPhase 2 (n=120)

Apr-14

CDK inhibitor dinaciclibChronic lymphocyticleukemia

HistopathologyPhase 2 (n=200)

?

BATTLE-2• AKT inhibitor (MK-2206)/MEK inhibitor (AZD6244)• AKT inhibitor (MK-2206)/erlotinib

Non small cell lung cancer

Predictive biomarker discovery

Phase 2 (N=450); Phase 2 (n=90)

Jun-17 and Nov-11

Phase 1 (n=109)

Phase 1 (n=124); multiple tumors

Apr-14

Mar-14

Source: Merck R&D Presentation 2011, clinicaltrials.gov, BMO Capital Markets


Page 52 May 17, 2012

Merck Biosimilars: Significant Opportunity for 2015-2020

Slightly Behind Competitors, but Judiciously Preparing for the Big Opportunity

Biosimilars are arguable the greatest biopharma opportunity in the latter half of this

decade. Biologics with cumulative annual sales of roughly $40-$50 billion will lose patent exclusivity by 2016 (Sources: IMS, Hospira, BMO Capital Markets estimates), with more to follow by 2020. The regulatory path remains somewhat ambiguous for more complex products, particularly in the US; however, given the cost-containment focus, biosimilars are inevitable in major markets. We believe emerging markets will also be a key growth driver as their budget constrained healthcare systems move closer to universal coverage. In most emerging markets, biologics targeting serious diseases such as cancer were either not available or not affordable to most patients. Merck and most of its pharma and biotech peers are pursuing biosimilars as part of their growth strategy in emerging markets. The High Barriers to Entry for Biosimilars Is a Key Advantage for Merck and Peers

Several significant barriers to entry make the biosimilar market attractive to big Pharma and big Biotech. The first is the higher uncertainty, and therefore risk, of the regulatory path for biosimilars. The second and more significant barrier is the relatively high manufacturing costs and technical expertise required to produce commercial scale antibodies and other complex biologics. We believe these barriers will favor companies that are already familiar with biologics and obviously those with the resources to make the needed investments in manufacturing and technical expertise. Merck has made significant internal and external investments to develop its biosimilar

franchise. Internal investments include the commitment of more than 200 people in R&D, who also have responsibilities for branded biologics and bio-betters, as well as the building of a $200+ million internal manufacturing infrastructure for biosimilars and other biologics. To augment its biologic manufacturing capabilities, Merck recently partnered with MedImmune, the global biologics arm of AstraZeneca, for their biologics manufacturing capacity from their new state of the art facility. For clinical development, Merck has partnered with Parexel (PRXL.O, Not Rated) in an exclusive biosimilars deal that will provide Merck with access to approximately 500 worldwide clinical sites for biosimilar clinical research. Its biosimilars business is led by Mr. Michael Kamarck, who has 30 years of biotechnology experience including vaccine and biologics manufacturing at Merck. Mr. Kamark was previously president of technical operation and product supply at Wyeth. Merck’s Biosimilar Pipeline: The Enbrel Biosimilar Seems Very Interesting

Merck initially expected to have five biosimilar molecules in phase 3 by the end of 2012; however, the company recently withdrew this goal owing to continued regulatory uncertainties. Merck’s most probable first biosimilar products will be the biosimilars of Amgen's Neupogen followed by Neulasta. However, the GSF’s are the relatively low hanging fruit in the biosimilar world as they are easier to manufacture than mAbs. Other companies with more advanced biosimilar G-CSFs include Teva and Hopsira. Merck considerably improved its biosimilar


Page 53 May 17, 2012

pipeline with its recent partnership with South Korea’s Hanwha Chemical Corp. (KSE:09830) to develop and commercialize Hanwha's biosimilar of Enbrel (etanercept). The compound, HD203 now also called MK-8953, is in phase 3 trials in Korea to evaluate its equivalence to Enbrel in rheumatoid arthritis (RA). These phase 3 studies are randomized double blind active controlled parallel group studies, which Merck should be able to leverage to some extent for the regulatory process in other markets. Merck is responsible for clinical development and manufacturing of HD203/MK-8953, and has exclusive commercialization rights outside of Korea and Turkey, where Hanwha retains rights. Hanwha received an upfront payment and is eligible for undisclosed milestones and tiered royalties.

Exhibit 31. Merck’s Biosimilar Pipeline: A Little Behind Competitors as It Proceeds Cautiously Given Regulatory Uncertainties

Reference Product

Brand company

Key Indications

Biosimilar developer

Biosimilar partner

Notes:

Neulasta Amgen Neutropenia Insmed MerckINS 20/MK-6302: Ph 1 demonstrated comparability with Neulasta; patent exp. Dec. 2013; considerably behind Teva (Ph. 3)

Neupogen (US)

Amgen Neutropenia Insmed Merck MK-4214, Ph 1; considerably behind Teva (Ph. 3)

Enbrel Amgen RA Merck HanwhaHD-203/MK-8953 (deal: 06/2011); Merck will run development & manufacturing and commercialize worldwide ex. Japan & Turkey. Ph 1 in US Ph 3 in Korea.

Rituxan (rituximab)

Roche/ Biogen

NHL, CLL, RA Merck MK-8808: Ph.1; well behind Novartis' which is in Ph 3.

General Merck ParexelAlliance; Parexel will provide access to global clinical development services for designated biosimilar candidates

Source: Company Reports, BioCentury, IMS, BMO Capital Markets.

We believe Merck’s biosimilar franchise will be a key growth driver from 2015-2020. Based on our review of the competitive landscape, we believe Merck will achieve its strategic goal of being among the first major players in biosimilars. Moreover, as demonstrated by the performance of current biosimilars in Europe, the commercial dynamics of biosimilars will be very different than those of small molecule generics. Therefore, we believe Merck’s marketing expertise should give it a competitive advantage relative to other biosimilar developers with a smaller presence in branded markets (e.g., Teva).


Page 54 May 17, 2012

Financial Position

Overall, Merck is in strong financial position, in our opinion. We expect Merck to generate operating cash flows of at least $13 billion from 2012-2015. We include $1.5 billion in 2012 as our estimated value for AstraZeneca exercising its option to buy Merck’s interest in Nexium and Prilosec (expected in September, 2012). Merck’s operating cash flows should be sufficient for cover capital expenditures, debt service, dividends, share buybacks, and other obligations. Merck finished 2011 with net cash position of about $900 million, including long-term investments. Most of Merck’s investments are in corporate notes and bonds ($2 billion), commercial paper ($1 billion), and US government and agency securities ($1 billion).

Exhibit 32. Merck Generates More Than Enough Cash to Cover Obligations

2011A 2012E 2013E 2014E 2015EFCF 10,660 11,613 11,454 11,094 12,363Total Debt 17,515 15,525 13,535 11,435 9,335Cash & Equivalents 13,531 13,351 14,147 13,848 14,731Investments (include non-current) 4,899 5,568 6,326 7,039 7,775Net Debt (Exl. Long Term Investments) 2,543 65 (3,479) (5,994) (9,712)Net Debt (Inc. Long term investments) (915) (3,393) (6,937) (9,452) (13,170)Source: Company Reports, Thompson One, BMO Capital Markets

Note: The aggregate maturities of long-term debt for each of the next five years are as follows: 2012,

$24 million; 2013, $1.8 billion; 2014, $2.1 billion; 2015, $2.1 billion; 2016, $893 million. (Source:

Merck 2011 Form 10-K)

Merck recently increased its divided by 11%, and is on track to return about $7 billion to shareholders in 2012. We estimate there is roughly $3.5-$4 billion remaining under the current share buyback program.

Exhibit 33. Merck on Track to Return $7 Billion to Shareholders in 2012

$4.7 $4.7

$1.3

$1.6 $1.9

$0.5

$-

$1

$2

$3

$4

$5

$6

$7

2010 2011 2012.1Q

$, B

illi

on

s Share Repurchase

Dividends



Page 55 May 17, 2012

Key Investment Risks

Lower-than-expected performance for key growth drivers: Merck is heavily dependent on its diabetes (centered on Januvia), vaccines, and diversified (Animal Health and Consumer) segments to absorb the impact of patent expirations. The diabetes segment could perform below our expectations owing to unforeseen changes in the competitive landscape. The vaccines segment is heavily dependent on government programs and purchasing patterns, which are difficult to predict. Similarly, there is relatively less visibility in Merck’s animal health and consumer segments, and as such, they may not exhibit the same steady growth expected in our forecasts. Finally, we expect sales of the Vytorin/Zetia franchise would decline significantly (10%-15%) if the IMPROVE-IT trial shows no incremental benefits.

Greater-than-expected failure rate for the late stage pipeline: Clinical trials are risky, and Merck has a number of first-in-class drugs that are typically riskier to develop than follow-on or “me too” drugs. Although, Merck is not particularly dependent on any one pipeline program, a higher-than-expected failure rate would jeopardize our longer-term cash flow growth assumptions.

Greater-than-expected impact from ex-US austerity measures and pricing cuts: European austerity measures and pricing regulations could restrict the uptake of some of Merck’s more expensive products (e.g., Remicade) particularly in cases where a generic alternative is available (e.g., Odanacatib in osteoporosis).


Page 56 May 17, 2012

Exhibit 34. Our Product Forecasts for Merck

2010A 2011A 2012E 2013E 2014E 2015E

Total Pharmaceuticals 39,267 41,288 40,117 37,732 38,130 39,778

Cardiovascular 4,577 4,541 4,390 4,311 4,410 4,626Zetia 2,297 2,428 2,470 2,508 2,539 2,558Vytorin 2,014 1,883 1,732 1,644 1,615 1,627Integrilin 266 230 188 159 125 21Tredaptive 0 0 0 0 130 420

Diabetes and Obesity 3,339 4,686 5,731 6,732 7,415 7,746

Januvia,$MM 2,385 3,324 4,096 4,889 5,447 5,743

Janumet, $MM 954 1,362 1,635 1,842 1,968 2,003

Diversified Brands, $MM 4,008 3,574 2,923 2,381 2,038 1,821

Cozaar/Hyzaar 2,105 1,663 1,244 950 774 675

Zocor 468 455 372 313 258 205

Propecia 446 447 421 300 243 233

Claritin Rx 296 314 257 219 189 162

Remeron 222 241 210 193 179 164

Vasotec/Vaseretic 255 231 209 199 190 179

Proscar 216 223 209 206 206 203

Infectious Disease 4,350 4,638 4,529 4,712 4,701 4,603Isentress 1,090 1,359 1,509 1,622 1,659 1,599PegIntron 737 658 588 536 489 442Cancidas 611 640 584 539 500 471Primaxin 610 515 345 271 224 183Invanz 362 407 448 496 540 576Avelox 316 321 267 265 146 24Noxafil 198 231 258 300 346 394MK-3415A 0 0 0 0 0 75Victrelis 0 139 531 683 796 840

Neurosciences and Ophthalmology 1,034 1,117 1,322 872 1,087 1,470

Oncology 1,652 1,548 1,313 1,233 955 1,085

Respiratory and Immunology 10,467 11,208 9,127 6,220 5,788 5,526

Singulair 4,987 5,479 4,145 1,264 1,138 1,124

Remicade 2,714 2,667 2,156 2,250 2,327 2,309

Nasonex 1,220 1,287 1,278 1,266 928 695

Clarinex 624 621 450 277 233 193

Arcoxia 399 432 412 407 401 389

Simponi 97 264 334 409 469 496

Asmanex 208 206 187 173 74 35

Proventil 210 155 0 0 0 0

Dulera 8 97 165 174 179 184

Allergy Immunotherapies (AITs) - - - - 38 100

Vaccines 3,505 3,894 4,414 4,907 5,219 5,709Gardasil and V503 989 1,210 1,480 1,660 1,852 2,024ProQuad/M-M-R II/Varivax 1,378 1,202 1,257 1,315 1,375 1,436RotaTeq 519 652 701 756 819 898Pneumovax 376 498 532 466 409 359Zostavax & V212 243 332 444 710 764 917V419 - - - - - 75

Women's Health and Endocrine 2,458 2,572 2,435 2,374 2,520 2,902

Fosamax 926 855 720 637 557 494NuvaRing 559 623 635 655 673 709Follistim AQ 528 531 461 419 383 348Implanon 236 295 330 358 386 414Cerazette 209 268 289 305 321 337Odanacatib (Ph 3 PMO) 0 0 0 0 90 300Elonva (Ph 3) 0 0 0 0 110 300

Other Pharmaceuticals 3,877 3,533 3,932 3,990 3,973 3,939

Biosimilars 0 0 0 0 25 350

Diversified Revenues 6,720 6,759 6,822 6,743 7,318 7,936Animal Health 2,942 3,254 3,664 4,104 4,572 5,067Consumer Care 1,823 1,840 1,930 2,032 2,145 2,268Other Revenues 1,955 1,665 1,228 607 602 601

Astra (AZLP) 1,252 1,183 842 215 215 215Other 703 482 386 393 387 387

Total Revenues 45,987 48,047 46,938 44,475 45,448 47,714

Source: Company Reports, Thompson One, BMO Capital Markets


Page 57 May 17, 2012

Merck Income Statement: Our Quarterly Estimates (Non-GAAP)

Merck Income Statment: Non-GAAP, $MM

Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013

Sales $11,580 $12,151 $12,022 $12,294 $11,731 $12,122 $11,888 $11,198 $10,801 $11,066 $11,379 $11,229

Materials & Production 2,690 2,831 2,969 2,889 2,803 2,788 2,900 2,598 2,484 2,545 2,617 2,583Gross Profit 8,890 9,320 9,053 9,405 8,928 9,334 8,988 8,600 8,317 8,521 8,762 8,646Marketing & Administration 3,083 3,425 3,252 3,576 2,999 3,288 3,089 3,361 2,939 3,288 3,131 3,365Research & Development 1,811 1,901 1,904 2,126 1,808 1,977 1,856 2,041 1,808 1,937 1,856 1,980Operating Profit 3,996 3,994 3,897 3,703 4,121 4,069 4,042 3,198 3,570 3,295 3,774 3,301

Equity income from affiliates (138) (55) (161) (257) (110) (55) (140) (10) (15) (15) (20) (10)Other (income) expenses, net 256 114 203 203 142 116 129 133 133 127 129 124Income (Loss) Before Taxes 3,878 3,935 3,855 3,757 4,089 4,008 4,053 3,075 3,452 3,183 3,665 3,187Income Tax Provision (Benefit) 989 955 915 748 1,016 934 932 646 851 735 836 663

Net Income $2,889 $2,980 $2,940 $3,009 $3,073 $3,074 $3,120 $2,429 $2,601 $2,448 $2,829 $2,524

Less: Net Income Attributable to Non-controlling Interests

28 30 32 31 29 30 0 0 0 0 0 0

Net Income Attributable to Merck & Co. $2,861 $2,950 $2,908 $2,978 $3,044 $3,044 $3,120 $2,429 $2,601 $2,448 $2,829 $2,524

EPS-Diluted $0.92 $0.95 $0.94 $0.97 $0.99 $0.98 $1.01 $0.79 $0.85 $0.80 $0.92 $0.83

Average Shares O/S Assuming Dilution 3,104 3,110 3,091 3,069 3,074 3,091 3,076 3,057 3,044 3,073 3,060 3,045

Dividend per share $0.38 $0.38 $0.38 $0.38 $0.42 $0.42 $0.42 $0.42 $0.42 $0.42 $0.42 $0.42

Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013

Growth RatesRevenue 1% 7% 8% 2% 1% 0% -1% -9% -8% -9% -4% 0%Gross Profit 3% 7% 9% 5% 0% 0% -1% -9% -7% -9% -3% 1%Operating Profit 16% 13% 16% 9% 3% 2% 4% -14% -13% -19% -7% 3%Net Income 10% 9% 10% 8% 6% 3% 7% -18% -15% -20% -9% 4%

MarginsGross Profit 76.8% 76.7% 75.3% 76.5% 76.1% 77.0% 75.6% 76.8% 77.0% 77.0% 77.0% 77.0%Operating Profit 35% 33% 32% 30% 35% 34% 34% 29% 33% 30% 33% 29%Net Income 25% 24% 24% 24% 26% 25% 26% 22% 24% 22% 25% 22%

2011A 2012E 2013E

Source: company reports, Thomson One, BMO Capital Markets estimates.


Page 58 May 17, 2012

Merck Income Statement: Our Annual Estimates (Non-GAAP)

Merck Income Statment: Non-GAAP, $MM

2010A 2011A 2012E 2013E 2014E 2015E

Sales $45,987 $48,047 $46,938 $44,475 $45,448 $47,714Materials & Production 11,400 11,379 11,089 10,229 10,224 10,351Gross Profit 34,587 36,668 35,849 34,246 35,224 37,362Marketing & Administration 12,604 13,336 12,738 12,723 12,850 12,979Research & Development 8,242 7,742 7,682 7,582 7,694 7,848Operating Profit 13,741 15,590 15,429 13,941 14,680 16,536Equity income from affiliates (588) (611) (315) (60) (60) (60)Other (income) expenses, net 779 776 520 514 410 210Income (Loss) Before Taxes 13,550 15,425 15,224 13,487 14,329 16,386Income Tax Provision (Benefit) 2,713 3,608 3,528 3,085 3,247 3,677

Effective Tax Rate 20.0% 23.4% 23.2% 22.9% 22.7% 22.4%

Net Income $10,836 $11,817 $11,696 $10,403 $11,082 $12,709Less: Net Income Attributable to Non-controlling Interests

121 120 59 0 0 0

Net Income Attributable to Merck $10,715 $11,697 $11,637 $10,403 $11,082 $12,709

EPS-Diluted $3.42 $3.77 $3.78 $3.40 $3.65 $4.21

Average Shares O/S Assuming Dilution 3,120 3,094 3,075 3,055 3,036 3,018

Cash dividends paid per common share $1.52 $1.52 $1.68 $1.68 $1.73 $1.85

2010A 2011A 2012E 2013E 2014E 2015EGrowth Rates

Revenue 4.5% -2.3% -5.2% 2.2% 5.0%Gross Profit 6% -2% -4% 3% 6%Operating Profit 13% -1% -10% 5% 13%Net Income 9% -1% -11% 7% 15%Dividend 0% 11% 0% 3% 7%

MarginsGross Profit 75% 76.3% 76.4% 77.0% 77.5% 78.3%Operating Profit 30% 32% 33% 31% 32% 35%Net Income 24% 25% 25% 23% 24% 27%

Payout Ratio 44% 40% 44% 49% 47% 44%Source: Company Reports, Thompson One, BMO Capital Markets


Page 59 May 17, 2012

Merck Balance Sheet

Merck Balance Sheet, $MM 2011A 2012E 2013E 2014E 2015EAssetsCash & ST Investments 14,972 15,460 17,014 17,429 19,047 Cash & Cash Equivalents 13,531 13,351 14,147 13,848 14,731 Short Term Investments 1,441 2,110 2,868 3,581 4,317Receivables (Net) 8,261 7,979 7,561 7,726 8,111Inventories - Total 6,254 6,102 5,782 5,908 6,203Deferred income taxes and other current assets

3,694 3,673 3,683 3,678 3,681

Current Assets - Total 33,181 33,214 34,040 34,741 37,042Investments 3,458 3,458 3,458 3,458 3,458Property Plant & Equipment - Net 16,297 15,665 14,051 13,480 11,835Good Will 12,155 12,005 11,855 11,705 11,555Other Intangibles, Net 34,302 33,251 32,201 31,152 30,102Other Assets 5,735 5,681 5,708 5,694 5,701Total Assets 105,128 103,274 101,313 100,229 99,693LiabilitiesAccounts Payable 2,462 2,405 2,279 2,329 2,445ST Debt & Current Portion of LT Debt 1,990 1,990 2,100 2,100 893Accrued and other current liabilities 9,731 9,123 9,427 9,275 9,351Income Taxes Payable 781 1,012 897 954 925Dividends Payable 1,281 1,284 1,278 1,291 1,285Current Liabilities - Total 16,245 15,814 15,981 15,948 14,899Long Term Debt 15,525 13,535 11,435 9,335 8,442Deferred Income Taxes and Noncurrent Liabilities

16,415 15,491 14,567 13,636 12,715

Total Liabilities 48,185 44,840 41,982 38,920 36,057Total Equity 56,943 58,434 59,331 61,310 63,636Minority Interest 2,426 0 0 0 0Total Merck Stockholders' Equity 54,517 58,434 59,331 61,310 63,636Source: Company Reports, Thompson One, BMO Capital Markets


Page 60 May 17, 2012

Merck Statement of Cash Flows

Merck Statement of Cash Flows, $MM 2011A 2012E 2013E 2014E 2015EOperationsNet Income (GAAP) 6,392 8,048 6,384 7,948 10,105Depreciation, Depletion & Amortization 7,427 6,387 5,493 4,724 4,063Intangible asset impairment charges 705 1,051 1,050 1,050 1,049Gain on disposition of interest in equity method investment

(136)

Gain on AstraZeneca LP asset option exercise

(1,500)

Equity income From affiliates (610) (315) (60) (60) (60)Dividends and distributions from equity affiliates

216 108 86 69 55

Deferred Income Taxes (1,537) (1,093) (1,096) (1,105) (1,098)Shared based compensation 369 431 436 412 426Other 323Funds From/For Other Operating Activities (766) 245 935 (143) (349)Net Cash Flow - Operating Activities 12,383 13,362 13,229 12,895 14,191InvestingCapital Expenditures (Addition to Fixed Assets)

(1,723) (1,749) (1,775) (1,802) (1,829)

Acquisitions of businesses, net of cash acquired

(373)

Purchases of securities and other investments (7,325) (7,261) (7,293) (7,277) (7,285)

Decrease In Investments 6,324 6,593 6,535 6,564 6,549Dispositions of businesses, net of cash divested

323

Other Use/(Source) - Investing 116Net Cash Flow - Investing (2,890) (2,417) (2,533) (2,515) (2,564)FinancingNet Proceeds From Sale/Issue of Stock 321 342 332 337 334Common Shares repurchased (1,921) (4,183) (3,052) (3,618) (3,335)Proceeds from issuance of debt 0Reduction In Long Term Debt (1,547) (1,990) (2,100) (2,100) (893)Inc(Dec) In Short Term Borrowings 1,076 0 110 0 (1,207)Cash Dividends Paid - Total (4,811) (5,224) (5,133) (5,254) (5,587)Other Source (Use) - Financing (22) (85) (71) (59) (72)Net Cash Flow - Financing (6,904) (11,140) (9,915) (10,694) (10,759)Effect of Exchange Rate On Cash 42 15 15 15 15Inc(Dec) In Cash & Equivalents 2,631 (180) 796 (299) 883Cash & Equivalents at beginning of period 10,900 13,531 13,351 14,147 13,848Cash & Equivalents at end of period 13,531 13,351 14,147 13,848 14,731

2011A 2012E 2013E 2014E 2015EFCF 10,660 11,613 11,454 11,094 12,363Total Debt 17,515 15,525 13,535 11,435 9,335Cash & Equivalents 13,531 13,351 14,147 13,848 14,731Investments (include non-current) 4,899 5,568 6,326 7,039 7,775Net Debt (Exl. Long Term Investments) 2,543 65 (3,479) (5,994) (9,712)Net Debt (Inc. Long term investments) (915) (3,393) (6,937) (9,452) (13,170)Source: Company Reports, Thompson One, BMO Capital Markets


Page 61 May 17, 2012

Other companies mentioned (priced as of the close on May 16, 2012):

Abbot Laboratories (ABT, $62.55, Not Rated) Amgen (AMGN, $70.98, rated Market Perform by Jim Birchenough) AstraZeneca (AZN, $42.25, Not Rated) Biogen Idec (BIIB, $136.80. rated Market Perform by Jim Birchenough) Bayer AG (ADR; PINK:BAYRY, 64.98) Bristol Myers Squibb (BMY, $33.02, OUTPERFORM) Celgene (CELG, $70.72, rated Outperform by Jim Birchenough) Eli Lilly (LLY, $40.75, Market Perform Gilead (GILD, $51.58, rated Outperform by Jim Birchenough) GlaxoSmithKline plc (ADR, NYSE:GSK, $45.37) Johnson & Johnson (JNJ, $63.71, Not Rated) Merck KGaA (ETR:MRK, 75.90, Not Rated) Roche Holding Ltd. (PINK:RHHBY, ADR, 40.76) Sanofi Aventis (SNY $34.29, Not Rated) Onyx (ONXX, $46.00, rated Outperform Jim Birchenough) Pfizer (PFE, $22.64, Not Rated) Vertex (VRTX, $62.61, Not Rated)


Page 62 May 17, 2012

MERCK & CO INC NEW (MRK)

Last Daily Data Point: April 5, 2012

Target Price(US$)Quarterly Price (US$)

Share Price(US$)

15

20

25

30

35

40

45

15

20

25

30

35

40

45

10

20

30

40

50

60

70

80

90

10

20

30

40

50

60

70

80

90

1) NR

1980 1985 1990 1995 2000 2005 201050

100

150

50

100

150

MRK Relative to S&P 500MRK Relative to Pharmaceuticals

1980 1985 1990 1995 2000 2005 2010

5

10

0

20

40

EPS (4 Qtr Trailing) - (US$) Price / Earnings

2009 2010 201180

90

100

110

120

130

140

MRK Relative to S&P 500MRK Relative to Pharmaceuticals

80

90

100

110

120

130

140

2009 2010 2011-50

50

MRK Relative to S&P 500 Y/Y (%)MRK Relative to Pharmaceuticals Y/Y (%)

MRK - Rating as of 27-Apr-09 = OP

Date Rating Change Share Price

1 3-May-11 OP to NR $36.31

-50

50


Page 63 • May 17, 2012

Important Disclosures Analyst's Certification I, Alex Arfaei, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of BMO Capital Markets and their affiliates, which includes the overall profitability of investment banking services. Compensation for research is based on effectiveness in generating new ideas and in communication of ideas to clients, performance of recommendations, accuracy of earnings estimates, and service to clients. Company Specific Disclosure Disclosure 9: BMO Capital Markets makes a market in this security. Methodology and Risks to Our Price Target/Valuation Methodology: DCF: Free Cash Flow To Equity and P/E multiple. Risks: Uncertainty of Phase 3 Pipeline.

Distribution of Ratings (March 31, 2012) Rating

Category

BMO Rating BMOCM US

Universe* BMOCM USIB Clients**

BMOCM USIB Clients***

BMOCM Universe****

BMOCM IB Clients*****

Starmine Universe

Buy Outperform 37.2% 12.1% 52.1% 39.2% 48.3% 54.6% Hold Market Perform 60.0% 7.0% 47.9% 57.6% 51.0% 40.1% Sell Underperform 2.4% 0.0% 0.0% 3.2% 0.7% 5.3%

* Reflects rating distribution of all companies covered by BMO Capital Markets Corp. equity research analysts. ** Reflects rating distribution of all companies from which BMO Capital Markets Corp. has received compensation for Investment Banking services as

percentage within ratings category. *** Reflects rating distribution of all companies from which BMO Capital Markets Corp. has received compensation for Investment Banking

services as percentage of Investment Banking clients. **** Reflects rating distribution of all companies covered by BMO Capital Markets equity research analysts. ***** Reflects rating distribution of all companies from which BMO Capital Markets has received compensation for Investment Banking services as

percentage of Investment Banking clients. Ratings and Sector Key We use the following ratings system definitions: OP = Outperform - Forecast to outperform the market; Mkt = Market Perform - Forecast to perform roughly in line with the market; Und = Underperform - Forecast to underperform the market; (S) = speculative investment; NR = No rating at this time; R = Restricted – Dissemination of research is currently restricted. Market performance is measured by a benchmark index such as the S&P/TSX Composite Index, S&P 500, Nasdaq Composite, as appropriate for each company. BMO Capital Markets eight Top 15 lists guide investors to our best ideas according to different objectives (Canadian large, small, growth, value, income, quantitative; and US large, US small) have replaced the Top Pick rating. Other Important Disclosures For Other Important Disclosures on the stocks discussed in this report, please go to http://researchglobal.bmocapitalmarkets.com/Public/Company_Disclosure_Public.aspx or write to Editorial Department, BMO Capital Markets, 3 Times Square, New York, NY 10036 or Editorial Department, BMO Capital Markets, 1 First Canadian Place, Toronto, Ontario, M5X 1H3. Prior BMO Capital Markets Ratings Systems http://researchglobal.bmocapitalmarkets.com/documents/2009/prior_rating_systems.pdf

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Page 64 • May 17, 2012

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