Joint Ventures and Other Equity Method Affiliates
Equity income from affiliates reflects the performance of the Company’s joint ventures and other equity method affiliates and was comprised of the following:
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| | | | | | | | | | | |
Years Ended December 31 | 2013 | | 2012 | | 2011 |
AstraZeneca LP | $ | 352 |
| | $ | 621 |
| | $ | 574 |
|
Other (1) | 52 |
| | 21 |
| | 36 |
|
| $ | 404 |
| | $ | 642 |
| | $ | 610 |
|
(1) Primarily reflects results from Sanofi Pasteur MSD and Johnson & Johnson°Merck Consumer Pharmaceuticals Company (which was disposed of on September 29, 2011).
AstraZeneca LP
In 1982, Merck entered into an agreement with Astra AB (“Astra”) to develop and market Astra products under a royalty-bearing license. In 1993, Merck’s total sales of Astra products reached a level that triggered the first step in the establishment of a joint venture business carried on by Astra Merck Inc. (“AMI”), in which Merck and Astra each owned a 50% share. This joint venture, formed in 1994, developed and marketed most of Astra’s new prescription medicines in the United States including Prilosec, the first of a class of medications known as proton pump inhibitors, which slows the production of acid from the cells of the stomach lining.
In 1998, Merck and Astra completed the restructuring of the ownership and operations of the joint venture whereby Merck acquired Astra’s interest in AMI, renamed KBI Inc. (“KBI”), and contributed KBI’s operating assets to a new U.S. limited partnership, Astra Pharmaceuticals L.P. (the “Partnership”), in exchange for a 1% limited partner interest. Astra contributed the net assets of its wholly owned subsidiary, Astra USA, Inc., to the Partnership in exchange for a 99% general partner interest. The Partnership, renamed AstraZeneca LP (“AZLP”) upon Astra’s 1999 merger with Zeneca Group Plc, became the exclusive distributor of the products for which KBI retained rights.
While maintaining a 1% limited partner interest in AZLP, Merck has consent and protective rights intended to preserve its business and economic interests, including restrictions on the power of the general partner to make certain distributions or dispositions. Furthermore, in limited events of default, additional rights will be granted to the Company, including powers to direct the actions of, or remove and replace, the Partnership’s chief executive officer and chief financial officer. Merck earns ongoing revenue based on sales of KBI products and such revenue was $920 million, $915 million and $1.2 billion in 2013, 2012 and 2011, respectively, primarily relating to sales of Nexium, as well as Prilosec. In addition, Merck earns certain Partnership returns, which are recorded in Equity income from affiliates, as reflected in the table above. Such returns include a priority return provided for in the Partnership Agreement, a preferential return representing Merck’s share of undistributed AZLP GAAP earnings, and a variable return related to the Company’s 1% limited partner interest.
In 2014, AstraZeneca has the option to purchase Merck’s interest in KBI based in part on the value of Merck’s interest in Nexium and Prilosec. AstraZeneca’s option is exercisable between March 1, 2014 and April 30, 2014. If AstraZeneca chooses to exercise this option, the closing date is expected to be June 30, 2014. Under the amended agreement, AstraZeneca will make a payment to Merck upon closing of $327 million, reflecting an estimate of the fair value of Merck’s interest in Nexium and Prilosec. This portion of the exercise price is subject to a true-up in 2018 based on actual sales from closing in 2014 to June 2018. The exercise price will also include an additional amount equal to a multiple of ten times Merck’s average 1% annual profit allocation in the partnership for the three years prior to exercise. The Company believes that it is likely that AstraZeneca will exercise its option in 2014.
Summarized financial information for AZLP is as follows:
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| | | | | | | | | | | |
Years Ended December 31 | 2013 | | 2012 | | 2011 |
Sales | $ | 4,611 |
| | $ | 4,694 |
| | $ | 4,659 |
|
Materials and production costs | 2,222 |
| | 2,177 |
| | 2,023 |
|
Other expense, net | 1,175 |
| | 1,312 |
| | 1,392 |
|
Income before taxes (1) | $ | 1,214 |
| | $ | 1,205 |
| | $ | 1,244 |
|
|
| | | | | | | |
December 31 | 2013 | | 2012 |
Current assets | $ | 4,832 |
| | $ | 3,662 |
|
Noncurrent assets | 182 |
| | 206 |
|
Current liabilities | 3,958 |
| | 3,145 |
|
| |
(1) | Merck’s partnership returns from AZLP are generally contractually determined as noted above and are not based on a percentage of income from AZLP, other than with respect to Merck’s 1% limited partnership interest. |
Sanofi Pasteur MSD
In 1994, Merck and Pasteur Mérieux Connaught (now Sanofi Pasteur S.A.) established an equally-owned joint venture to market vaccines in Europe and to collaborate in the development of combination vaccines for distribution in Europe. Joint venture vaccine sales were $1.2 billion for 2013, $1.1 billion for 2012 and $1.1 billion for 2011.
Johnson & Johnson°Merck Consumer Pharmaceuticals Company
In 2011, Merck sold its 50% interest in the Johnson & Johnson°Merck Consumer Pharmaceuticals Company (“JJMCP”) joint venture to J&J. The venture between Merck and J&J was formed in 1989 to develop, manufacture, market and distribute certain over-the-counter consumer products in the United States and Canada. Merck received a one-time payment of $175 million and recognized a pretax gain of $136 million in 2011 reflected in Other (income) expense, net. The partnership assets also included a manufacturing facility. Sales of products marketed by the joint venture were $62 million for the period from January 1, 2011 until the September 29, 2011 divestiture date.
Investments in affiliates accounted for using the equity method, including the above joint ventures, totaled $1.6 billion at December 31, 2013 and $1.3 billion at December 31, 2012. These amounts are reported in Other assets. Amounts due from the above joint ventures included in Deferred income taxes and other current assets were $277 million at December 31, 2013 and $302 million at December 31, 2012.
Summarized information for those affiliates (excluding AZLP disclosed separately above) is as follows:
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| | | | | | | | | | | |
Years Ended December 31 | 2013 | | 2012 | | 2011(1) |
Sales | $ | 1,326 |
| | $ | 1,295 |
| | $ | 1,331 |
|
Materials and production costs | 581 |
| | 573 |
| | 584 |
|
Other expense, net | 691 |
| | 705 |
| | 642 |
|
Income before taxes | 54 |
| | 17 |
| | 105 |
|
|
| | | | | | | |
December 31 | 2013 | | 2012 |
Current assets | $ | 1,486 |
| | $ | 971 |
|
Noncurrent assets | 149 |
| | 112 |
|
Current liabilities | 456 |
| | 480 |
|
Noncurrent liabilities | 154 |
| | 97 |
|
(1) Includes information for the JJMCP joint venture until its divestiture on September 29, 2011.
