The factors Merck uses in deciding to source internally or externally include capacity, technical capabilities, core competencies, company priorities and cost.

Once we have made a decision to use an external manufacturer, we then select the most appropriate manufacturer based on its ability to meet our business requirements with respect to supply, quality, service, cost and innovation, regardless of geography. In addition, Merck is committed to business relationships with suppliers who share the company's dedication to conducting business in a legal and ethical manner that is protective of the safety of both our suppliers' workers and surrounding communities as well as the environment.

In 2010, following the merger with Schering-Plough, Merck adopted policies and practices that reflect the best practices of the two legacy companies, thus enhancing the company's program for assessing external manufacturers.

We also recognize our responsibility to influence suppliers and licensees to respect the human rights standards defined in the Universal Declaration of Human Rights of the United Nations and the core labor standards set out by the International Labor Organization.

In 2006, Merck was one of the five initial companies to publicly support the Pharmaceutical Industry Principles for Responsible Supply Chain Management (PSCI). These PSCI principles outline industry expectations for suppliers' operations with regard to labor, health, safety, environment, ethics and management systems. The PSCI identify compliance with local laws and regulations as a universal expectation, and promote continuous improvement of our suppliers' ethics, labor and EHS programs and practices.

Merck external manufacturers are expected to understand and comply with these principles, and are encouraged to contact their procurement representative at Merck with any questions about the expectations. The PSCI are being communicated to all legacy Schering-Plough external manufacturers over the course of business integration.

When concerns arise from either supplier survey responses or on-site assessments, Merck works with the supplier to understand the issue, establish an improvement plan and offer technical support (if necessary) to enable the supplier to achieve the desired outcome. Prospective external manufacturers who are selected and current external manufacturers are required to submit a corrective action plan to address regulatory compliance gaps or deficiencies with respect to generally accepted industry practices and the PSCI. If a current supplier does not show adequate improvement over a defined period of time, Merck may discontinue work with the existing supplier and seek alternative supply arrangements.

Beginning in 2007, Merck's Global Procurement department introduced a new Detailed Supplier Ethical Assessment questionnaire for suppliers of new products and services globally. This assessment tool is used to help identify any significant ethical or human rights concerns and is based on the ethics parameters set forth in Merck's Code of Conduct known as Our Values & Standards. The survey includes such questions as:

• Does your organization abide by the U.S. Foreign Corrupt Practices Act?
• Do you have a policy on speaking up (i.e., whistle-blowing) within your organization and/or do you provide a means for raising issues that could include criminal conduct/illegal activity, dishonesty (theft/fraud), environmental or safety concerns, integrity of financial reporting, conflicts of interest, or regulatory compliance?
• Does your company guarantee that forced/child labor is not used in your business operations?
• Are provisions made to allow employees time for observance of religious festivals and prayer?

If responses to the questionnaire raise concerns, Merck will investigate further and may determine not to do business with the potential supplier. All suppliers are required to conduct business activities related to Merck in accordance with applicable laws and the ethical business policies, practices and standards of Merck. Merck monitors adherence to these principles in a variety of ways that are described in subsequent sections of this report.